Freeman

ARTICLE

The Problems of Halting Economic Growth

APRIL 01, 1976 by DWIGHT R. LEE, ROBERT MCNOWN

Messrs. McNown and Lee are Assistant Professors, Department of Economics, University of Colorado at Boulder.

This article is based on a chapter from a book by Professors Lee and McNown, to be published by Science Research Associates, Incorporated in 1976.

Economic growth is no longer a universally accepted goal of economic policy. To be sure there are still plenty of defenders of economic growth, but it has become increasingly fashionable to criticize continued growth as undesirable and unsustainable. The debate surrounding this issue has centered almost entirely on the question of whether our resource base is adequate to support the demands of a growing economy. Without going into detail here, it is our judgment that historical evidence and economic analysis require that this question be answered with a resounding affirmative.

The purpose of this paper, however, is to address an important aspect of the growth versus no-growth debate that has been largely neglected. There has been little discussion of the problems that would be encountered in actually formulating and implementing a policy of zero economic growth. Despite the importance of these problems in assessing the desirability of the no-growth position, they have been brushed aside by those pushing for a halt to economic growth. According to E. J. Mishan, one of the most articulate advocates of zero economic growth (in his words, a steady-state economy):¹

The actual means whereby a steady-state economy is to be brought into being — the rationing of raw materials, the controls on technology, etc. — and the level of affluence to be sought are important subjects of discussion. But in the existing state of social awareness, they are perhaps premature…. The aim of the ecologist and environmentalist is not a no-growth economy per se. It is to win acceptance by the public at large of a no-growth society.

Why Does Growth Occur?

One may also say it is premature to feel an urgency to convince the public of the desirability of a proposal until it has been fully thought through. Certainly a consideration of the implementation and functioning of a zero-growth economy is crucial in assessing the overall desirability of such an economy.

In considering the question of how growth in the economy is to be halted, it is wise to ask why economic growth occurs in the first place. The motivating force behind our economic growth has always been the desire of individuals to improve the economic well-being of themselves and their offspring. Government policy can help by creating a stable political environment, protecting property rights, and not destabilizing the economy with inappropriate monetary and fiscal policy. But without individuals seeking to improve their lot by working, innovating, saving, and investing, economic growth would not take place. This means that achieving a no-growth society would require denying people many of the opportunities and freedoms they now have to improve their situation. The question of how this is to be accomplished poses problems that are crucial in assessing the merits and liabilities of a no-growth economy.

Certain attributes are desirable in any economy, whether growing or not. One of the most important of these is that our resources be used as efficiently as possible to produce those goods and services most valued by consumers. Certainly this has to be considered an important attribute to those who feel that a dwindling resource base makes halting economic growth an imperative. Stopping economic growth clearly shouldn’t mean halting technological improvements that allow a given set of consumer desires to be satisfied with reduced demands on our resources. If a no-growth policy restricted this technological growth, it would frustrate the mechanism that has provided us with a growing usable resource base in the past and can continue to do so in the future. And as we are about to see, the implementation of a no-growth policy is very likely to hamper technological advances. In so doing, such a policy would probably hasten the very problems its advocates claim it will postpone.

Market Allocation

In a market economy the efficient use of resources is accomplished primarily by private producers responding to prices of productive inputs and outputs. Output prices provide information on consumer preferences, with the relative price of a good increasing in response to an increase in consumer demand, which in turn motivates producers to increase their production of the good. Prices of productive inputs reflect their value in their most productive employments in the economy. Therefore, with producers responding to these input prices in their attempt to produce as cheaply as possible, the cost of producing commodities is kept to a minimum, with substantial rewards going to those who can innovate more efficient ways of producing. While the market mechanism doesn’t always work perfectly, it works better than any other mechanism yet conceived.

But without a large amount of freedom afforded to the individual to spend his money as he desires, and to allocate his productive resources and talents as he sees fit, much of the advantage of the market mechanism is negated. This brings us face to face with the problem of how zero economic growth can be achieved without obstructing the desirable allocation of our resources among competing uses.

How Assure Constant Output?

It may seem quite simple to design an effective policy imposing zero economic growth. The government could pass and enforce a law requiring the value of production to remain constant from year to year. However, some problems come immediately to mind. First of all, what mechanism can the government use to insure that output doesn’t increase? One possibility would be to place quotas on the quantity of each good to be produced. If this is done a major problem is that of determining which goods should be produced and in what combination.

