Ferraris for all

This is my comment from this week’s Fund Strategy. The issue also includes a cover story by me on the British debate about economic policy in the run-up to the next election

The slight upward revision in the figures for Britain’s GDP growth in the final quarter of 2009 is little cause for cheer. While economic growth is always welcome, a closer look at the figures reveals no signs of a strong recovery.

Of course the usual caveat applies: short-term figures should not be taken too seriously. But the breakdown of the figures gives some indication at least of where the economy appears to be heading for now.

Although the overall growth figure was revised upwards from 0.1% to 0.3%, there are several reasons to question claims that this indicates a robust recovery. The impending rise in VAT probably encouraged consumers to make discretionary purchases earlier than they otherwise would have done. Perhaps they bought a new television in December rather than waiting until 2010. But this is no sign of a real recovery.

In addition, while the contribution from exports rose, that from imports increased even further. This is the wrong direction for those hoping that net exports will power Britain’s recovery.

More fundamentally, gross fixed-capital formation fell by 3.1% and is now 14.2% lower than in the final quarter of 2008. Yet such investment is a fundamental driver of economic growth in the future.

Britain’s problem of low growth is discussed in more detail in my cover story this week. Over the past decade, Britain grew at its slowest rate since the second world war. This was in turn part of a longer-term trend, with relatively low growth rates from the 1970s onwards.

Yet despite the scale of the problem, it receives relatively little attention. Politicians evidently prefer to obsess over the fiscal deficit and lambast bankers for their high bonuses. These are likely to dominate the economic debate in the run-up to the election, rather than the problem of low growth.

Overcoming this blinkered attitude demands a fundamental cultural shift. Promoting strong and consistent long-term growth should be the key priority of any political programme. The ideas used to question the feasibility of growth, including the flawed notions of environmental and moral limits, also need to be challenged.

Labels: economics, finance, Fund Strategy, growth

An example of the growth scepticism of Arundhati Roy, a leading Indian writer and social campaigner, in an article in Outlook India. Roy moves from criticising the Indian government’s repressive military campaign against “Maoists” in Orissa (which she suggests is actually against indigenous people), to a discussion of the vested interests of mining companies in the region to a rejection of growth in general:

“The real problem is that the flagship of India’s miraculous ‘growth’ story has run aground. It came at a huge social and environmental cost. And now, as the rivers dry up and forests disappear, as the water table recedes and as people realise what is being done to them, the chickens are coming home to roost. All over the country, there’s unrest, there are protests by people refusing to give up their land and their access to resources, refusing to believe false promises any more. Suddenly, it’s beginning to look as though the 10 per cent growth rate and democracy are mutually incompatible. To get the bauxite out of the flat-topped hills, to get iron ore out from under the forest floor, to get 85 per cent of India’s people off their land and into the cities (which is what Mr Chidambaram says he’d like to see), India has to become a police state. The government has to militarise. To justify that militarisation, it needs an enemy. The Maoists are that enemy. They are to corporate fundamentalists what the Muslims are to Hindu fundamentalists.”

I know nothing about the conflict in Orissa but I am certain it should not be used as a general argument against development. It is not growth that leads to repression but stifling people’s aspirations by keeping them poor.

Labels: environment, growth, india, inequality

Part one of an interesting critique of the New Economics Foundation’s Growth Isn’t Possible by Matthew Lockwood of the Institute for Public Policy Research, an influential British think thank. I look forward to seeing part two.

Back on 6 April 2007 I wrote a short critical blog post on Lockwood’s apparently radical views on Africa.

Labels: Africa, economics, growth

My news analysis from this week’s Fund Strategy attempts to grapple with the debate on economic policy in the run-up to Britain’s general election.

It is rare for so much fuss to be made over anything so small. Yet the announcement of a 0.1% rise in Britain’s GDP in the final quarter of 2009 got economic pundits highly excited last week.

Up to a point, the hype can be explained by the figure’s symbolic value. After six consecutive quarters of falling output the economy had finally returned to growth. For production industries, where the fall was steeper still, the relief was even greater.

But one quarter’s figures mean little. Even if the preliminary estimate is revised upwards, which many argue is likely, it says nothing about the long-term trend.

The most important economic challenge facing the next government, whichever party wins the election, is how to generate the best possible growth.

More rapid GDP growth means increasing prosperity as well as enhancing Britain’s ability to repay its burgeoning debt.

Despite the bickering there is little difference between the main parties on macroeconomic policy.

There is a broad consensus that the next government will need to make substantial spending cuts and that growth is likely to be slow over the next few years.

As Jonathan Loynes, the chief European economist at Capital Economics, concluded in a recent paper on the subject: “On fiscal policy, the gap between the two main parties is perhaps not as big as the rhetoric suggests, but an earlier and rather bigger tightening is probably still likely under the Conservatives.

“Whoever is in power, though, the next parliament will be characterised by a long and painful fiscal squeeze, accompanied by ultra-loose monetary policy.”

This narrow consensus begs the question of why there is not a bigger debate on economic policy.

In broad terms there are two ways to deal with the debt problem. The one emphasised by the main political parties is to restrict consumption so that Britain can slowly reduce its fiscal deficit. The alternative approach, to strengthen the productive side of the economy to generate more growth, receives relatively little consideration.

Some might argue that the size of Britain’s debt burden means that ¬savage spending cuts are necessary. According to a recent study by the McKinsey Global Institute, Britain’s debt-to-GDP ratio is the highest of any major economy except Japan’s - and this is even adjusting for London’s role as a global financial centre.

But the size of the debt burden alone does not explain the widespread anxiety about growth among Britain’s political elite. If anything, more rapid growth would enhance the country’s ability to rapidly reduce its debt.

In broad terms, it is possible to identify three related ways in which the nervousness about growth is expressed:

Bubblephobia
Politicians seem incredibly worried that any surge in growth will be followed by a bubble and inevitable bust. The experience of the past two years is enough to warn them of the ¬turmoil that such a course of action could bring.

That is one reason why all the main parties are concerned to restore stability to public finances and maintain the independence of the Bank of England. However, it does not follow that any rapid growth will automatically turn into a bubble.

The challenge is to promote growth which is strong and consistent rather than an artificial boom based on credit expansion.

Sense of limits
Since the 1970s a pervasive sense of limits - environmental, moral and social - has enveloped the British political establishment. It has become widely accepted that there could be damaging consequences if growth is not restrained.

So, for example, in a speech given last week, Vince Cable, the Liberal Democrats’ shadow chancellor, warned the government against being “too absorbed by growth for its own sake rather than protecting the environment and maintaining a sense of fairness and community”.

Cable’s statement was particularly peculiar in that context. It is hard to imagine many people favouring growth “for its own sake”. The benefits of growth include greater prosperity and the ability to repay debt more rapidly.

In addition, the idea of limits to growth is open to question, but an investigation of this subject is beyond the scope of this article.

Blindness to production
It is striking how little of Britain’s economic debate is about restructuring and bolstering the productive side of the economy.

Although there is some talk of entrepreneurship, innovation and even industrial policy the character and scale of what is being proposed
is limited.

Britain is suffering from a strong cultural aversion to economic growth and prosperity. Unless this is tackled it is likely that Britain’s growth record will remain muted in the years to come.

Labels: debt, economics, finance, Fund Strategy, growth

Spiked has published a review by me looking at three American growth sceptic books. It is essentially an introduction to some of the key themes of my new book.

Labels: book, growth, media appearances, review, spiked

There is little new in yesterday’s New Economics Foundation (NEF) report arguing growth isn’t possible apart from its vivid metaphor about giant hamsters. The report draws an analogy between a hamster rapidly gaining in weight and the dangers of economic growth:

“From birth to puberty a hamster doubles its weight each week. If, then, instead of levelling-off in maturity as animals do, the hamster continued to double its weight each week, on its first birthday we would be facing a nine billion tonne hamster. If it kept eating at the same ratio of food to body weight, by then its daily intake would be greater than the total, annual amount of maize produced worldwide. There is a reason that in nature things do not grow indefinitely.”

Although Malthus did not use the hamster metaphor this is essentially his argument in a different guise. Malthus famously argued that population growth would outstrip the supply of food and mass starvation would result. If he had thought of the hamster metaphor he could have used it back in 1798 when he first issued his warning about overpopulation.

The NEF takes rising consumption resulting from economic growth (rather than population growth) and represents it by the hamster. What it forgets is that human ingenuity can increase the supply of resources more rapidly than demand.

As a result humanity can get richer and consume more resources at the same time. Failure to recognise this elementary fact has meant that - fortunately - gloomy Malthusian predictions have proved appallingly innaccurate.

All the NEF report proves it that its authors have a vivid imagination and a gift for public relations.

Labels: consumption, economics, environment, growth, Malthus

This is my comment from this week’s Fund Strategy.

