Notes for a panel discussion in Ottawa on Tuesday evening (details below).
200 years ago, economists made a prediction, and we got it wrong. "Big deal" you might say. But it was a big deal; a much bigger deal than some piddling mistake like failing to predict a global financial crisis. Basically, 200 years ago economists predicted that long run growth was impossible. That's the biggest thing in economics you can be wrong about.
Nearly everyone has heard of Malthus' Essay on Population, but few people know that Malthus was an economist, and his ideas were once central to mainstream economics. It wasn't just Malthus who got it wrong; it was we economists who got it wrong.
Malthus' theory was good. Growth, either in population or output per head of population, required natural resources, like land. And land was finite. And putting more workers on the same amount of land meant diminishing returns. GDP could not keep on growing indefinitely.
And it wasn't just good in theory, it had massive empirical support. For the whole of human history, and pre-history, and for the whole of animal and plant history too, Malthus' theory basically fit the facts. People, animals and plants were all up against their Malthusian limits. Malthusian economics provided the theoretical basis for Darwin's evolutionary theory.
Ironically, Malthusian theory worked well right up until about 200 years ago in England, the very time and place he wrote it. Then it stopped working. World GDP started growing, and has grown massively since then.
So is it any surprise if economists are sceptical of environmentalists' arguments about limits to growth? We were wrong about this 200 years ago. And we still don't really understand why we were wrong. Nor do the environmentalists.
Contraception is not why we were wrong. If Malthus were right about diminishing returns on natural resources, a smaller population would have increased GDP per person, but reduced world GDP. Population, GDP, and GDP per person, have all increased.
One reason we were wrong is that we failed to anticipate the acceleration of improving technology. The more people there are, the more new ideas people have, and ideas have increasing returns, offsetting the diminishing returns to natural resources. You and I can't both grow wheat on the same acre of land. But you and I can both use the same idea of how to grow more wheat.
A second reason we were wrong is that producing more stuff doesn't necessarily mean producing more stuff: it can mean producing better stuff. I drink about the same amount of cheap Ontario wine as I did 30 years ago. The difference is that cheap Ontario wine used to taste like crud, and now it tastes good. And yes, that is economic growth. Statistics Canada includes quality improvements in measuring GDP, or at least tries to. And most of the stuff we produce today isn't even really stuff; it's services. Stop thinking about GDP in terms of kilograms. It ain't kilograms; it's value. If an economy consists of people singing songs to each other, and every year the songs get more beautiful, that is an economy with GDP growth. The limit on growth is then human brains, not natural resources.
Can we continue to outrun the Malthusian demons indefinitely? Or is the last 200 years just a random error in the history of biology? I don't know, and nor does anyone else.
Growth is not something imposed on us by governments. Governments tax GDP growth, as if they were trying to discourage it, like they do smoking. If I try to grow my GDP by producing and selling $100 more goods, I only get to keep about $45 after income and sales taxes. That doesn't look like a pro-growth agenda.
Governments do not need to impose a pro-growth agenda on us in order to prevent mass unemployment. If we all decided we would be just as happy consuming half as much stuff, we would all decide we only needed to earn half as much income too. The demand for goods and labour would halve, and so would the supply of goods and labour. No general glut of unsold goods. No mass unemployment. The unemployment problem today is not that people don't want to spend; it's that they want to spend tomorrow rather than today. So they want to work, produce, and sell stuff today, and hold little bits of paper so they can spend it and buy stuff tomorrow. And the solution is for the government to print lots of little bits of paper to fix this temporary problem. Which is what governments eventually got around to doing.
The "pro-growth agenda" is a people's agenda. We get growth because individuals want growth for themselves, and their kids, and are prepared to work, save, invest, and think up better ways to produce better stuff.
Maybe people are wrong to want growth. Maybe they would really be as happy with half the stuff. Maybe guys just need a project to work on, and it doesn't have to be getting rich; it could be anything. Maybe playing guitar gets as many girls as a Porsche. OK, convince them of that. And if you succeed, that won't bother me. I believe in consumer sovereignty, and that includes just sitting around consuming leisure. That's nothing the market system can't handle (unless it happens overnight, and it won't).
But personally I'm still glad that cheap Ontario wine tastes a lot better than it used to. And that I can eat Thai food in Ottawa restaurants. And that my 2000 Mazda is a better car than Mother's 1960 Mercedes Benz. And that's GDP growth.
Press Release, Ottawa, October 26, 2009
Economic Game Plan for a Shrinking World:
should the fundamentals change?