As previously discussed, a crucial goal of any economy is that these decisions be made to conform to consumer preferences. These preferences vary widely from individual to individual and change unpredictably through time. It takes an extraordinary amount of information to keep the productive process responsive to these consumer preferences. It is optimistic indeed to hope that any government agency would be able to keep abreast of this information and maintain the desirable production quota system. Optimism would require not only tremendous confidence in the government’s ability to keep current on changing preferences, but also great faith in its ability to make decisions independent of political pressures.

Assume, for example, that consumers began to sour on the automobile as the almost exclusive form of personal transportation and that millions of individuals decided that bicycles offered a more desirable alternative. With production decisions being made in response to market forces, we would find a reduction in auto production as auto manufacturers found fewer people willing to buy their product at prices that covered their cost. On the other hand, with increasing numbers of people willing to spend money on bicycles, producers of bicycles would expand output in response to higher profits.

Problems of Control

It’s hard to imagine this adjustment occurring so smoothly if the decision of auto versus bicycle production was under the control of a government agency. Under these circumstances automobile manufacturers would find it to their advantage to invest heavily in lobbying against any reduction in their production quotas. They could come up with any number of “justifications” for maintaining high production levels for autos. Of course, bicycle manufacturers could, and probably would, lobby for an increase in their production quotas; but being much smaller and less influential politically, they would have an uphill task getting their quota enlarged at the expense of the automobile quota. The bicycle manufacturers certainly wouldn’t get any help from the oil industry or the highway lobby, both of which would take an active interest in the issue. Meanwhile, the consumer, who should be the important decision-maker, will hardly be heard from in the decision-making process.

Extend our example of autos and bicycles to include razor blades, running shorts, motor boats, tennis balls, insect repellent, shoe repair services, dental repair, textbooks, soy beans, and the like, and it is clear that vesting government with the authority to determine the allowable production of each conceivable good and service would be a frightfully clumsy and wasteful way to halt economic growth.

But there are further difficulties involved in direct government control. Once the quota for a good has been established, decisions as to which producing units are to fill that quota would have to be made. Suppose, for example, that an individual developed a new technique for making sleeping bags, and as a result thought he could give consumers a better bag than was currently available and at a lower price. Operating under the market mechanism, this individual could invest his money in manufacturing and promoting his sleeping bag. If his assessment of his bag wasn’t consistent with that of the consumer, he would soon find it advantageous to direct his talents and money elsewhere. On the other hand, if consumers did find his sleeping bag preferable to existing bags, his production and revenue would expand while the production and revenue of his competitors would fall. Eventually our innovator’s techniques would be imitated and all producers would be producing better bags for less, much to the consumer’s benefit.

The Consumer’s Interest

If a government agency rather than the market was responsible for deciding for each product which firms could expand output and correspondingly which firms had to reduce output, it’s doubtful if the interests of the consumer would be promoted. For practical purposes it would be impossible for a government agency to have the information on changing productive techniques necessary to know, for each product, which firms should be expanding and which should be contracting. Not having this information, the agency would soon find itself relying on the expertise of the existing firms in each industry in order to make its decision. Each firm in an industry would soon learn that in order to protect or enlarge its market share, it has to appeal to the judgment of the regulatory agency rather than that of the consumer. Technological improvements and product innovations would be found less useful to the aggressive firm than its lobbying activities and influence with the right regulators. Unfortunately, this wouldn’t create the type of environment that a new firm with an improved product or lower price will find very hospitable. Well-established firms in the industry could be expected to use their influence to prevent such intruders from ever getting their product to market.

This is more than idle conjecture. We unfortunately have had plenty of experience with government agencies regulating such things as market share and entry in many of our industries. For example, since the Civil Aeronautics Board was established in 1938 to regulate our airline industry, not one new airline has been permitted to enter into long haul competition with the existing airlines.