Last week saw the most decisive intervention so far in the economic debate leading up to the election but it did not come from a politician.

Instead Mervyn King, the governor of the Bank of England, endorsed the need for austerity as pivotal to dealing with Britain’s plight.

Being a central banker he did not come straight to the point. By the time he had finished talking about global rebalancing and moved on to Britain his audience was probably on to after dinner drinks.



Even then he initially talked about cutting public spending as a key way of encouraging savings. It was only when he was coming to the end that his message was made clear:

“The patience of UK households is likely to be sorely tried over the next couple of years. There is little scope for growth in real take-home pay, which may remain weak even as output recovers.”

This remark was barely commented on by the main political parties—presumably because they agree with it.
In any case it seems unlikely that anyone will challenge King’s argument. Times are hard and austerity is viewed as the only solution.

Such a point is easy for King to make. As a non-elected official he is not threatened with losing his seat if his words displease the public. In that respect he can afford to be more blunt than politicians.

Sadly today’s generation of politicians are not much better than King. Although they are answerable to their electorates they lack the imagination to envisage an alternative response to the crisis.

Industrial policy—in which the state gives direction to the promotion of industrial enterprises—is out of fashion. The government has abdicated responsibility in that area as it has for many others.

Despite the talk about infrastructure relatively little is being built. Projects such as airports, roads and power stations are seen as morally suspect rather than as necessary to a country’s economic health.

Politicians have become as dull and grey as central bankers. They may bicker like children but their arguments do not extend to promoting different visions of social organisation.

What is needed is an injection of politics. Genuine debate demands a recognition that there is more than one view of how best to do things. There are other shades of colour besides grey.

Labels: economics, finance, Fund Strategy, growth

Duncan Green of Oxfam describes in his blog a meeting in London organised by CEECEC and the New Economics Foundation to discuss “degrowth”. The idea was inspired by Serge Latouche in France, where it is known as décroissance, and it also has followers in Italy (where it is called decrescità ) and Spain. Green criticises the movement on the grounds that he is against shrinking the global economy but he does argue the orthodox case that there are limits to economic growth (see 30 September 2009 post).

Labels: economics, Europe, growth

This is my comment from this week’s Fund Strategy.

Barring an apocalypse it looks certain there will be a general election in Britain over the next few months.

Yet none of the main parties has convincing policies for the restoration of economic growth. Indeed, they all embrace policies that are likely to damage Britain’s growth prospects.



Although the parties have yet to publish their manifestos they all have statements of economic policy on their websites. It is also possible to discern a party’s trajectory by scrutinising statements by its leaders.


Strangely they all seem to follow a similar pattern. They start with pledges of measures to support particular groups. Whatever the merits of the supposed beneficiaries it is hard to see what bearing they have on reviving the economy. And if the economy cannot be rejuvenated then many of these promises will not be kept.

Then there are the buzzwords which indicate that the party concerned is intent on limiting its aspirations. These include such terms as green, responsible, sustainable and low carbon.



Although these might appear common sense they are essentially a way of indicating support for restraint. For example, why would anyone want economic performance to be sustainable when it would be far better to have a transformation to something better? The notion of sustainability embodies a deeply conservative outlook. It is an updated version of the idea that aristocrats should exercise stewardship of the environment for the sake of other generations.



A similar point could be made about responsible policy. It means keeping demands strictly limited rather than engaging in any bold ambition.



To be sure, all the parties make some of the right noises such as acknowledging the need to invest in infrastructure. Yet they are vague about how it can be achieved.

Typically they make at least two fundamental errors. First, they do not recognise that to build a vibrant new economy they need to let go of the old. Some old companies and sectors should be closed down while new ones should be encouraged to take their place. If this is done in a co-ordinated way it should be possible to minimise any social dislocation that results.

Second, they pay far too little attention to the productive side of the economy. The overwhelming emphasis is on such matters as bolstering the consumer, financial regulation and skills training. However worthy any of these causes they fail to get to the nub of addressing Britain’s economic weakness.

As Britain enters a new year it should be willing to embrace change. Not as a platitude but as a process of genuine economic and social transformation.

Labels: economics, Europe, growth

The cover story of this week’s Economist is on the discrediting of the idea of progress. It is an astute piece overall but better on the benefits of progress than explaining its contemporary unpopularity.

On the gains resulting from economic growth and the development of science it argues that: “For aeons people lived to the age of just 25 or 30 and most parents could expect to mourn at least one of their children. Today people live to 65 and, in countries such as Japan and Canada, over 80; outside Africa, a child’s death is mercifully rare. Global average income was for centuries about $200 a year; a typical inhabitant of one of the world’s richer countries now earns that much in a day. In the Middle Ages about one in ten Europeans could read; today, with a few exceptions, such as India and parts of Africa, the global rate is comfortably above eight out of ten. In much of the world, ordinary men and women can vote and find work, regardless of their race. In large parts of it they can think and say what they choose. If they fall ill, they will be treated. If they are innocent, they will generally walk free.”

It points to several factors to explain the demise in the popularity of progress including the extreme nationalist conception of progress pursued by the Nazis, the totalitarian record of the Soviet bloc, the misuse of science, inadequate regulation of business, fear of environmental damage and status consciousness. Such arguments are half true at best. For example, the Nazi experience certainly played an important role in discrediting the idea of progress but they were against it rather than simply perverting the concept. And it should be asked why economic growth is widely seen as the cause of environmental damage rather than the source of potential solutions.

These questions will be examined more closely in my forthcoming book.

Labels: growth, progress, science

I have belatedly caught on to a new angle of attack against economic growth. According to John Kampfner’s Freedom for Sale, published in September, many countries have agreed to forsake democracy in return for higher growth. Kampfner’s book is reviewed in The National, an Abu Dhabi publication, by George Scialabba.

As far as I can gather Kampfner is unaware of the substantial volume by Benjamin Friedman, The Moral Consequences of Economic Growth, which argues the opposite is generally the case. There is a link to my review of Friedman’s book in the left hand column.

Labels: ethics, growth

Development is increasingly discussed in relation to security. Rather than considering how to promote economic growth much of the debate is about how external actors should intervene to help resolve conflict.

In line with this trend the World Bank’s World Development Report 2011 will be on the theme of conflict, security and development. The bank has also recently launched a blog on the same subject.

Labels: development, growth

Barack Obama argued during the presidential campaign that some economic growth should be sacrificed for fairness according to this blog post on the Forbes website. The remarks were evidently made last year during an interview with Charlie Gibson of ABC news. Unfortunately I cannot find an original source to verify this claim.

Labels: America, growth, inequality, Obama

Andy Warhol’s paintings of Campbell soup cans are among the most widely recognised images of American pop art. But I had not thought about their symbolic value until a read a review in yesterday’s Financial Times by Jackie Wullschlager of several books on him. She makes the point that:

“His Campbell soup cans and Coke bottles speak a vernacular language anyone can understand; like Joseph Beuys’ fat and felt, they resonated too with widespread memories of cold and hunger for a postwar generation. Their repetition, and Warhol’s obsession with working in series, are not just formal devices – though they were a slap against the individualism of abstract expressionism – but emblems of political equality. As a child, face pressed to the windows of downtown stores packed with desirable, unaffordable products, Warhol had known real want: here were his dreams of assembly-line plenty and security.”

Labels: America, consumption, growth, progress

Robert Skidelsky, an academic best known for his mammoth biography of John Maynard Keynes. Reiterates his support for the notion of natural and moral limits in an article on the Guardian comment is free site. Skidelsky is particular keen to rehabilitate Keynes’ argument about moral limits:

“Here I think Keynes comes closest to answering the question of why his "enough" will not, in fact, be enough. The accumulation of wealth, which should be a means to the "good life," becomes an end in itself because it destroys many of the things that make life worth living. Beyond a certain point – which most of the world is still far from having reached – the accumulation of wealth offers only substitute pleasures for the real losses to human relations that it exacts.”

The topic is discussed in more detail in his recent book on the resurgence of Keynesianism.

It is not clear to me why the accumulation of wealth should necessarily lead to real losses in human relations. On the contrary, the end of scarcity is a pre-condition for a full flowering of such relations.

Labels: environment, ethics, growth

Daron Acemoglu, a professor of economics at MIT, summarises contemporary theories of global inequality in an article in Esquire (of all places). In broad terms two main lines of thought are popular nowadays: those that emphasise environmental factors such as geography and weather (such as Jeffrey Sachs) or natural endowments (such as Jared Diamond) or whose which emphasise “institutions” (which essentially means market incentives and stable politics).

Theories which look at society more broadly, such as Max Weber’s Protestant ethic, are summarily dismissed as superficial.

Labels: corruption, development, environment, growth, inequality

This is my comment from this week’s Fund Strategy.

The debate on public spending is proving to be one of the most degraded in economics. Each round of discussion is even worse than the previous one.

