The direction of economic growth

I’d like to call attention to an interesting site, “Our World in Data,” a nice aggregation of research on many different topics. The particular article that caught my eye was entitled “What is economic growth?” – I’m a big fan of revisiting elementary questions. They’re usually not nearly as settled as you’d expect, and need to be asked over and over.

Nothing in this article sparks disagreement on my side, certainly not the main thrust of author Max Roser’s argument in this article and others he links to: That further economic growth is needed to raise people out of poverty: Attenuating inequality alone will not do the trick, even if it is a worthwhile endeavor in its own right. Roser also says that “Growth doesn’t just have a rate, it has a direction, and the direction we choose matters.”

I couldn’t agree more, and I think this question of the direction is too often ignored. To illustrate what options we might have for directing economic growth, I’m going to pick apart a particular statistic Roser cites, namely that “just two centuries ago roughly three-quarters of the world ‘could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.’” (Roser cites a study by Mihail Moatsos from 2021.)

I’ve commented elsewhere that the height of the Industrial Revolution (1820, two centuries ago and the beginning point for Moatsos’s study) may not be a fair baseline from which to evaluate our economic models. But let’s assume that the circumstances in 1820 were representative of the previous two thousand years or so. Let’s consider different scenarios in which a statement like “75% of humanity can’t afford food and shelter” could be true.

Scenario 1: 75% of humanity has insufficient access to food and shelter, the remaining 25% has just enough to count as sufficient. In this scenario, clearly economic growth – growing more food and building more shelter – is necessary. There is no alternative if we want to raise the 75% out of poverty.

Scenario 2: 75% of humanity has insufficient access to food and shelter, the remaining 25% consumes four times as much as they actually need. On the face of it, this sounds like a problem of inequality, to which redistribution is an alternative solution to economic growth. However, what if at any given point in time, it is not the same 75% that have insufficient access to food and shelter? So let’s split this into two scenarios:

Scenario 2a: 75% of humanity has insufficient access to food and shelter, and year after year the same remaining 25% enjoys four times as much as they need.

Scenario 2b: In a given year, natural variation in weather, etc., ensure that a random set of 75% of humanity have insufficient access to food and shelter, and the remaining 25% has four times as much as they need.

Do Scenarios 2a and 2b differ in such a way that we would propose different solutions to the poverty problem in either case, both for practical and moral reasons?

For example, in 2a it seems clear that 25% enjoy some kind of structural advantage, and if so, it’s not clear that just producing more food and shelter is going to solve the poverty issue by itself: We’d also want to have a look at the root causes of the structural advantage, and at least in principle, we might conclude that “more stuff” doesn’t solve anything, but different rules of distribution would. And depending on the root causes of the structural advantage, we might also feel that redistribution is the morally right thing to do.

In Scenario 2b we might solve the problem by growing more food and building more shelter. Maybe then we’d have enough so that even the “bad” outcome that occurs to 75% of the population leaves them an adequate amount to survive comfortably. But there might also be an alternative to blindly making more stuff. Political and economic activity could be focused not on “more stuff” but on reducing the variability in the outcomes. Depending on what we measure when we measure “economic growth” we may or may not recognize reducing variability in outcomes as economic growth, because we may not actually wind up growing more food and building more shelter: we just get better at channeling what is there already.

In a business, a lot of activity is not actually focused on “more stuff, more cheaply.” It’s focused on reducing variability: smoothing both supply and demand of products, services, and cash flow. The value of a company – its stock price or the price an investor is willing to pay to buy it – tends to go up not only when it grows its top line and its bottom line but when it creates the perception that it delivers reliable payouts to its investors. There are times in a business’s lifecycle when it makes sense to focus on its reliability more than on growing its profits: What ends up creating value depends on the constraints imposed by customers, suppliers, competitors, etc., and that context can change over time.

Similarly, the direction in which we grow the economy overall should depend on which of the above scenarios we believe we are in. Only in Scenario 1 is it unambiguously true that “more stuff” will solve the poverty problem, because unambiguously, there is not “enough stuff” even on average. But in both variants of Scenario 2, there is “enough stuff” on average, but not enough for particular individuals. However, the causes of an uneven distribution of goods differ between Scenarios 2a and 2b, and the approaches to addressing them must differ correspondingly, both in terms of “what works” and in terms of “what is right” (or at least politically possible).

Whether reduced variability can only be achieved politically – with winners and losers – or economically – with win-win solutions – is an open question. But that question can’t even be properly posed as long as all our rhetoric is focused on economic growth in the sense of “more stuff, better stuff.” All too often – and Roser’s essay is no exception – stories about economic growth are told through simple exponential growth curves: “See, we are making progress on producing more stuff, especially since the Industrial Revolution. Let’s continue down that path.” And all too often, criticisms of growth-oriented organizations of economic relations – specifically, capitalism – focus on intentional, structural inequality: “Cutthroats have commandeered economic growth to their benefit and nobody else’s.” Both perspectives may have some merit at the same time, and yet be largely beside the point: The bigger and more urgent challenge may be to find better ways to deal with random fluctuations in the local availability of basic resources. Neither “more stuff” nor expropriation and redistribution may be helpful approaches to this challenge.