— dialogue on a critical question for our times —
Members of the public are invited to hear the views of three respected, articulate and differently opinioned panelists, and then to join in on a dialogue. Key questions for discussion:
· Is economic growth necessary to maintain quality of life in affluent countries like Canada?
· Would abandoning growth as a central public policy goal help address the pressing issues of our time such as climate change, poverty, deforestation, fisheries collapse, and water depletion? Or is continued growth needed to deal with these issues?
· What would be the broad brush strokes a new economic paradigm?
The evening will begin with brief presentations and a debate among the panelists, followed by an open-mike discussion with the audience. The event is hosted by Councillor Clive Doucet.
PANELISTS
Chris Henderson
Founder of Delphi Group, head of Lumos Energy, past chair of Ottawa Centre for Research and Innovation
Mike Nickerson
Environmental activist and author of Life, Money and Illusion: Living on Earth as if we want to stay
Nick Rowe
Associate Dean of Public Affairs at Carleton University and associate professor of economics
MODERATOR — CBC Ottawa’s Adrian Harewood
Tuesday October 27th, 7 to 9 pm
OTTAWA CITY HALL, 110 Laurier Ave W., Council Chambers
Worthwhile Canadian Initiative 
“I’m not confident that technology will outrun diminishing returns/natural resources. But I’m also not confident it won’t. We don’t know. I don’t think we can know”
Seems to me that the most pressing environmental problems are not (yet) a lack of natural resources and limits to growth, but rather the effects of extraction and use of those resources, and more specifically who pays to fix the resulting mess. Most of the time the people and firms who wreck the environment and benefit from it do not pay for the damage they cause. And all too often, regular citizens are explicitly blocked from seeking damages. AB is particularly bad for that. Landowners in AB have the gov’t and oil companies wrecking their land all the time, but the laws have been rigged so that they can’t keep them out and it’s basically impossible to sue for damages.
It’s similar for lumber companies. I bet lumber companies wouldn’t be so eager to rape and pillage the way they do on crown land if they owned the land they logged, and getting more land required paying market price for it.
Anyway, I read an interesting book titled “Property Rights in the Defence of Nature” by Elizabeth Brubaker (it was online at one point, but seems to be gone now). It had an interesting story about the farmer in England who used trespass law to prevent the city of Manchester from fouling the river his cows drank from… in the 18th century. Good doing that today. People with a conservative/libertarian political outlook might find it interesting. Property rights and tort reform might be way to get people who might otherwise be skeptical to support what is effectively stronger environmental protection.
reason: “And Nick the bit about taxes and income effects is cheating. You ask a question about taxes and then give an answer about the whole government sector.”
That’s not cheating; that’s just respecting an accounting identity ;). The money’s got to go somewhere!
Loof will later (in the next few days he hopes) stand on his soap box (and maybe slip off) to show that neo-classical economics as well as bioeconomics both suffer from the “fallacy of misplaced concreteness” in opposite ways. But let’s put that aside for now. Also, let’s put aside Nick’s valid point regarding the positive values derived from squeezing more from the entropic flow with better technique; versus wasting so many valuable resources with better techniques (G-R’s point)—and briefly look at some evidence of how long the world’s non renewal resources will last in quantitative terms relative to supply and demand. And, if demand grows…?
Here is a diagram published by New Scientist that simply lays it out: http://www.newscientist.com/data/images/archive/2605/26051202.jpg
While Loof’s initial reaction was one of shock and denial a little investigation of one of the authors turned is a world class authority on the subject. Thomas Graedel, of Yale University, was elected to the U.S. National Academy of Engineering for outstanding contributions to the theory and practice of industrial ecology, 2002. He is Professor of Industrial Ecology, Professor of Chemical Engineering, Professor of Geology and Geophysics, and Director of the Center for Industrial Ecology.
I agree that Declan’s point is brilliant, and I had never heard it before either, but shouldn’t the marginal tax rate be weighted by income (or maybe income affected), rather than by people? – eg (5×0 + 5×0 +5×0 +5×0 + 80×50) / (5+5+5+5+80) = 33%
I was planning to add a comment but I see RebelEconomist has already made my main point.
The example I gave depended on treating everybody as an equal potential source of added output (given the right incentive). Support for cutting taxes on the wealthy despite the current levels of inequality is conditional on instead weighting each person as a source of added output based on their current income.