First there was denial. The main political parties even refused to discuss the possibility or desirability of making cuts. This was despite the obvious deterioration in the public finances.

Labour maintained this position longer than any of the others. It scoffed at “Tory cuts” as opposed to what it characterised as Labour investment.

After it while it became clear that Labour could no longer maintain such a ludicrous position. Then all of the parties starting to compete in a virility competition about who could talk tougher on cuts. Although they were all short on detail, they all agreed that Something Must Be Done regarding public finances. Tough choices needed to be made in a world of scarce resources.

All of this betrays a one-dimensional understanding of economics. Policy is not simply a question of whether to cut or not. Nor can it be reduced to, in effect, nice cuts versus nasty cuts.

Even in the most general terms there are more choices ahead than simply whether or not to cut.

Logically it is possible to identify at least three ways to rebuild the public finances: to make cuts, to raise taxation or to bolster economic growth.

What is most striking about the debate is how little attention is being given to strengthen economic growth. Yet if growth was stronger it would be possible to increase public spending where necessary, increase tax revenue yet not raise tax rates. If the pie was bigger there would be more to go round for everyone.

Yet instead of having an urgent public debate about how to raise economic growth the opposite is happening. The consensus seems to be that there should be slower, greener, more “sustainable” growth. But the consequence of continuing slow growth is likely to be more pain for everyone.

There should be a substantial reassessment of economic priorities. If anything needs to be cut it is the attachment to sustainability and “green growth”. Strong growth needs to be put back at the centre of economic policy.

Labels: economics, finance, Fund Strategy, growth

Duncan Green of Oxfam explicitly calls for the rationing of economic growth in his blog today. He summarises the conclusions of his talk to a Quaker economic conference as follows:

“if you want to maximise happiness (a utilitarian argument which offends the rights-based people, I know, but not a bad start) AND prevent catastrophic global warming, you need to make sure that incomes rise in the poor countries, but are steady or falling in the rich ones. i.e. we need to ration growth – it’s just too precious (and dirty) to waste on the rich countries.”

This neatly shows the use of climate change as an argument against growth in the mainstream discussion. At least Green - unlike many others - has the virtue of being open about his conclusions.

Labels: climate, consumption, environment, growth

Evidently the debate on GDP goes even further than I assumed. I was sent a message by Alexander Dill of the Global Commons Index in Basel who runs the whatiseconomy.com website. He pointed to an August 2009 report by the European Commission on GDP and Beyond. Dill has himself written a paper on Wealth Beyound GDP. Meanwhile, Der Spiegel, a German weekly newsmagazine, has run on article on what it calls “the cult of GDP”.

New Scientist is even more direct in its attack on economic growth in a comment on “the real problem with overpopulation”. It favours what it calls “demographic sustainability”:

“This is all about creating both environmental and economic sustainability with a falling, ageing population. It involves fine-tuning fertility to keep populations level or in slow decline. Critically, it also means basing success on stability - recognising that economic growth at all costs, not population growth, is the real root of all evil.”

So for New Scientist not only is growth unwelcome but it is explicitly cast as evil. It is a particularly sad way for a science magazine to look at the world.

Labels: Germany, growth, Malthus, science

In the run-up to the Copenhagen summit in December there is no doubt going to be more of an obsession with climate change than ever. One area in which this is clear is in relation to development. A couple of key recent reports on the subject have made a concerted effort to redefine it in relation to climate change:

The World Development Report 2010 from the World Bank on Development and Climate Change The. There is also an accompanying World Bank blog combining the two topics.

- From the United Nations there is World Economic and Social Survey 2009: Promoting Development, Saving the Planet which covers similar ground as the World Bank report.

The combination of climate change and development can only damage understanding of both topics. No doubt there is a relationship between the two – it is a truism that the poor will suffer more as a result of climate change than the rich – but they should be kept logically distinct. Combining the two is essentially a way of putting limits on the possibilities for development. Despite the sometimes ambitious sounding rhetoric what is essentially being said is that development must be limited for the sake of the planet.

This combination of climate change and development also points to a broader and even more retrograde trend. It is what could be called “the climate change-isation of everything”. No doubt there is a snappier way of putting it – any suggestions please email me – but virtually every social problem nowadays seem to be being redefined in relation to climate change. It has become more of a moral category than a scientific one.

Labels: climate, development, economics, environment, growth

I was planning to write a note on the 10: 10 campaign launched in Britain yesterday but Brendan O’Neill has saved me the trouble with a critique on the Guardian comment is free site.

I particularly liked the concluding quote on prosperity from Sylvia Pankhurst, the revolutionary suffragette leader, so I checked it out. It is from an article in Workers’ Dreadnought, 28 July 1923:

“Socialism means plenty for all. We do not preach a gospel of want and scarcity, but of abundance.

“Our desire is not to make poor those who to-day are rich, in order to put the poor in the place where the rich now are. Our desire is not to pull down the present rulers to put other rulers in their places.

“We wish to abolish poverty and to provide abundance for all.

“We do not call for limitation of births, for penurious thrift, and self-denial. We call for a great production that will supply all, and more than all the people can consume.”

Those who assume that supporting prosperity is a free market preoccupation take note.

Labels: climate, consumption, geo-engineering, growth, Malthus, progress

Partha Dasgupta, a professor of economics at Cambridge University and a patron of the Optimum Population Trust, tries to play down the costs of dealing with climate change in a lecture to the Sante Fe Institute. He argues that the costs of dealing with climate change could amount up to 10% of the GDP of the rich countries equivalent to trillions of dollars. But since GDP has grown at an average rate of about 2% a year for the past 30 years such a loss would mean going back to the way things were four or five years ago. Since things were not so bad then, he argues, going back to the recent past would not be a big deal.

Such an outlook reveals exceedingly low horizons. For example, think of the pain caused by the recent global economic crisis. Yet, according to the latest estimate from the International Monetary Fund, output in the advanced economies will fall by only 3.8% this year. In any case the world is not nearly rich enough to tackle all the challenges it faces now – let alone if it was 10% poorer.

Labels: climate, economics, environment, growth, Malthus

The following comment by me appeared in the latest Fund Strategy (20 July).

The current Economist asks an important question: what went wrong with economics? Unfortunately, it comes up with superficial answers.

The magazine identifies three common criticisms of economics. That it helped cause the crisis, that it failed to spot it and that it has no idea how to fix it.

No doubt, these are widely made attacks on economics. But they do not get to the nub of what is wrong with the discipline. For example, in relation to the first one, the Economist says it is “half right”. Economists placed too much emphasis on targeting inflation and too little on asset bubbles.

But this view is far too flattering on the importance of economists, while grossly underestimating the underlying causes of the crisis. No doubt, asset bubbles were inflated in the run-up to the current crisis. But these were a symptom of atrophy in the real economy, rather than the result of policy errors or human greed.

Asset bubbles were inflated largely as a result of state action to offset the effects of a sagging economy. Interest rates were kept low and state spending high in an attempt to maintain economic momentum.

The inability to recognise this relationship reveals the first key weakness of contemporary economics. Its one-sided emphasis on consumption. The production side of the economy is relegated to a subsidiary role. As a result, key measures of economic health get little attention. Profit rates and labour productivity warrant barely a mention in much economic discussion. Instead the emphasis is on such things as share prices, official interest rates and inflation.

This fixation with consumption is related to another weakness of economics. The emphasis on stability, rather than growth.

Such a focus was apparent in the report on the British economy published by the International Monetary Fund (IMF) last week. A related statement said the IMF’s directors: “emphasised the importance of following credible and consistent policies to maintain domestic and external stability, limit downside risks and strengthen market confidence. Resolving the problems in the financial sector and setting monetary and fiscal policies consistent with a firm commitment to price stability and fiscal sustainability are the main policy priorities.”

Such an overwhelming emphasis on stability is central to economic orthodoxy. In Britain, Gordon Brown is one of its leading proponents. Yet it makes little sense. What brings wealth and prosperity is economic growth, rather than stability.

From this perspective, economic disruption can be positive. If it involves a restructuring, which leads to a more dynamic economy, it should be welcomed. Yet attachment to stability, rather than growth is another of the blind spots of contemporary economics.

Labels: economics, finance, Fund Strategy, growth

The following comment by me appeared in the latest Fund Strategy (13 July).

The government’s white paper on financial regulation is a dangerous distraction from the real challenges facing the economy. It is more an exercise in scapegoating bankers than getting to grips with Britain’s economic problems.

Nearly one year since the collapse of Lehman Brothers the government is persisting with the line that bankers were the main culprits in causing the ­crisis. Such an argument is convenient for politicians of all stripes, since it helps absolve them of responsibility, but it is far removed from reality.
Banks may have benefited from the financial game played until last year but the state authorities set the rules. In a desperate attempt to maintain economic momentum the authorities kept interest rates artificially low and therefore encouraged the consumer boom. New Labour also constantly lauded the City of London because it was desperate for the financial revenue the financial centre provided.

