"You have stolen my dreams and my childhood with your empty words. And yet I’m one of the lucky ones. People are suffering. People are dying. Entire ecosystems are collapsing. We are at the beginning of a mass extinction, and all you can talk about is money and fairy tales of eternal economic growth. How dare you!” — Greta Thunberg
These are the words of then 16-year-old Greta Thunberg at the UN summit on climate change in 2019. In 2013, Sir David Attenborough phrased this in a more light-hearted manner:
“Anyone who thinks that you can have infinite growth in a finite environment is either a madman or an economist” — Sir David Attenborough
These quotes seem totally plausible at first. But to prove their validity it is paramount to first understand what growth is and how it came to be. In this article I aim to show how thinking about it evolved over time and why Thunberg's and Attenborough's views are outdated. In our journey back in time, we’ll encounter the 19th century political economist Thomas Robert Malthus, who held ideas similar to Greta’s but not about the growth of the economy; rather, he was concerned with the growth of the population. However, I believe we can still learn something important from his theory (and some economics along the way) that is applicable to economic growth. Malthus recognized that diminishing marginal returns kept humanity in stagnation for most of its history. But precisely because growth does not originate from the ground but form the mind we were able to escape the curse of marginal returns. The Nobel laurate American economist Robert Solow calculated in the mid-20th century that capital expansion (e.g., new factories) accounted for only 12% of GDP growth in the US between 1909 and 1949 while more than 30% was due to technological change. This data implies that growth is less grounded in the physical world, and total decoupling might be possible.
For almost the entirety of human history, the idea of economic growth was unimaginable. People lived as their grandparents had, who themselves lived mostly like their grandparents. Look at the graph below which shows the GDP per capita in five countries from the year 1000 to 2018. If I were to take you back to the year 1400, it wouldn’t really matter if I dropped you into a small village in India or Britain—assuming that GDP per capita is a good measure of your economic well-being, a question that, while interesting, goes beyond the scope of this article. Today, obviously, this is not the case. The UK’s GDP per capita is around six times greater than that of India. What changed?
The answer, rather unilluminating, is growth. To emphasize how new the idea of growth is, one simply needs to look at the works of classical economists like Adam Smith or David Ricardo. They did not address growth simply because it was so small that they paid no attention to it. However, the accelerating rate of population growth was alarming to some.
Thomas Malthus was in his forties when the world population passed 1 billion people in the early quarter of the 19th century. He could have very reasonably said, “anyone who thinks that you can have infinite population growth in a finite environment is a madman.” So, he built his theory around this central idea, describing what economists call diminishing returns. The idea is quite simple. In the short run (where the size of the factory is fixed), the productivity increase by the n+1th worker person will be 0 — or if you pay them a high enough wage, it could be even negative.
Observing this, Malthus argued that even though the number of workers increases, overall output will plateau. Thus, any increase in the number of people would necessarily come with a reduction in the living conditions of everyone. Luckily, as Nobel Laureate Paul Krugman said, “[…] Malthus was right about the whole of human history up until his own era.”
Today, there are more than 8 billion people on the planet, and virtually everyone is better off than people living in the early 19th century, even if the fruits of growth are distributed very unequally. But the question of how humanity escaped the law of diminishing returns haunts academics to this day. The German sociologist Max Weber, in his most well-known book The Protestant Ethic and the Spirit of Capitalism released in 1905, argued that it was the Protestant work ethic that triggered the dawn of capitalism. Others argue that the fact that industrialization started in Britain is independent of any cultural differences and can be explained by the unique combination of high labor and cheap energy costs.
It wasn’t until the mid-20th century that the American economist Robert Solow and the Australian economist Trevor Swan independently started working on a production function that includes diminishing returns. Their answer to how to achieve growth was technological progress. This means that as we add more workers, roads, computers, etc., the law of diminishing returns dictates that we must get less and less for each additional unit. However, with constant technological improvements, we can offset the tendency to stagnate and achieve growth.
Testing his theory in the real world, Solow calculated that between 1909 and 1949, the growth of capital (i.e., machines, roads, etc.) accounted for only 12% of growth. In his prize lecture, Solow mentioned that this conclusion was reinforced by the calculations of Edward Fulton Denison, who found that the growth of the US economy averaged 3.1% yearly between 1929 and 1989. Twelve percent of this growth came from capital, as Solow calculated, 16% came from the increase in the average education of workers, and 34% was due to technological progress. Thus, in essence, the Solow-Swan model proved that economic growth isn’t as dependent on the material world as previously thought.
Can we simply conclude after this brief historical account that growth is not physical, and therefore we shouldn’t worry about climate change, since all we need to do is invest in R&D and let the markets do their job? Well, I am not convinced by this argument. First, as the British economist Daniel Susskind argues in his book Growth: A Reckoning, the market is efficient, but it needs a goal. It is not obvious why the market would produce the necessary technologies to decouple, so he explores the idea of directed technological progress. He argues, through the example of the COVID-19 pandemic, that directed technological change is possible. The lockdowns during the pandemic jumped decades of change in remote work or automatization in factories and warehouses. He claims that through well-though out incentive structures it is possible to promote innovation that helps decouple growth from the Earth’s physical constraints. However, there are still several rare earth materials that we know will run out in the next 30 years if we continue using them at this rate. Not to mention that these materials are distributed very unequally around the world so scarcity of them would likely bring serious geopolitical tensions as well.
In conclusion, the idea of infinite growth on a finite planet is not as unimaginable as one might think. As we have seen, simply having more of everything does not add up to infinite growth. Instead, it is the intangible world of ideas helps us escape the law of diminishing returns. However, certain aspects of the economy are very much grounded in the physical world and highly dependent on finite materials. The jury is still out on whether it is possible to detach growth from the physical world, but to find out, we must move past one-line slogans and think critically about growth.
Acknowledgement: My thinking about the subject and the argument presented in this article is heavily influenced by Daniel Susskind’s book Growth: A Reckoning.
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