Go with a smile!

Wednesday, February 20, 2013

Zero Growth

On one of the first lessons I’ve had in science as a secondary school student, we were introduced to the sigmoid function. At that time I didn’t really think very much of it. It didn’t seem like one of the “really important functions” that we learnt in mathematics, like the sine curve or the parabola. But now when I think about it, it’s really important.

What it predicts is growth. The growth of a human being follows the sigmoid function. Relatively slow, and then a growth spurt in the teenage years, and finally adulthood, and you don’t see any growth at all. Any organisation, any biological organism would grow this way. For various reasons. Companies grow that way. Or maybe not.

But when we think about economics, we don’t usually think about it that way. We are too fixated on the idea of exponential growth. When a country is not growing economically, we think that it is dying. Now somebody has finally come out and said it. Economic growth is bunk.

What the author is proposing, and what I am beginning to come to terms with, is that economic growth is something that we have come to see as the norm, because of the particular circumstances we live in in human history. There was the industrial age. Then there were the fundamental changes to the economic system which were fuelled by automation and the advancement in technology. For a period of time, the economic system was changing because people were moving around faster. They were improving their processes and becoming more productive at work. More efficient machines were taking the place of human labour.

But this phase of our human history is coming to an end, as can be evidenced in many developed countries. You cannot think of technological changes producing gains in efficiency. Maybe you can envision technology being able to do things that were not being done before. Maybe some advancements will still lie in the future – maybe mechanical roadsweepers will replace the current ones. But until then I try to think of how technology is going to make us efficient in a big big way, and I cannot think of anything.

What we have to understand is that the economy does not grow by magic by x% every year. All economic growth is underpinned by something more substantial and material. And if we cannot explain what this is, then there would be something extremely fishy and bogus about this so-called “economic growth”.

What has changed? The so-called "economic growth" is an end result of a certain form of technological change. This technological change is coming to an end. Progress is not supposed to take place indefinitely. It is meant to be epochal and it is meant to come to an end.

200 years ago, we eat 1 bowl of rice for dinner. Today, we eat 1 bowl of rice for dinner. Where is the economic growth? Ultimately there are hard limits on what a human being can consume. What’s the point in more and more wealth per capita? I have this theory (I don’t know if it’s shared by other economists because I’m not familiar with the literature) that the only driver of economic growth is a very specific kind of technological progress. We can’t just assume that this technological progress is going to last forever. We’re just running on the momentum that was built for us by those who have been there before. We’re just using the old paradigms, and we haven’t updated our thinking to change with the times.

It is as though we are 18 years old, we see ourselves as being much taller than our 12 year old selves, and believe that we are going to continue growing forever. The truth is 1, we are not growing anymore. 2, we don't have to worry anymore that we are not growing anymore. 3, we will live a long long time without ever growing anymore, and it doesn't matter anyway.

There are two ways for the economy to “grow”: the right way is things becoming bigger / better / faster / more. The wrong way to grow is everything becoming more expensive. Unfortunately that’s how Singapore has decided to grow over the last few years. It's pretty clear to most of us what kind of "economic growth" we've been having of late. To continue on like we have been doing, looking at the nice fat economic growth numbers and telling ourselves that life is getting betterer and betterer, is pretty retarded. Let’s put it this way. You can easily cook up higher GDP growth this way. First step, you force everybody into a small piece of land. Because of competition and scarcity, housing prices will rise. Everybody will take out a loan to buy a smaller and smaller piece of real estate for more and more money. All of this will be booked as “economic growth” because it makes the GDP go up. But are peoples’ lives really improving? Obviously not. No value add, no improvement in the quality of life. Only paper results.

This is only for first world economies.
Now I’m not saying that the whole world is like that. There are still places on this planet where people live like it’s the 19th century. Obviously some nations’ economies have a long way to go. China is still pretty undeveloped in many parts, but in the coastal cities, it is pretty much almost there. India still has some way to go. But for places like Singapore or other places in the developed world, our race is pretty much run.

How are people going to adjust?
A lot of shit is going to happen before people finally come to terms with this. Economic growth is usually seen as exponential. Anybody who knows maths knows that exponential is obscenely fast. Anything obscenely fast that goes on forever is unsustainable. Thus far, economic development has been structured around growth. Now we have to figure out how to make the system work in an era of zero growth.

Eventually the economy has to be like a tropical jungle. Some trees grow, other trees die, but there is equilibrium and the sum total of the biomass stays the same. Mature democracies are having economic crises now because they haven't figured out how to manage zero growth economies, but once that happens, we'll just realise: forget about the growth. Just manage the wealth distribution and the jobless rate.

It used to be very simple. Everything is growing. If you are a firm, and you capture a certain percentage of the pie, then you will grow together with the economy, even if you don’t expand your market share. In a non-growing economy, in order to be a growing firm, you have to eat into somebody’s share, and that somebody will not be happy with you. Economic competition would be stronger. Firms going out of business will be more common, and there will be more thought put into how to wind down a business that has to be wound down.

In a non-growing economy, you will not have real growth every year. There will be nominal growth, which will be perfectly offset the inflation. Or there will be alternate years of growth and recession. The problem is that this mechanism of discounted rate has proven in the past to be a driver of the growth of individual wealth. We only manage to convince people to put money into long term investments, because of interest rates: otherwise if your money gets shrunk every year, you might as well spend everything right now instead of saving for the future. There is a certain kind of stability associated with a perpetually growing economy, because the balance is always tilted towards people saving for the future.

Except, now I don’t think that people are saving for the future at all. It has come to the point where maybe Singaporeans’ average savings is something close to zero, when you consider how many people have taken out mortgages. That means that all the wealth is going in one direction – into the banker’s pockets, and never out of it. There is a global imbalance of money, and it’s like there’s this black hole that’s sucking the life force out of the economy. I don’t know how we’re going to fix that – that’s for the macroeconomists out there to figure out.

A related problem is that somehow, because of the systematic tendency of money to flow in one direction and almost never another, we have some kind of a tendency where money gravitates towards more money – in other words the rich get richer and the poor get poorer. I haven’t even figured out how to get around that.

One argument is that if mature economies are supposed to stop growing, then eventually they will be overtaken by the growing developing economies. That may well be true. But I think that forcing a form of “economic growth” where there is no material substance behind that growth might have a lot of negative consequences.

The other thing is, it is still true that even while the economy of a country may stay stable (let’s call it a stable economy, rather than a stagnant one, to reflect this paradigm shift) the economies of the regions and the towns within that country may wax and wane. There is still such a thing as economic competition: I may still not understand the full implications of a stabilized economy, but I’m sure that economic competition and capitalism will not go away. Then it is tempting to say that for the sake of competition, a city must always pursue economic growth. Because – if a dip happens, who knows whether it’s going to be a one off blip or it’s a prelude to a Detroit style implosion? But I don’t buy that. I think that a central government can always manage things well, and prevent disasters from happening, without having to force square pegs into round holes and make “growth” happen.

I don’t think that all of this was deliberately engineered to serve the nefarious purposes of people working in financial institutions who want to bilk this system for all that it’s worth. But at the same time I’m sure that there are a lot of people benefitting from the current arrangement and don’t really want to see it ending soon.

There is a lot of economic work to be done on this. I’m sure that there are still a lot of Nobel prizes out there to be claimed for the macroeconomics of steady state mature economies.


Post a Comment