But the underlying problem was economic atrophy. Weak sectors of the economy were buoyed by state spending while new sectors were not encouraged. The virtues of growth were constantly called into question with the attachment to dogmas such as green initiatives and sustainability. What such concepts really meant, despite the confusing rhetoric, was that limits should be placed on economic growth.

This weak dynamic towards genuine growth was the true cause of the crisis. To the extent that there was growth, it was based on a consumer boom rather than real organic development.

The measures proposed in the white paper do nothing to tackle this problem. For instance, setting up a tripartite financial stability committee of representatives from the Bank of England, Financial Services Authority and Treasury cannot remedy the fundamental problem. Economic weakness cannot be resolved by slightly rejigging state institutions.

Indeed, the government is failing to recognise the gravity of the economic challenge. Recent figures show that Britain is facing its sharpest economic contraction in half a century, yet the government is still preoccupied with stabilising the banking system.

Eventually a recovery will come, but it is likely to be anaemic. The government must stop hissing at bankers and start tackling the urgent problem of ­economic restructuring.

Labels: economics, finance, Fund Strategy, growth

A belated look at the recent Joseph Rowntree Foundation report on Understanding Attitudes to Tackling Economic Inequality by Tom Horton and Louise Barnfield of the Fabian Society. A couple of points that struck me:

* Almost everyone defined themselves as in the middle of the income spectrum. This is despite the fact that those polled were a cross-section of the population. The “income gap” was therefore interpreted as being between the “middle” and the super rich.

* The idea of prioritising economic growth as a way of raising living standards was unpopular (p45). This could well be a popular perception but it is also possible that the authors’ prejudices skewed the results. They linked support for economic growth with a free market vision and support for smaller government. It apparently it did not even occur to them that it is possible to be in favour of strong growth without being a free marketeer.

Labels: growth, inequality

It’s official. The leaders of the world’s largest economies have endorsed the dogma of “green growth”. Ministers from the 30 member countries of the Organisation for Economic Cooperation and Development alongside 10 other nations declared their support for the concept at a conference in Paris.

For my take on how “green growth” means austerity see the post of 2 March 2009 and the related link.

Labels: economics, environment, growth

One of the most insidious trends in recent years is the redefining of development in cultural terms. For example, take this article in today’s Independent on domestic violence in poor countries by Cherie Blair, a human rights lower and wife of a former British prime minister, in support of the ActionAid 6 Degrees project. For her:

“there is a direct link between the struggle to smash the glass ceiling or to ensure equal pay in our societies and the assumptions in others which justify honour killings, deny women the right to vote or leads to infanticide of baby girls. It is the belief, conscious or unconscious, that women are simply not worth the same as men.”

But does such a connection really exist? And what are the consequences of taking such an approach?

While women no doubt suffer discrimination it is hard to see a “direct link” between women lawyers not reaching the top of their profession in Britain and infanticide of baby girls. The difficult situation of women in the South is largely to do with dire poverty.

Recasting development in cultural terms also means interfering in the minutiae of family life in poor countries instead of promoting economic development. It means non-governmental organisations such as ActionAid hectoring poor people about how to run their lives. It does not mean promoting the economic growth that such countries desperately need for their citizens to live full lives.

The cultural approach to development reinforces rather than challenges inequality. To do this in the name of protecting women is particularly shameful.

Labels: development, growth

Many commentators have made the correct point that the next British government, whichever political stripe, will have to make public spending cuts. Forecasts of economic growth, tax revenue and debt repayments suggest cuts will be substantial. What the pundits have missed is that the reluctance of political parties to be open about austerity is consistent with their more general growth sceptic outlook.

New Labour is the clearest example. Gordon Brown’s linguistic convulsions to avoid admitting his party was planning cuts was like watching a worm wriggle at the end of a hook. Brown implied cuts were necessary but was determined not to use the word in relation to his own plans. This is entirely in line with the growth sceptic approach of suggesting austerity is necessary without advocating it openly. He clearly wants to “nudge” people into being more “prudent” but does not want to lose their electoral support.

The Conservatives and Liberal Democrats are little better. Both parties have started to talk openly about austerity and the need for cuts. But only after it became obvious to virtually everyone that the current path of Britain’s finances is unsustainable.

Paradoxically there is probably a roughly inverse relationship between those who believe in economic growth and those willing to talk openly about cuts. The Tory government of the 1980s had many faults but it was explicit about cuts as it believed economic restructuring meant Britain could resume reasonable growth. New Labour, in contrast, is fearful of restructuring and has little confidence in growth.

Of course the ideal solution would be to make the world economy resume a strong growth path as quick as possible. The larger the economy the more scope there is for public spending where necessary. Unfortunately this is a discussion that few commentators seem to want to have.

Labels: consumption, economics, growth, sustainability

The following comment by me appeared in the latest Fund Strategy (15 June).

Oh no it isn’t! Oh yes it is!

The debate about whether the world is recovering from recession is getting mightily confusing. Economic discussion has been largely reduced to pantomime.

Last week pundits latched on to several indicators that appeared to show Britain and America are recovering from the economic downturn. Work by the National Institute of Economic and Social Research, a leading think tank, suggested the British economy grew slightly in April and May. In addition, judging by the latest month’s figures, business confidence is rising, factory output is increasing and house prices are up. On the other side of the Atlantic the Federal Reserve’s Beige Book suggested America’s downturn is moderating, while retail sales rose in May.

But hold on. There is also a lot of bad news out there. Many big exporting countries have reported bad monthly trade figures, including China, Germany, South Korea and Taiwan. Meanwhile, industrial production in the eurozone suffered a record fall in April while the European Central Bank (ECB) has forecast that the region will remain in deep recession till mid-2010. The ECB also had to lend €3 billion (£2.6 billion) to the Swedish central bank to help deal with the fall-out from the crisis in Latvia. In addition, several more countries have recently entered recession, including Brazil, Romania and Switzerland.

Nor is the divide between the Anglo-Saxon economies and the rest. Lombard Street Research argued that the jump in retail sales was mainly to do with the increase in petrol prices rather than economic recovery.

What does all this conflicting data show? For a start, reality is complex. Understanding it means more than looking at a few sets of data.

More importantly, far too much attention is paid to short-term indicators. Even when recovery comes, it is likely to be anaemic.

At some point the world will escape from technical recession. Growth will be restored in strict mathematical terms, but looks set to be weak. The economic growth dynamic in the developed world is generally feeble and there is also a large debt overhang.

The key challenge facing the world economy over the coming years is how to achieve a path of strong growth. Far better to discuss this problem than have a pantomime discussion on “green shoots”.

Labels: economics, finance, Fund Strategy, growth

A hugely revealing essay attacking growth by James Gustave Speth for America’s Schumacher Society. Speth is, among other things, a former head of the United Nations Development Programme (1993-9). Yet a man who was entrusted with the leadership of one of the world’s key development institutions is blatantly anti-growth:

“Economic growth may be the world's secular religion, but for much of the of the world it is a god that is failing – underperforming for most of the world's people and, for those of us in affluent societies, creating more problems than it is solving. The never-ending drive to grow the overall U.S. economy undermines families, jobs, communities, the environment, a sense of place and continuity, even mental health. It fuels a ruthless search for energy and other resources, and it rests on a manufactured consumerism that is not meeting the deepest human needs.”

Thanks to Austin Williams for the link.

Labels: consumption, development, environment, growth, sustainability

Carl Schramm provides a useful review of growth theory in an article for Real Clear Markets. He takes in key mainstream thinkers on economic growth and development including Paul Collier, William Easterly, Deepak Lal, Dani Rodrik, Walt Rostow, Jeffrey Sachs, Robert Solow and Mohammad Yunus.

Two points stood out for me. First, the difficulty mainstream economic theory has in explaining economic growth:

“Harvard economist Elhanan Helpman published an entire book exploring the “mystery” of economic growth only a few years ago, and even Robert Solow, who won the Nobel Prize for his pioneering growth theory, today says there are more questions than answers as to the causes of growth. This failure to understand the sources of America’s own economic performance, let alone the world’s, will be a serious handicap as we try to figure out how to renew prosperity in the face of a dramatic global slowdown.”

Second, the anti-growth sentiment at the root of microfinance:

“Muhammad Yunus, a Ph.D. in economics who won the Nobel Peace Prize, disregards all such evidence in Creating A World Without Poverty (2008). Having created Grameen Bank, an institution that increased remarkably the welfare of millions of the world’s poorest in Bangladesh through the innovation of micro-credit, he appeals for a new world economic order that does not contemplate growth. “The bigger the world economy, the bigger the threat to planet Earth.” For global welfare to increase, he argues, capitalism will have to be reformed through “social businesses”—entities that put people above profits.”