Another example comes from the Interstate Commerce Commission (ICC), an agency of the federal government charged with regulating interstate ground transportation. In 1961, Southern Railroad had developed a grain-carrying car that allowed them to cut their freight rates on grain by 60 percent and requested the ICCto permit this reduction. It was estimated that this innovation would save consumers millions of dollars annually. Yet the ICC, in sympathy with barge lines, trucking firms, and other railroads, all of which competed with Southern Railroad, refused to allow the rate reduction Southern requested. It wasn’t until 1965, after the case was nine times before lower federal courts and twice before the U.S. Supreme Court, that the ICC quit fighting the rate reduction and allowed it to go into effect.² Many other examples could be given indicating the tendency of agencies charged with regulating industries to completely lose sight of the consumer interest. But by now our point should be clear. Attempting to halt economic growth by controlling the permitted output for each good and service would be inconsistent with the goal of using our resources as efficiently as possible to produce a combination of goods and services compatible with the preferences of consumers. The cost of halting economic growth in this way would be so high that only the most enthusiastic no-growth advocate would find it acceptable.

Let Consumers Choose, But Limit Total Income

Having a government agency decide on the combination of goods and services to be produced, isn’t the only way zero economic growth could be imposed. Another possibility is to let consumers spend their incomes as they see fit, but limit the total income that can be earned in the economy. This would seem to have the advantage of allowing consumers to decide what should be produced and encouraging producers to be innovative and efficient with their use of resources. But, of course, we now have the problem of controlling incomes. And, unfortunately, for this approach, there is a strong relationship between how consumers exercise their preferences for goods and services and how individuals earn their incomes.

People earn their incomes by responding to the desires of consumers, producing and perfecting those things on which consumers are most anxious to spend their money. As we have already pointed out, this provides the incentive for producers to use resources efficiently and creatively in order to provide consumers with better products at lower prices. But people get rich doing this, and in so doing they invariably enrich countless others by creating highly productive jobs and permitting consumers to obtain more with less effort.

So any attempt at controlling the incomes consumers have to spend will require strict controls or strong disincentives against creative responses to the wishes of consumers. This doesn’t necessarily mean that the government would have to apply direct restrictions on innovative behavior. A high enough tax on profits or investment returns could sufficiently discourage investment in capital and technological improvements to be consistent with a no-growth economy. But whatever the means, only by discouraging producers from responding to the consumers’ desire for better products at less cost will it be possible to prevent incomes from increasing.

It’s hard to see, therefore, where this approach to controlling economic growth has eliminated the disadvantage of direct controls on output. Both approaches will have the effect of insulating the actions of producers from the desires of consumers.

Reducing Income Mobility

Attempting to control incomes and dampen investment presents another, but related, problem. The necessity of controlling innovative responses to consumer preferences means controlling one of the most important sources of income mobility in the economy. Despite much ridicule of the Horatio Alger “myth” the evidence indicates a substantial amount of income mobility in the U.S. from one generation to the next.³ There are plenty of opportunities for the ambitious and capable individual to become wealthy even though born into poverty. Likewise, being born into wealth is no guarantee that an individual can remain both indolent and affluent for long. The primary source of this mobility is that those who are productive are rewarded while those who are unproductive aren’t. Attempts to control income would surely reduce income mobility in our society by hampering the mechanism that produces it. Restricting people’s ability to develop more productive techniques or train for more productive employment would restrict the means by which individuals have been able to improve their economic situation. It also restricts the competition that forces those who have achieved economic success to either remain responsive to consumer desires or move down the economic ladder. With perhaps a little cynicism, we note that no-growth advocates are seldom positioned in the bottom half of the income distribution. Designing and enforcing a policy to halt economic growth would be a difficult task. If such a policy were actually imposed, many of the consequences would be unfortunate. It would reduce the influence that consumers have on the choice of what is to be produced. Coupled with that is the stifling influence the implementation of such a policy would have on motivations to produce efficiently and creatively. We would also find a more regimented society, with far less chance for the relatively disadvantaged in society to improve their situation through ingenuity and hard work. The likely consequence of this calcification of society would be disruptive social unrest or the emergence of a caste system in which people knew their place and accepted it.

If the advocates of eliminating economic growth feel we are faced with an imperative, they had better come to grips with the serious problem of implementing their proposals. It is our judgment, however, that they have first failed to establish the imperative for a no-growth policy, and secondly, have no positive proposals on how such an economy could be implemented without unfortunate consequences.

ASSOCIATED ISSUE

April 1976

ABOUT

DWIGHT R. LEE

Dwight R. Lee is the O’Neil Professor of Global Markets and Freedom in the Cox School of Business at Southern Methodist University.

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