Why growth​?

Ever since World War ll a central preoccupation of leading world governments has been to maintain as high a rate of economic growth as possible. At the same time it has been generally understood that the key indicator for which growth was being sought was Gross Domestic Product (GDP).

It is not widely understood that this figure is mereiy an expression of the total amount of financial transactions – or aggregate value added – during a particular year. The reason this is used as an indicator is that its purpose is to reflect the level of commercial and financial activity in the economy. Hence it is not necessarily to be seen as reflecting the general level of economic prosperity, although it is often treated as such by economic commentators, This is so despite the fact that it may result, for example, in the double counting (as positive additions to GDP) of the construction of a building and its subsequent demolition, while it also allows the inclusion in aggregate GDP of the net value added of sectors such as gambling, which are manifestly not positive for collective welfare and wealth .

It might be wondered why therefore policy makers place such emphasis on maximising GDP given that it does not represent any specific measure of economic welfare. The answer is that the ruling establishment is less concerned with the level of economic or social welfare than with that of aggregate financial transactions, since the latter is a reflection of the total value of commercial activity in the economy – and also of potentially taxable private sector revenues. Hence all transactions that can be seen as adding to this total are to be included in GDP.

The importance of this order of priorities in a capitalist market-based economy should seem quite normal and obvious, given that corporate decisions tend to be made based on appraisals of market trends and prospects, while at the same time government policy decisions need to take account of the general level of economic activity – including the impact on state finances. On the other hand no allowance is made for the fact that many transactions (such as in the above examples) do not represent a positive addition to collective output or wealth.

Equally there is no adjustment made for the fact that many transactions included in the aggregate are purely “paper” ones – i.e. adding to personal income and wealth but not necessarily to collective well-being or prosperity. This point was brought to light by a comment of a former head of the Confederation of British Industry, and subsequently of the Financial Services Authority, Adair (now Lord) Turner, who described – as long ago as 2010 (in the wake of the global financial crisis of 2008 – some of the speculative activity on financial markets as “socially useless”, a remark which unsurprisingly upset many in the City of London.

What is not shown by bare GDP statistics is the extent to which they reflect genuine net additions to output or wealth, whether national or global. To the extent that official policy has nevertheless been concerned to promote high GDP growth it has been a notable failure in recent decades, as shown in the figures below (based on World Bank data). This is all the more remarkable in that it covers the period since the 1970s, which had itself been seen as a decade of relative stagnation. Yet, so far from reviving global growth from this supposed stagnation global GDP has remained, on average, below the pre-1980 level in each subsequent decade.

Average annual rate of world GDP growth at constant prices (per cent)

1961-70 1970-79 1980-89 ¹ 1990-99 2000-09 2010-19

 4,72   3.80   1.9   2.52  2.79  2.94

It is not possible to determine what percentage of the recorded growth was “real ” – i.e. representing actual output of goods and services – rather than purely “paper” gains. However, in view of the progressively more enhanced importance of speculative investment – aided by a more permissive attitude to hitherto illegal share buybacks, which facilitate share price manipulation – it seems reasonable to infer from the above data that the real average growth of global GDP hardly exceeded 2 per cent a year in the 40 years after 1980.

Equally, however, it raises the question of what chance there may now be of reviving growth in face of the perceived need to reduce global carbon emissions and thus the pace of global warming. In fact this prospect must surely now seem more rather than less remote in view of probable future restrictions on activities such as air travel. This danger seems all the greater given that sectors offering apparent potential for growth – such as gambling and pornography – might increasingly be seen as socially undesirable and requiring contraction rather than expansion. This is mainly because such constraints:-

1. Would reduce justification for giving public support to private investments such as would tend to generate growth;
2. They would neutralise arguments against more equal distribution of income, which have hitherto been countered by claims that this could be better achieved by growing the economy – as in the familiar saying (beloved of “trickle-down” advocates) that “a rising tide lifts all boats “.

Hence it would seem self-evident that the pursuit of renewed rapid growth has been and will continue to be at best futile and in any event likely to be negative rather than positive for public welfare. Such a finding, it may be noted. is in line with predictions made by the author in his book The Trouble with Capitalism (published in 1998) even though at that time the threat of global warming was not yet seen as imminent.

In view of the growing evidence that this “growth ideology” is no longer tenable it may at one level seem surprising that there appears to be so little discussion among economists or political leaders of what this might imply for the future global economy. On the other hand, given what is at stake, it is hardly remarkable that the establishment should seek to cling to the status quo for as long as possible.

For, as indicated above, the global economy has been dogged by chronically low GDP growth for the last few decades despite strong political commitment to boost it. Perhaps unsurprisingly, however, there is little official enthusiasm for weakening a policy consensus that is already on its last legs.

While the future pattern of global economic development remains as hard to predict as ever, the likely progressive dissolution of what is still referred to as the capitalist system can be expected to proceed by default – albeit in very chaotic fashion. It would thus be following the example of the French and other revolutions of the modern era, albeit, as may be hoped, without a comparable degree of violence and misery.

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