Labels: development, economics, finance, growth

It is rare to find new ways of expressing growth scepticism – the arguments tend to fit into well-established patterns – but Richard Reeves came up with one in an article in the Financial Times yesterday. The director of Demos, an influential British think tank, came up with “progressive austerity”. By this he means cutting public spending in such a way that preserves the programmes that most benefit from the poor.

The fundamental point this misses is that what is needed is growth rather than austerity. Rather than debate which London professional orchestra to cut funding to – he says there are five – we should be discussing how to restructure the economy to bring about vibrant growth.

What next from Demos? Perhaps “how dictatorship can advance democracy”!

Labels: economics, growth, inequality, progress

More attempts to redefine the American dream in diminished terms (see post of 6 March 2009).

The traditional conception of the American dream, as put forward by James Truslow Adams in his book The Epic of America in 1931 was of: “that dream of a land in which life should be better and richer and fuller for everyone”. But the desirability of becoming richer, or the link between wealth and a full life, is increasingly being called into question.

William Greider, a veteran left wing journalist, suggests an alternative idea which is explicitly opposed to the goal of becoming richer in an article in the Nation (and in turn an extract from his new book on Come Home America (Rodale Press)): “Here is the grand vision I suggest Americans can pursue: the right of all citizens to larger lives. Not to get richer than the next guy or necessarily to accumulate more and more stuff but the right to live life more fully and engage more expansively the elemental possibilities of human existence.” In essence Greider is proposing that Americans accept austerity – although he is too coy to use the word – and a vague hope that this will somehow lead to more fulfilling lives. The idea that the end of scarcity is a necessary condition for true freedom is alien to him.

Even more explicit is Ted Kulongoski, the governor of Oregon. He was recently quoted in the New York Times as arguing: “Other than taxes … the hardest thing I find to talk with my constituents and my citizens about is about changing lifestyles.” By “changing lifestyles” it is clear he means reduced living standards.

Finally, there is the story of stuff a 20 minute environmentalist video rant which has apparent had over six million viewings. At a conservative estimate I counted at least 20 serious misconceptions in 20 minutes. My favourite was her insistence that human baby milk is incredibly toxic one minute followed by her reassurance that breastfeeding is still best straight afterwards. It is hard to understand how she can justify giving what she claims is a highly poisonous substance to babies. I am no expert in child care but it seems to me incontrovertible proof of a mentality that is, to put it politely, confused.

Labels: America, book, consumption, film, growth

The concept of greed is central to the popular critique of capitalism. It is interesting therefore to trace how its use has evolved in recent years.

Until I read the article in this week’s Spectator by Fraser Nelson I did not realise that Gordon Brown had a book called Where There’s Greed published in 1987. Nelson quotes Brown denouncing the Conservatives and the “sinister insights of Adam Smith”. But it should be clear that what Brown really despises is the idea of progress and material advance. Indeed a key element of Smith’s philosophy was his link between these two elements.

Brown’s book was published in the same year as Oliver Stone’s Wall Street appeared in the cinema. The film is often remembered as a celebration of “greed” and the financial markets. In fact the intention of Stone’s film was clearly to satirise “greed”. Evidently Michael Douglas has just signed up to do a sequel to the movie in which he reprises the role of Gordon Gekko. It will focus on the recent turmoil in the financial markets.

Unravelling the concept of greed is becoming increasingly important to anyone who wants to defend economic growth and its link to progress.

Labels: book, consumption, film, finance, growth

It is important to put the current demands for austerity in Britain into the right perspective. The more explicit character of the call for austerity is an important development. But the drive for austerity is not new nor has the process unfolded to its full extent.

The Conservative Party has pushed the idea of the age of austerity hard at its spring forum in Cheltenham this weekend. It is also calling for a “government of thrift”.

But the Liberal Democrats had already beaten it to the post with Nick Clegg’s call for a mood of austerity earlier in the year. He also said it should be “green” and “fair”.

As I have argued previously on this blog the idea of austerity is implicit in growth scepticism. The idea that there is a need to put limits on growth for the sake of, for example, the environment or human happiness became mainstream in the 1970s. The importance of the recent statements is that they are becoming more explicit rather than implicit.

This more open drive to austerity also shows the idea of the “green squeeze”, popular last summer, is wrong (see 1 July 2008 post). Green ideas are not going to suffer a backlash as a result of the economic crisis. On the contrary, austerity will often be sold to the public as a desirable green measure.

However, it is clear from the Labour Party’s reluctance to talk openly about austerity that the process still has further to run. The governing party is still talking coyly about “efficiencies” rather than “cuts” in public spending. It is also trying to balance its desire for austerity with its fear of worsening the downturn by discouraging consumers from spending.

The unfolding of the demand for austerity should be monitored closely in Britain and in other countries.

Labels: consumption, economics, environment, ethics, growth

I see that yet another documentary, Hooked on growth, is being made claiming that we should break our supposed addiction to growth. Surely it is time for Dave Gardner - the producer, director and writer of the film who describes himself as the “voice of reason in Colorado Springs” - and others like him to change their tune? Now that the world economy looks set to shrink for the first time since 1945 how about a documentary in praise of rising unemployment, falling living standards and cuts in consumption? Presumably the pain the world economy is suffering is welcome from their jaundiced perspective?

Labels: consumption, economics, growth, television

Thomas Friedman, the New York Times foreign affairs columnist and doom-monger-in-chief, has written an op-ed piece claiming the economic growth model must come to an end:

“We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ...

“We can’t do this anymore.”

This passage makes the elementary mistake of conflating two different things. It is true that the economic imbalance between American consumption and Chinese production looks unsustainable. Either the Americans will have to produce more than they are or consume less relative to the Chinese. America cannot simply continue borrowing huge amounts of Chinese money to finance its consumption. But this is a fundamentally different problem from the supposed natural limit to economic growth that Friedman is suggesting.

Labels: America, china, climate, economics, environment, growth

The purpose of David Kamp’s cover story on “Rethinking the American dream” in the April 2009 issue of Vanity Fair seems to be to argue that economic growth has reached its limits. He comes to the conclusion by way of the likes of John Kenneth Galbraith and Gregg Easterbrook (plus a nod to Simon Cowell):

“And what about the outmoded proposition that each successive generation in the United States must live better than the one that preceded it? While this idea is still crucial to families struggling in poverty and to immigrants who’ve arrived here in search of a better life than that they left behind, it’s no longer applicable to an American middle class that lives more comfortably than any version that came before it. (Was this not one of the cautionary messages of the most thoughtful movie of 2008, wall-e?) I’m no champion of downward mobility, but the time has come to consider the idea of simple continuity: the perpetuation of a contented, sustainable middle-class way of life, where the standard of living remains happily constant from one generation to the next (original emphasis).”

Labels: America, consumption, growth, progress

After several recent posts about the trend towards austerity perhaps something for comic relief. Peter Wilby, a columnist for the New Statesman, writes in a review for the magazine published on 19 February:

“Children … have become the motors of economic growth, responsible (through what they spend and what their parents spend on them) for a market worth nearly £100bn annually, up 33 per cent in five years. Moreover, they influence an unquantifiable proportion of adult spending on, for example, cars and holidays. If parents show children insist they spur themselves to renewed effort. Companies once sold to children by marketing to parents. Now it's the other way round, with children sometimes pointing their parents to advertisements for loans or new credit cards.”

This takes to an absurd conclusion the already odd notion that consumption drives the economy. It is not clear where such commentators think consumer goods come from. Perhaps they are somehow consumed without being produced first? It also makes the common mistake of overestimating the importance of personal consumption in the economy.

Labels: book, consumption, economics, ethics, growth, review

I am having enormous problems finding a title for my book which pleases me, my agent and my publisher. I have tried numerous permutations of words such as abundance, affluence, growth, progress and prosperity but with no joy. No doubt there is scope for some lateral thinking but I am stumped for now.

Anyone who can come up with a good title I can use will have my eternal gratitude and a free copy of the book when it comes out (and I do not intend to give many away).

Labels: growth, progress

Lord Robert Skidelsky, Warwick University professor and biographer of Keynes, expounds classic growth sceptic ideas in the cover story of the January issue of Prospect.

He argues that: “to ensure we have an ordered system requires us to make globalisation efficient and acceptable. In the course of that debate, I expect one crucial point to emerge: the benefits of globalisation are real, but have been exaggerated. Improvements in the allocation of capital and reductions in opportunities for corruption are offset by increased volatility. Globalisation also raises huge issues of political accountability and social cohesion that are scarcely considered by economists, and only lazily by politicians.”

The underlying reason, in his view, for this blind spot is that the world has: “not adjusted to the era of partial abundance, nor to the existence of natural limits to growth.”