The right approach (assuming a simplistic goal of maximizing measured output) is to weight people based on their marginal productivity. Problem being, we have no way of really measuring that! – at least that I’ve seen, maybe some enterprising economists have undertaken such an effort. It seems likely to me that there would be some significant mean reversion meaning that incomes are not a great proxy for marginal productivity, but it also seems plausible that just treating everyone the same (as in my previous comment) would understate the greater contribution of higher income people.
Point being, that even if we leave aside the huge pile of other issues and assume that we’ve all agreed that our only goal is to maximize output based on minimizing the marginal tax rate on potential added output, the right answer is still far from cut and dried.
Declan – “weight people based on their marginal productivity” don’t wages, in theory, already do that?
I would expect that wages would cover a person’s entire productivity, not just their marginal productivity, but maybe I’m missing something.
Declan:
Assume competitive firms choose the amount of labour to hire to maximise profits taking prices and wages as given.
Profits = Price x output – wage x employment – other input prices x quantity of other inputs.
Differentiate with respect to employment, holding other inputs constant:
dprofit/demployment = Price x marginal product of labour – wage
Set dprofit/demployment = 0 for a maximum.
Price x marginal product of labour = wage.
Sorry Nick, it’s been too long since I took any economics courses (Patrick’s comment did trigger some distant memory, hence the comment about how I might be missing something 🙂 – but thanks for the refresher on the theory! Any word on how well it works in practice – I can’t imagine how you would set about measuring people’s marginal productivity accurately.
I realised after I posted it, Declan, I should have used words rather than math! Typical math snow-job!
In my New Keynesian guise, believing in imperfect competition, I don’t think it works too well. Wage = marginal productivity(1/(1-1/elasticity demand)), and firms in the real world do not face infinitely elastic demand curves. Dunno.
The math is fine by me, not to worry, I was apologizing for making you take the time to write out such basic economics due to my faulty memory, not complaining about having to deal with a little calculus.
I’ll stop writing comments now, so that you can focus on your next post (back on the blogging treadmill! 🙂
That’s not cheating; that’s just respecting an accounting identity ;). The money’s got to go somewhere!
No it doesn’t. We can run loose fiscal policy and tight monetary or vice-versa.
Loof,
I’m sure the diagram is excellent, but on my monitor it is unreadable.
Re Taxes and income and substitution effects,
I just realised that of course you are cheating. If you want to offset the income effect of government spending, then you also have to offset the substitution effect. Government spending increases demand.
Imagine an income that taxes progressively but gives back exactly so progressively (in fact in this case regressively) with respect to income in government services. Then why should that depress GDP exactly? We are just exactly replacing private expenditure with public expenditure.
On the other hand, I’m sure there are elasticities of demand for leisure such that a perfectly redistributive government policy, would also not have any impact on GDP. (Sketch briefly – redistribution to people with a low marginal value of leisure – less than what they are forced to take by hours/holiday legislation for instance from people with a very high marginal value of leisure).
From Nick:
It took me a long time to deal with this.
You do understand that this is tax policy that drove the French Revolution, don’t you?
Jim: and I think it’s a difficult thing for optimal tax theorists to deal with too. One of the dirty little secrets of optimal tax theory they don’t know quite how to handle. Their logic leads to this conclusion, but they don’t like it. (Perhaps it’s a bit like Greg Mankiw’s argument that a tax on height would be desirable too if you believed optimal tax theory; he’s not arguing in favour of a height tax, but pointing out a paradox).
If you think you will get theoretical support for higher taxes on the rich from a generalised utilitarian social welfare function framework, the logic doesn’t always lead you where you want it to lead you.
But declining marginal tax rates could (I think?) be compatible with rising average tax rates, if you had a negative income tax system.
I’m not an optimal tax theorist, by the way, and I’m sure some other commenter knows more about this than I do.
I said: “But declining marginal tax rates could (I think?) be compatible with rising average tax rates, if you had a negative income tax system.”
Nope, I was wrong there. Or rather, if marginal tax rates decline with income, eventually hitting zero, then average tax rates may initially rise (and will initially rise if taxes are negative for lowest income people), but eventually must fall with income (beginning at the point where average equals marginal tax rate). ECON1000. Embarrassing mistake on my part.
