What is blinding economists. What was blinding me.

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I am an economist and I was, until only a few years ago, part of those economists that defended the idea that economic growth is always good. I would like to explain what was blinding me from questioning this idea, as it may be part of what is still blinding many economists today.

Photo by Ryoji Iwata on Unsplash

The way we see reality is determined by the stories we have been exposed to. Stories — and the assumptions that result from these stories — are the shortcuts that our brain uses to comprehend reality, too complex otherwise.

Because they determine the reality that we see, power is with whoever controls stories. Power not being distributed equally, naturally results in the fact that some stories dominate.

For example, this photo looks normal to most of us.

Photo by Vita Marija Murenaite on Unsplash

Except that it may not be. What if the public space was used for something else than a giant car parking? What if the narrative of what a city looks like was controlled by someone else than the automobile industry? (more on this) How different could cities look like?

In economics, the story that dominates is the one told by neoclassical economists. While there is a multiplicity of branches within economic theory, a vast majority of economists — myself included — are neoclassical by academic imposition. The homogeneity of thought in academia is such that it has led to the appearance of groups like Rethinking Economics, that mobilize for plurality and against dogmatic teaching of economic theory.

The neoclassical analytical framework is a very specific way of seeing the economy, and I argue one that is distant from reality in the 21st century. I will try to illustrate this with a key assumption of the neoclassical analytical framework: the idea that economic growth is always good.

What does “economic growth is always good” mean? In economic terms, it means that the marginal benefit of an additional unit of production is always higher than its marginal cost. In layman’s terms, it means that what we obtain from more human-made products or services is better than what we need to give up for them.

At the microeconomic level, economists are taught to pay attention to where the marginal benefit and marginal costs meet, because at that point the marginal benefit of an additional unit of production is lower than its marginal cost, and we are thus better off not producing that unit. Said differently, what we need to give up for that additional unit is worth more than what we would produce. That is also why, for example, some of you may have decided to have a garden rather than build two extra rooms in that space.

At the macroeconomic level, we do not pay attention to where the marginal benefit and cost meet, because we assume that the marginal benefit of an additional unit will always be higher than its costs. Why do we do this? Why is our reasoning different at the macroeconomic level?

This has to do with the analytical framework of neoclassical economics, based in turn on classical economics. This is what you were likely taught in your first economics class: in an economy, there are inputs transformed through agents of transformation into outputs, which is what we measure in the Gross Domestic Product (GDP).

The input-output model

The economy is the whole and natural resources are an input to the economy. Being the whole, there are no opportunity costs to its growth. When the economy grows, it displaces nothing, it expands into the void.

The world by classical, neoclassical, and environmental economists

Except that it does not. And classical economists knew this. They knew that every human-made product is a physical transformation of the ecosystem into the economy. That we do not produce anything, we only transform what is already there.

The world was, however, fairly empty (of our stuff) when the classical analytical framework was developed. We were so small compared to the environment, and we had so little technology, that the “void” was almost a good proxy of reality. We were in any case not capable of fishing faster than the rate of fish reproduction, we were not capable of producing more waste than what the earth could absorb. There was no problem.

Now, thanks to economic growth and to technology, reality changed. As Herman Daly (an ecological economist that I wish I had discovered much earlier in my career) explains, the limiting factor is no longer boats, it is fish. We now have the technology to fish faster than the fish rate of reproduction. We can now pollute (and we do) faster than what the earth can absorb.

Reality changed, the limiting factor changed, and our analytical framework has not adapted.

The assumption that more human-made capital is always better than what we need to give up for it — and thus that economic growth is always good — may no longer be true. In the same way that two extra rooms may not be better than a garden, if you already have a lot of rooms.

Ecological economics — a branch of economic theory taught in only a handful of universities — argues that seeing the economy as a sub-system, as a part rather than as the whole, is the first step towards sustainability. This way of seeing the economy changes the questions we ask, and thus the answers we get.

The world by ecological economists

With the economy as a sub-system, we can see that when the economy (the part) expands, it imposes an opportunity cost, as the natural environment (the whole) must shrink to make room for it. When we expand the size of the economy, we lose life support systems, which we often call ecosystem services. If we do that too much — and climate change, the mass extinction of species, and many other indicators suggest we are — then economic growth ends up costing us more than its benefits. It may well be uneconomic to grow the economy: the marginal benefit of an additional unit may be lower than its marginal cost. Like that extra room that implies you no longer have a garden (unless that we assume, of course, that natural resources can be substituted by human-made products, which, you may have guessed, mainstream economists do. See page 50 for more on this). The idea that economic growth can be uneconomic is so rare, so excluded from the dominant story, that not even Google finds it.

I would like to conclude with a disclaimer. When talking about this to people, some of them hear me saying that then all economic growth is bad. Since I have not yet discovered what I am communicating wrongly for them to hear that, I would like to be very explicit about the fact that that is not my point.

I am not saying that economic growth is necessarily bad, I am just encouraging colleagues to question whether it is always good.

Would you like to discuss? Please put in touch.

This article is part of a series of articles, available here.