G20: Obama’s zero-sum wrong

John Coulter

President Obama’s recent claim that all nations can grow their economies, that ‘growth is not a zero-sum game’ is simply untrue. For it to be true Obama would implicitly believe in an infinite flat Earth. The logic is simple although it seems beyond the courage of most politicians to grasp.

Economic growth refers to a percentage year on year growth of GDP. GDP measures the dollars paid for all goods and services, the dollars being adjusted for inflation, i.e. you can’t grow the economy by inflation. GDP is thus a measure of the goods and services flowing through the economy and growth means that more flows through this year than last.

Some, even some environmentalists, try to use the word growth to mean something different from growth of GDP. Often this is a deliberate device to avoid facing the fact that the prevailing view that we must stimulate economic growth is wrong, dangerous and impossible. Obama meant economic growth, growth of GDP, and so did our treasurer and every other person who attended the G20. There can be improvement in the human condition without economic growth as explained below.

In classical economics the inputs to the provision of goods and services were: capital, land and labour (‘land’ should today be broadened into material resources more generally). Capital is really composed of the other two as it is either capital saved from previous production in which the inputs were material resources and labour or is capital created by banks as loans which is a claim on future resources and labour. So the real inputs to production are material resources and labour.

How then does a person, a group or a nation increase its GDP, its throughput of goods and services?

Imagine two groups or nations A and B and suppose group A invents a better widget. If group A sells the same number of widgets to group B for the same price as before, group A’s GDP does not increase. If group A is able to halve the price and sell twice as many widgets its GDP does not rise. Only if it sells its superior widgets at a higher price or sells more of them or some combination of the two will group A’s GDP rise. But those in group A and B have the same allocation of time: 24 hours in each day. Those in group B must therefore work more hours in order to afford the more expensive widgets or to buy more of them.

Suppose group B made thingamajigs (TMGs) and sold them to group A it might redress the imbalance by making superior TMGs and selling them at an increased price or quantity to match the purchase of group A’s widgets. But if the economy of the two groups was composed of widgets and TMGs a mutually cancelling increase in their respective prices would be inflation and that would not amount to economic growth.

A second way group B can compete is to increase exploitation of its material resources including its non-renewable resources.

The consequences of the pursuit of economic growth, of growth in GDP is either to increase the disparity of income between nations as some grow at the expense of others or to increase the pressure on the exploitation of the natural world including its mineral resources. This leaves future generations poorer. It is far from a zero-sum game.

It’s true that an economy can change from one based on material consumption to one more heavily oriented toward services but two observations are relevant. The provision of all services requires the consumption of material resources even though it may be at a lower level. For example, the district nurse travels round by car and uses panoply of gadgets using electricity to keep in touch with base. Secondly, an economy that is more based on services still uses material products which are often sourced from another country. For example, Australia’s heavy industry has been replaced to a degree with service provision but we buy in the same material goods from China and other foreign countries so the material consumption for which we are responsible has not necessarily reduced. And finally, if we grow our economy by charging more for our services then we increase the inequity between those buying our services and ourselves.

Note that a group or country could invent a better widget which may use less material in its manufacture but if that group or country sells the same number of widgets at the same price as before to another group or country then its GDP does not increase.

Nonetheless, all are better off and so is the environment. Thus there can be considerable and continuous improvement even while the economy does not grow, and it may even decrease in size.

As long ago as the middle of the 19th century J.S. Mill pointed out that there may actually be more improvement under such conditions when we were not all scrambling to make more and more of the same, and Herman Daly has also hammered this same point.

When populations were much much smaller and industrial use of material resources was much less, i.e. when we lived in an ’empty world’, GDP could grow without producing the constraints of increasing inequity or unsustainable use of non-renewable resources. GDP, if it had been measured in the early 19th century also would have been built far more around the consumption of essentials such as food, shelter and clothing. Now that we live in an over-full world in which the grades of ores being exploited are approaching the limits of energy availability to make them useful, any sane restriction on growth in the use of these resources accompanied by continuing pressure for growth of GDP will necessarily occur at the expense of increased inequity between those who grow and the rest.

Today about fifty percent of all photo- synthetic energy is used directly or indirectly by humans leaving the other half for the tens of millions of other species on which they and we depend. A recent study has shown a forty percent decline in the prevalence on both terrestrial and aquatic vertebrates since 1970. Yet our treasurer with the support of those attending the G20 meeting seeks a 2% per year growth in global GDP, a doubling of consumption in 35 years or by 2049.

This will not happen and the attempt is wrong-headed. It is damaging, possibly irreparably, the survival of human civilisation. The very first priority of the G20 should be to abandon GDP as a measure and its growth as a goal.

There are so many flaws in GDP as a guide, whole books have been written about it. Perhaps the flaw that is most noticeable to the general public is that GDP combines everything on which money is spent. It includes many things which are really costs. But because of the peculiar way GDP is composed these costs are added to GDP and counted as benefits. Many people are aware that while the government and media tell them GDP is growing, they know that life is becoming harder. A number of studies have shown that if more comprehensive and better design- ed indexes are used to measure progress, then for much of the world including Australia, these alternative indexes have shown a plateau or a fall since the 1970s even while GDP has been rising.

Environmental footprint studies have shown that if the whole world lived like Australians we would need four planets. Two percent growth will make that eight planets in the lifetime of most people alive today. We do not live on an infinite flat Earth as implied in President Obama’s statement: we live on a finite planet and we have exceeded its carrying capacity.

Dr John Coulter is a scientist, a former senator for SA, and a member of ERA