Labels: economics, growth

Monthly Review, an American left wing publication, has an article by Immanuel Wallerstein, a senior research scholar at Yale, on “The Human Costs of Economic Growth” in its December issue. The title is misleading as the article is a review of Amiya Kumar Bagchi’s Perilous Passage: Mankind and the Global Ascendancy of Capital (Rowman & Littlefield, 2005). The most explicit reference to the headline states that Bagchi:

“wishes to center his attention on the degree to which economic growth under capitalism is very poorly correlated with human development, even in the West. His book is an attempt to analyze in detail the human suffering that has been at the basis of ‘the advantages reaped by the European ruling classes’”.

Most of the review focuses on different explanations for the relatively rapid economic growth of the world over the past two centuries. However, from Wallerstein’s account the book sounds highly sceptical of the benefits of economic growth:

“Bagchi analyzes this capitalist world not in terms of how much growth it made possible but how much human development it made possible, and in this regard he finds it very wanting. One of his principal services to readers is his pulling together of the demographic literature on life expectancy, the public health literature on disease prevention and cure, data on nutrition, income levels, and the various forms of labor coercion to give us a nuanced picture of human development over time and throughout the world, one that is differentiated by geography, age cohorts, and gender.”

Labels: book, development, economics, growth

Highlights of my appearance at the Battle of Ideas 2008 can now be viewed on the latest Worldbytes programme (see 30 October 2008 post). I appeared on a panel on “Growing pains: the pros and cons of economic dynamism” alongside, among others, Martin Wolf of the Financial Times and Ha-Joon Chang of Cambridge University.

Labels: development, economics, growth, media appearances, speeches, Worldwrite

A particularly interesting insight into the logic of growth scepticism from Philip Stephens, an associate editor of the Financial Times, in a piece in today’s newspaper entitled: “Global warming: the way not to mobilise the masses”.

He first acknowledges that anti-growth sentiment of the type favoured by protestors against Stansted airport is unlikely to win popular support”

“In this mindset saving the planet demands that people give up their foreign holidays, abandon their cars, turn down the heating and clean their teeth in the dark. Through this prism, pain is a virtue and the halting global warming metamorphoses into a much broader attack on consumerism, materialism and, at the extreme, anything that smacks of the market.

“Whatever one makes of the intent, such zealotry is doomed to failure. Self-flagellation does not sell. If keeping the planet cool is seen to be the project of affluent middle-class do-gooders the masses will mobilise all right – against it.”

The wording in the second paragraph should be carefully noted. He does not object to the intent of the protestors but simply the zealotry with which they publicise their case. Stevens favours putting the argument in a positive form:

`’The case must be framed as an opportunity rather than a burden. Technological innovation – in automobile design, energy efficiency, renewable energy and the rest – is more than a useful adjunct to an austere low carbon lifestyle. It is a vital pillar of any plan to reduce the build-up of CO2. Bluntly stated, unless we find a way to capture emissions from coal-fired power stations, the game will be lost.”

For him technological innovation - of a low horizons, low carbon kind - needs to accompany the austere low carbon lifestyle. They are not an alternative.

Labels: climate, consumption, economics, environment, growth, technology

Yesterday I went to the launch of the International Growth Centre at the London School of Economics (LSE). The international network of scholars is a joint venture between LSE and Oxford University with funding of £42m from Britain’s Department for International Development (DFID).

Superficially the tone was incredibly pro-growth. This was reflected in a DFID booklet (PDF) handed out at the event called Growth: Building Jobs and Prosperity in Developing Countries. It opens with the sentence: “Economic growth is the most powerful instrument for reducing poverty and improving the quality of life in developing countries”. Much of the rest of the text is in a similar vein.

However, numerous caveats to the initially upbeat assessment of growth are subtly introduced including:

* An emphasis on “poverty reduction” rather than all-rounded development.

* An emphasis on the importance of climate change.

* References to “environmental sustainability” and “low carbon” growth.

The whole approach is also technocratic. It emphasises “growth diagnostics” - experts identifying the barriers to growth - rather than mass participation in development. Although it discusses “ownership” of projects by third world nations this conception only seems to take in a narrow elite of government officials, business leaders and non-governmental organisations (“civil society”).

I also notice that Paul Collier, one of the directors of the centre and a speaker at yesterday’s event, has a forthcoming book, Wars, Guns and Votes (Bodley Head), out on development. It evidently extends his call for United Nations intervention in troubled areas (see 14 May 2007 post) - an initiative that can only make matters worse for the world’s poorest countries.

Labels: Africa, book, climate, development, economics, environment, growth

The following is my latest comment from Fund Strategy.

Although the West's current predicament differs in some respects from Japan after the collapse of the baburu keiki (bubble economy) of the 1980s there are many similarities.

For those who are not old enough to remember, or who have not read the history, the Japanese economy was growing at a relatively healthy average rate of 4% in the 1980s. But the expansion was artificially inflated by surging equity and property prices. At the end of the decade asset prices crashed and the economy entered a period of slow growth. The average growth rate in the 1990s was only 1.7%.

The similarities between Japan in the 1990s and the West today are fairly apparent. In both cases the economy suffered as a result of the bursting of an artificially inflated asset price boom. And in both cases an indecisive and often gormless political leadership made the crisis worse than it needed to be. Rather than address the fundamental problem of a lack of growth in real productive capacity they simply attempted a fiscal stimulus.

There are also differences. Japan's problems were partly centred on the industrial sector. Manufacturing in particular had reached a stage where it needed to restructure to be able to achieve a new round of investment. After spectacular economic growth in the 1950s and 1960s its once mighty industrial sector needed to be revamped. In contrast, the West's downturn is focused on the consumption side of the economy. Manufacturing is now being hit but it was consumption that suffered first.

The situation also differs because the emerging economies play a far more important role in the world economy than they did in 1990. It is China, rather than America, that has become the largest source of economic growth globally.

If there is a lesson to be learned from Japan's "lost decade" it is that decisive political action is a key part of solving the crisis. It is not enough just to spend money. Resources should be devoted to bolstering productive capacity. It is also necessary to involve emerging economies in the recovery process by acknowledging their increasing importance in the global economy

Labels: Asia, economics, growth

A thick, glossy magazine caught my eye in the newsagent. The winter 2008 Davos Edition of The New Economy has a polar bear on the front cover along with a main cover line proclaiming: “Standing on the edge: Why economic growth is bad for the planet. The cover section includes articles by Herman Daly (veteran ecological economist), Tim Jackson (adviser to the British government on sustainability), Gus Speth (a former adviser to American President Jimmy Carter) and Susan George (veteran political campaigner).

Perhaps the strangest aspect of the whole thing was the claim on the contents page that: “The tenet that economic growth is essential to global stability and prosperity has long remained unchallenged”. Such claims, although often made, are absurd. The benefits of growth are constantly being questioned. Indeed the authors of the cover story are among many who have long questioned the benefits of growth. I should probably start collecting examples of this claim to alleged heresy.

Labels: economics, environment, growth

I have unwittingly gone straight from one anti-growth BBC television documentary to another. “High Anxieties: The Mathematics of Chaos”, a one-off documentary by David Malone, achieves this effect by muddying the difference between the natural world and the social world. It starts by outlining how the Newtonian worldview was a relatively simply linear one which allowed for human beings to increase their control over nature. But the development of what later became known as chaos theory from Henri Poincaré (1854-1912), a French mathematician, onwards showed the world was both more complex than previously assumed and non-linear. This set up a phoney debate between environmentalists who recognised the need for caution and limits and economists who believed in growth. It ended with James Lovelock, a veteran environmentalist, arguing that with climate change we could, metaphorically speaking, be at the edge of a cliff and unable to return to normality.

Chaos theory may well be a good way to understand non-linear natural systems such as climate. But the social world is fundamentally different from the natural one. Society is composed of human beings with the potential to act consciously to mould the world around them.

Labels: economics, environment, growth, science, television

Have just caught up with the first episode of Simon Schama’s BBC television documentary series on “The American Future: A History”. It might more accurately be called “reinterpreting American history to fit today’s culture of low expectations”.

The episode on “American plenty” focused on how America has, sensibly in Schama’s view, come to accept the need for limits. It starts symbolically with the Colorado river and expresses the view that “the land of plenty is running dry”. The building of the Hoover Dam and Lake Mead was basically presented as an act of hubris. Although it enabled the irrigation of several states and the creation of cities such as Las Vegas it was running dry as a result of over-use and climate change. The message was clear: America has to learn to live with fewer resources.

Schama presented the debate between expansion and restraint as a constant theme of American history. Expansion might have brought some short term gains in living standards but it was also responsible for such acts as the “ethnic cleansing” of native Americans. He also presented the 1980 American presidential election as a contest between the calls for restraint of Jimmy Carter and the drive for expansion by Ronald Reagan. He ended with the correct point that both main candidates this time around accept the need for restraint.

Schama’s history is a classic piece of growth scepticism. It downplays the huge benefits of economic growth and exaggerates the scale of problems that need to be overcome.