The economic value of entropy measures the qualitative difference between useful resources and useless waste. Georgescu-Roegen (G-R) focused on “entropy degradation”: what’s wasted and squandered away and, oddly enough, I’m not aware of him seeing the positive in the neoclassical approach of being smarter, using better technology getting more from throughput. It’s why I said G-R appears to suffer from “the fallacy of misplaced concreteness”; while neoclassical economics suffer the same oppositely: being practically blind to increasing degradation with better technique: economically and ecologically. They consistently overvalue the values of maximizing self-interest and utility as I see it; and undervalue the problem of Greedy. Loof calls it Greedy’s Law: where bad utility with the best technique drives our good utility with better technique. I will give an example from experience when I get the time, but am too busy to do the thinking and will be beyond the pale for awhile.
But, G-R’s prime example of “entropy degradation” was the wanton wastage of nuclear material used every which way. Not just waste in heaps of pollution with nowhere to go and forever here; also the waste in using a non-renewable resource for offensive weaponry that has no real utility (except as a value for MAD it seems). He also saw the waste of human labour involved. Humanity has brilliant minds making better bad bombs. What if they were progressively employed? Waste, waste, waste — and wasting time with fearful states in delusional politics fearing fearful Iran will get the bomb: while each state can push a button to destroy the world in minutes.
What does neoclassical economics have to say about this top-dog under-god basket case? It seems if the price is right maximizing self-interest and maximizing utility they’d recommend mining all nuclear material as fast as possible – and invoke Greedy’s Law.
As such, the abstract values of maximizing self-interest and utility are wrongheaded: the neoclassical school is riding a dead horse and flogging it to find the right price. How did Einstein define insanity? The orthodox economic paradigm is dead; part of the problem forever seeking the right price when key abstract values are misguided in theory and misguiding in practice. But, heh, the horse can be resurrected with a slight shift, eh.
Of course
“… the rich have a lower labour supply elasticity than the poor”
Otherwise they would all be “working” 24 hours a day.
reason: as we move along the income distribution, starting with the lowest wage workers and ending with the highest wage workers, two things happen.
First, the substitution effect from higher wages ( a higher price of leisure relative to goods) leads people to substitute away from leisure (i.e. work longer hours).
Second, the income effect makes people richer, and rich people demand more goods and more leisure (i.e. work shorter hours).
So, what we observe is the sum of substitution and income effects, pointing in opposite directions. So we can’t tell from looking at the distribution of hours worked and wages/income whether the rich have higher or lower labour supply elasticities.
But you might nevertheless be right about the rich having lower labour supply elasticities. That would be my hunch too.
Well, Loof is back from the pale to comment on Gresham’s Law, where bad money drives out good money enabled by positive law, is analogous to Greedy’s Law where bad utility drives out good utility likewise enabled legally.
Simply look at the utility of maximizing standard clear-cut logging in law by BC. Clear-cutting is generally unsustainable (please, pretty please, someone challenge Loof here;), though clear-cutting may be possible on fire regenerated ecosystems like pine species. The worldwide empirical evidence in temperate forests (20 yrs ago) has Scots pine doing the least worst losing about 1/3 of its logging productivity over 3 generations. However, in some BC pine forests simply not cutting the forests and gathering Pine mushrooms (destroyed by clearcutting) each year over the 70 yrs needed for the forest to regenerate was worth more. And, buried 20 yrs ago in BC government files is a study of dozens (68?)of marketable products that would be available if the bad utility of the clear-cut wasn’t legalized (and regionally monopolized by a half dozen corporations throughout BC)– and the good utility of other cuts: select cut, shelter woods, strip cuts, etc. to enable utility optimization from logging as well as other productivities. Greedy’s Law can also be applied to agricultural economics relative to monocultures where it’s bad utility drives out good utility. Come to think of it, the present financial crisis relative to Greedy’s Law appears like the bad utility (value) of Wall Street’s economy is legally driving out the good utility of Main Street’s economy.
Geez, I’m starting to see Greedy Archimedes everywhere. Must be an illusion or perhaps delusional, eh? As such, this backwards fool doesn’t know where the analogy between Gresham’s Law and Greedy’s Law breaks down. Perhaps it has something to do with the quantification of Gresham’s Law in modern economics and the qualification of the same principle with the ancient Greeks seeing bad politicians driving out good politicians.
Ps. Here’s a recent related news from another angle on pine forests headlined “Pine beetle runs out of food, B.C. mills to run out of wood” regarding the unsustainability of 110 communities of BC totally dependent on industrial forestry’s clear-cutting and the government putting all BC forests in one basket case. http://rlch.org/content/view/1930/62/
What do you mean sustainable? If it’s returning to a forest-like state then it isn’t, but if it’s founding tree-plantations then it is.