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Plan B – is there an alternative to economic growth? Part 1

Plan B: Is there an alternative to economic growth? Imagine that a family takes a trip to the mountains. They are walking on a path that looked quite good in the beginning when they somehow got on it. But now it’s getting increasingly difficult. It’s narrow and steep and there’s a real danger of falling off the edge, especially for the kids. And it is too late to turn back. The question I would like to address is whether at this point it would be useful to have a map and to look at it. Just to see if there’s an alternative way to go. The answer can be informative for a much bigger journey which is in many ways very similar.

The path on which the majority of the world population has found itself is the path of economic growth. More exactly, a path on which GDP growth is a non-negotiable target of economic and social policy. We got on this path a few hundred years ago when increasing population density and easier trade made it possible for many to abandon self-sufficiency. Instead of producing almost everything for themselves more and more people specialized on something and satisfied their needs through exchange with others. Markets grew quickly and people became mutually dependent on each other.

Market competition made the productivity of any specialized activity essential for success, which led to the improvement of tools and machines. Those who did not increase productivity, however, could lose their jobs.

But many of these people were not able to satisfy their own needs anymore, for instance, because they had no access to land. So the problem of unemployment appeared. The main solution was to increase total production in the economy so that workers can find new jobs.

Therefore, economic growth rates and changes of unemployment became tightly correlated. The extreme example for this is the United States where the relationship between GDP reduction, shown in gray, and the rise of unemployment is almost automatic. This correlation, however, is just one of the factors that make current economies dependent on growth. A second one is related to money. If there are more products and services, then the amount of their virtual equivalents, which is money, can grow as well without generating inflation.

Sharing more money is easier, especially if the costs of growth can be pushed onto other species, countries or generations. So then, growth means that the average income is higher, tax revenues are higher. Governments can spend more on poverty reduction, health care and education, or give more money to the CEOs who will help to re-elect them. States can also borrow more, and usually at a lower cost, which again helps to increase public expenditure.

Moreover, larger economies are more powerful in the global economic and military competition. The extremely influential global financial sector is a further proponent of growth because they stand to lose a lot of money if investments are cut back and default rates increase in the absence of growth.

And this leads to a third, systemic cause of growth dependence: self-amplification in the economic system. Today, most of the important economic variables are connected in a way that any positive or negative change is reinforced. If there is growth and optimism, then new business investments create jobs, wages earned in these jobs increase aggregate spending, and the amount of money can grow in the economy through relatively easy credit. If, on the other hand, growth and expectations are negative, then investments stop, unemployment soars, real incomes fall, and debt problems increase. We are either on an upward spiral or a downward spiral. Stability is always fragile.

And this is partly due to rules and institutions we could change. Yet, increasing stability receives much less attention in economics and politics than staying on, or getting back to, the upward spiral. This path, however, has become life-threatening. Most people have a hunch that endless economic growth is not sustainable on a finite planet. But let’s see what science says about this! It is a fact that past economic growth has been accompanied by increasingly serious environmental problems, such as climate change, the chemical and physical change of our environment, and the loss of biodiversity and ecosystems.