Labels: America, economics, environment, growth, television, water

Just as the world appears to be on the edge of an economic downturn New Scientist (18 October) comes along with a special issue on “The folly of growth”. Its online edition edition is even bleaker with a headline of “How our economy is killing the earth”. It seems to be based on the hoary old argument that the economy is growing exponentially in a finite world. Contributors include many of the usual suspects such as Herman Daly, Susan George, Tim Jackson and Andrew Simms. Along with the customary references to books by Herman Daly, Paul Ehrlich, Al Gore and Jeffrey Sachs are others by Peter Dauvergne, Herve Kempf and James Gustave Speth.

If only the magazine would stick to science rather than recycling dodgy economics.

Labels: book, economics, environment, growth, science

Just a reminder I will be speaking in the session growing pains: the pros and cons of economic dynamism at the Battle of Ideas festival at the Royal College of Art, London on 1-2 November. Other speakers in that session include Martin Wolf of the Financial Times, Paul Mason of BBC Newsnight and Ha-Joon Chang of Cambridge University.

Labels: development, economics, growth, speeches

I will be debating Ha-Joon Chang of Cambridge University, Paul Mason of BBC Newsnight and Martin Wolf of the Financial Times in a session on the pros and cons of economic dynamism on 1 November. It is part of the Battle for Prosperity strand at this year’s Battle of Ideas festival in London.

Labels: development, economics, growth, speeches

I have finally managed to find a publisher for my book on growth scepticism! I tried three other publishers before I found my present one but each of them backed away when they realised the full implications of my argument. The experience reinforced my view that an uncompromising defence of prosperity is both necessary and likely to prove unpopular in some quarters.

Labels: book, growth

The following comment by me - written during the opening ceremony for the Olympic games - appeared in this week’s Fund Strategy.

The Beijing Olympics symbolises the most important and positive development in the world in decades: the rapid economic development of China. Those who whine so noisily about the Olympics and China reveal more about their own insecurities than about the Asian giant.

China’s rapid growth over the past 30 years has raised more people out of poverty than any other development in world history. Its population is benefiting enormously from rising prosperity in a country where the scourge of famine was until recently a frequent occurrence. It is true that inequalities within China are widening, but in absolute terms living standards are immensely higher than in the past. China’s rapid growth has also led to a welcome reduction in the inequality gap between the developed world and emerging economies.

Given that China’s population is 1.3 billion, a fifth of the world’s, its internal development is hugely important. But it has also brought immense benefits to the rest of us. The global economy would have grown far more slowly in recent years if it were not for China’s contribution. Its rapid growth has played a key role in keeping the world economy going in the midst of an economic slowdown in the West.

If China’s development is so positive, why does it elicit so many complaints? It is hard to escape the conclusion that the West feels threatened by China’s emergence. Although China’s growth strategy is pragmatic, the western countries are worried they could lose their privileged place in the world.

The nauseating double standards applied to China confirm the point that the criticism is driven by western anxieties. No doubt the Chinese regime is deeply autocratic, but many critics forget, or at least downplay, anti-democratic trends at home. Try drawing breath in any British city without being filmed by CCTV cameras. Or how about detaining suspects for 42 days without charge? Those who complain about Tibet seem to forget about British troops in Afghanistan and Iraq. Defenders of such measures might point to the threat of terrorism and crime, but Beijing could do the same.

Rather than carp about the Olympics and China, it is time to enjoy the spectacle of the greatest sporting event on Earth.

Labels: china, development, Fund Strategy, growth

I am struggling to find a term to describe the angst-ridden mindset of even the most pro-capitalist economists nowadays (see 1 August post). Cheerless cheerleaders? Demand depressives? Moody mentalists? None of these quite captures it. Any ideas please email me.

In the meantime here is a contribution from Willem Buiter, a professor at the London School of Economics and former member of the Bank of England’s monetary policy committee, from today’s Financial Times:

“Once the cyclical correction in emerging markets has run its course, I expect growth in those countries to resume at rates that are high but no longer stratospheric. The reason is the environmental constraints on growth in these markets. I am not referring to the (massive) contribution of China and others to global warming, but to the local and regional environmental fall-out from unsustainable industrial and agricultural development: increasing scarcity and rising costs of clean fresh water, clean air and soil that is fit for humans. When the last athlete hobbles out of the polluted Olympic Games of Beijing, black-lunged and gasping for oxygen, there is likely to be a reassessment of what is sustainable growth in China. Even totalitarian regimes require, if not the consent, at least the acquiescence of the populace. Double-digit rates of growth are a thing of the past.”

His article concludes:

“So how bad will things get? After the slowdown/recession has corrected the excesses of the past decade, prospects for the overdeveloped part of the world are quite reasonable, as long as material aspirations moderate in line with modest prospects for sustained growth in standards of living. For emerging and developing countries at the right end of the commodity boom, the potential for prosperity is there, as long as the resource curse is avoided. For poorer countries at the wrong end of the commodity boom, the combination of the terms-of-trade shock and acute environmental challenge will make life very difficult.”

I was particularly struck by the reference to the "overdeveloped" parts of the world.

Pass the prozac!

Labels: consumption, economics, environment, growth, water

Harvard’s Dani Rodrik makes the correct point that even staunch defenders of globalisation are becoming nervous about its benefits. Writing for Project Syndicate (reproduced in Britain’s Guardian newspaper) he argues that:

“we have Paul Samuelson, the author of the postwar era's landmark economics textbook, reminding his fellow economists that China's gains in globalisation may well come at the expense of the US; Paul Krugman, today's foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality; Alan Blinder, a former US Federal Reserve vice-chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labour force; Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, writing of his disappointment with how financial globalisation has turned out; and Larry Summers, the US Treasury chief and the Clinton administration's "Mr Globalisation," musing about the dangers of a race to the bottom in national regulations and the need for international labour standards.” (see original article for links).

He could have added Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard, who recently argued in the Financial Times (29 July) that:

“Of course, today’s mess was many years in the making and there is no easy, painless exit strategy. But the need to introduce more banking discipline is yet another reason why the policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom. For most central banks, this means significantly raising interest rates to combat inflation. For Treasuries, this means maintaining fiscal discipline rather than giving in to the temptation of tax rebates and fuel subsidies.”

As Rodrik argues it is now mainstream economists who pose the most criticisms of globalisation: “The cheerleaders' true sparring partners today are not rock-throwing youths but their fellow intellectuals.”

For Rodrik the key question is to find the appropriate rules for regulating the globalised world. He does not appreciate the dangers that such regulation can bring - particularly if they restrain economic growth.

Labels: economics, globalisation, growth

The following comment by me from Fund Strategy argues it is useful to describe this economic downturn as “mental”.

A senior American politician and economics expert got into trouble recently for saying America was in a “mental recession”. Phil Gramm, vice-chairman of UBS and a former senator, was forced to resign from his position as a top economic adviser to John McCain, the Republican presidential candidate. Barack Obama, McCain’s Democrat rival, had already pilloried Gramm saying – in a reference to a prominent TV talk show therapist – “America already has one Dr Phil”. Despite the hostile reaction, the idea of this being a “mental recession” is a useful one. Both in America and Britain this economic downturn is substantially different from the typical recession. This should be clear from an examination of the magnitude of the slowdown and its character.

In terms of the numbers, it would be easy to assume from the gloomy discussion that the economy is already contracting. But, at least so far, that is not the case. For example, the latest British GDP figures show the economy expanded by 0.2% in the second quarter. It is certainly possible that Britain could dip into recession – defined as two consecutive quarters of contracting GDP – next year, but it has not crossed the threshold so far. Nevertheless, the average independent forecast predicts GDP growth of about 1.5% in 2008 and 1.1% in 2009. It may not be as pleasant as more rapid growth, but it is hardly the Great Depression.

The global figures appear even more robust. According to the latest forecasts from the International Monetary Fund, global output should grow by 4.1% in 2008 and 3.9% in 2009. America is forecast to grow by only 1.3% this year and 0.8% next year, while emerging economies will grow far faster.

The figures do not tell the whole story. Not only is the slowdown far more muted than generally assumed, it is also different in character. Traditional recessions have focused on the production side of the economy. Industry has suffered a shakeout and workers have lost their jobs as companies are restructured. This time, the driver of the slowdown seems to be much more on the consumption side. A reining-back on credit and a squeeze on disposable income seem to be key factors.

A more balanced view of the slowdown should help deal with it in a calmer and more rational way. At present, politicians of all shades seem prone to panic.

Labels: consumption, economics, Fund Strategy, growth

Dani Rodrik of Harvard University has written a summary of the new pragmatic development consensus in the Guardian (10 July). He focuses it on the Spence Commission on Growth and Development (on Spence see posts of 24 April 2007, 13 April 2008, 23 May 2008 and 15 June 2008).

Labels: development, economics, growth

A couple of people have asked me what impact I think the current economic slowdown will have on growth scepticism. The assumption behind the question seems to be that economic restraint will somehow make people see the benefits of growth again. In my view the answer is not straightforward but, on balance, the growth sceptics are likely to be strengthened.

It is true that cuts in living standards, or even slow increases in living standards, can generate resentment among those involved. Worrying about the consequences of wealth in the abstract is one thing but adjusting to the reality of lower living standards is another.

But in the current cultural climate it is likely that growth scepticism will be strengthened on balance. For example, striving for growth is likely to be seen as coming into conflict with environmental limits. Or it could also lead to fears of the destabilising consequences of inequality.

Growth scepticism can be seen, at least in part, as a negative and fearful response to the circumstances in which we find ourselves. For example, it was the economic crisis of the early 1970s that played a key role in first popularising the idea of the “limits to growth”.

Labels: consumption, economics, growth

Martin Wolf, the chief economics commentator of the Financial Times, argued in a feature in yesterday’s paper that sustaining economic growth is the century’s big challenge.

The article, which was partly a review of the new book by Jeffrey Sachs and partly a discussion of the recent growth commission report, started by asking:

“Is it possible for the vast mass of humanity to enjoy the living standards of today’s high-income countries? This is, arguably, the biggest question confronting humanity in the 21st century. It is today’s version of the doubts expressed by Thomas Malthus, two centuries ago, about the possibility of enduring rises in living standards. On the answer depends the destiny of our progeny. It will determine whether this will be a world of hope rather than despair and of peace rather than conflict.”

As a free marketeer Wolf says that his inclination is to argue that problems raised by economic development can be resolved. But later on he admits to developing some sympathy with environmentalism:

“it has become evident, at least to me, that the human impact on the planet on which we depend has risen to enormous proportions. We have treated the global commons as if they were free. Self-evidently, they are not.”

Evidently free marketeers cannot be relied upon to give an unequivocal defence of economic growth.

Labels: development, economics, environment, growth, Malthus, progress

A leader in today’s Financial Times includes a useful summary of the just published Growth Report from the Commission on Growth and Development:

“The “Washington Consensus” – stabilise, privatise and liberalise – is dead. Long live the new pragmatism. That is the message of “the growth report” released this week by the commission on growth and development chaired by the Nobel laureate, Michael Spence.

“No single recipe will secure sustained and rapid economic growth in poor countries, it argues. Governments have to choose from a variety of ingredients. Yet only governments can do so. They “are sometimes clumsy and sometimes errant”, but “active, pragmatic governments” are indispensable.

“This pragmatism is one of the two principal contributions of this report. The other is its focus on growth itself. This is not to suggest that growth alone matters. But without it sustained improvements in human welfare are impossible: one cannot redistribute nothing. The report forces us to refocus attention on this overriding goal.”

I suspect the support for growth is more qualified than the comment suggests. However, since most of the commission’s members are developing country policymakers it is likely to be more pro-growth than if it was composed mainly of Westerners.

Labels: development, economics, growth

Tomorrow the Hamilton Project at the Brookings Institution and the Commission on Growth and Development will hold a joint discussion on the role of economic growth in poverty reduction. Participants will include Robert Rubin, Michael Spence, Larry Summers. The Growth Commission includes some useful working papers on its website including one by Ravi Kanbur.

Labels: development, economics, growth

It is sad that New Scientist magazine seems to have swallowed environmentalist prejudices whole. The editorial in the latest issue (5 April) is a defence of The Limits to Growth, a key 1972 report arguing that there are natural limits to economic growth. It describes the report as warning that with growing population and an expanding economy “resources would eventually run out”. In fact the report argued that many key resources would run out within a few years. It proved spectacularly wrong.

The cover story is on “the collapse of civilisation”. It builds on the work of Jared Diamond: best-selling environmentalist author and purveyor of the idea that the agricultural revolution was the worst mistake in human history. The basic argument is that that more complex society becomes the worse things could get if it breaks down.

Perhaps we should all be living in mud huts isolated from the rest of humanity? That way if our neighbours encountered problems we could be immune!

Labels: consumption, economics, environment, growth

Kevin Watkins, now at Oxford University’s global economic governance programme but formerly at the United Nations Development Programme and Oxfam, had a comment in yesterday’s Guardian on the scourge of traffic accidents in developing countries. Sadly he used the opportunity to take a side swipe at economic growth while also implicitly calling for more external intervention into poor countries:

“Why, then, are governments failing to protect their citizens? Partly because the victims lack a political voice. But often traffic death and injury is viewed as the inevitable collateral damage that comes with economic growth.”

Surely the key problem is that such countries do not have the resources to provide adequate safety measures. In that sense it is a problem that comes with insufficient economic growth. No doubt the more affluent such countries become they better able they will be to provide a better infrastructure for their inhabitants.

Labels: development, growth, transport

A substantial feature in Monday’s Wall Street Journal on the new “limits to growth” illustrated, if anything, the limitations of the free market critique of environmentalism. The article - which unfortunately it not freely available on line - started with the correct observation that the Cassandras have always proved wrong on limited resources. But it lacked confidence in the ability of the current generation to increase supply to meet rising demand. Its conclusion:

“Indeed, the true lesson of Thomas Malthus, an English economist who died in 1834, isn't that the world is doomed, but that preservation of human life requires analysis and then tough action. Given the history of England, with its plagues and famines, Malthus had good cause to wonder if society was "condemned to a perpetual oscillation between happiness and misery." That he was able to analyze that "perpetual oscillation" set him and his time apart from England's past. And that capacity to understand and respond meant that the world was less Malthusian thereafter.”

By coincidence the Financial Times today ran a piece by Martin Wolf, its chief economics commentator, lamenting the death of the free market:

“Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits.”

Labels: consumption, economics, finance, growth, Malthus

Barbara Ehrenreich makes an unusual analogy when she discusses the American economy in an article on The Nation website (posted 22 January): “With all the talk about how to stimulate it, you'd think that the economy is a giant clitoris.”

Her initial target is the recently announced fiscal stimulus. She makes the fair point that it looks likely to benefit the rich more than the poor. But then she moves on to a broader attack on what she calls “economy fetishism”. She goes on: “If we have learned anything in the last few years, it is that the economy is no longer an effective measure of human well-being. We've seen the economy grow without wage gains; we've seen productivity grow without wage gains. We've even seen unemployment fall without wage gains.”

In her conclusion she argues: “My point is just that our economy--with its dizzying bubbles, wild lending sprees, reckless downsizings and planet-wide hyper-sensitivity--has gotten too far disconnected from ordinary human needs.”

As I have argued before it is a mistake to use the undoubted existence of inequality as an argument against economic growth. If anything there needs to be even more importance attached to the economy and more growth so that everyone can benefit. The problem is not too much emphasis on growth but too little.

Labels: economics, growth, inequality

spiked has published a review by me of John Kenneth Galbraith’s Affluent Society. I argue that the book, which was first published 50 years ago, anticpates many of the key themes of contemporary growth scepticism.

Labels: book, consumption, economics, growth, review, spiked

The main aim of this note is to spell out the correct statistics on India’s economic growth record. A participant in today’s session on India at 60 at the Battle of Ideas conference claimed incorrectly that India enjoyed strong growth in the decades immediately following the second world war. I said I would put the correct statistics on my site so here they are:

1950-1980 – average growth rate 3.75%.

1980-1990 – average growth rate 5.7%.

1990-2000 – average growth rate 6.0%.

2000-2005 – average growth rate 6.9%.

My source for this is a presentation by TN Srinavasan, a professor of economics at Yale, to an International Monetary Fund book forum on December 14, 2006. A PDF is available here (see page 8).

The pattern is confirmed in the recent country report on India from the Organisation for Economic Cooperation and Development. The graph of GDP growth per head here clearly shows that the economy was pretty sluggish from the 1950s to the 1970s.

As it happens there is a serious debate among economists about Indian’s economic growth but it is not about the facts of growth from the 1950s to 1970s. Instead it is about whether India’s growth took off in the 1980s or whether the reforms of the 1990s were truly responsible.

While I am writing I will quickly correct a couple of other misconceptions.

First, while it is true that India’s agricultural sector is important socially it is much less important economically. Although agriculture accounts for 60% of India’s work force it only accounts for 17.5% of its GDP (see the India entry in the CIA World factbook). Therefore even if the output of the agricultural sector grew rapidly it would only have a limited impact on GDP.

Second, it is necessary to be wary of the talk of India’s “middle class” or indeed that of other developing countries too. The problem is that the term is used extremely loosely. It is necessary to be more specific about how the term is being defined before drawing any sweeping conclusions about a rising middle class.

The point of course it not to be against the use of statistics. On the contrary, they are a valuable tool in understanding development. But they need to be used carefully rather than in a cavalier way.

Labels: development, economics, growth, india