Below is the transcript for my interview with John Coglianese, doctoral candidate for economics at Harvard. This interview was conducted as part of my research for a blog series for Alternatives Journal, the first of these articles can be found here.
1) What are the most common misconceptions about economic growth?
GDP consists of the total value of all goods and services sold in the economy. We often pay attention to the goods side of GDP, thinking about economic growth in terms of manufacturing and resource extraction. Most of the examples I remember from Econ 101 consisted of a person or a firm trying to figure out how many goods to make using some production technology. But in most advanced economies, services actually play a much larger role. In the US, personal consumption of services accounts for 45% of total US GDP, compared to less than 25% for personal consumption of goods. GDP only measures final sales in the economy, but even if you look at the inputs to those final sales, much of the value is coming from intermediate services. Raw resources are typically a small percentage of GDP. Oil is one of the most important natural resources for the US economy, but oil imports are only about 1% of GDP. In most introductory economics classes, students are taught to think about the economy through examples about producing goods, when actually services account for a larger share of economic activity in developed countries these days.
The production of services in the modern economy is fundamentally reliant on human capital – the accumulated value of education and skills. Oded Galor has been doing really fascinating work integrating the entire history of economic growth into a single unified theory. He shows how up until a few centuries ago economic growth was governed by the type of dynamics described by Thomas Malthus. Technological progress and population growth were relatively slow, and economic growth was even slower since resources per capita were diminishing. The explosion of industrial technologies about two centures ago enabled workers to be much more productive and led to the creation of giant factories producing goods at a rapid pace, although the real success of the Industrial Revolution was that it changed much more than the production of goods. Previous advances in technology had produced only temporary spurts of growth, while the Industrial Revolution managed to generate sustained growth through raising the value of human capital. Human capital became so valuable that fertility has declined as families in developed countries have decided to invest more heavily into the education of fewer children. Much of the developing world is still in the post-Malthusian, pre-fertility-decline stage of economic growth, but signs indicate that this may change in coming decades.
Lastly, although as an economist it’s easy to think that economic growth is the only measure of our success as a society, there are other measures to consider. One of my professors would frequently point out that life expectancy in developed countries has grown steadily over the last century. He told us that if you calculate the amount of extra economic consumption coming from increased longevity in the US over the last forty years, it’s approximately equal to the total amount of GDP growth over the same time period. Additionally, there’s some really interesting research looking at measures of happiness across countries. While they’re mostly correlated with economic growth, it may be that the uncorrelated portion is picking up something unique that we should be giving more attention.
2) If you were trying to answer the question, ‘Is infinite economic growth possible in a full environmentally sustainable world?’ what questions would you want to know the answer to?
I’d mainly want to know if there are any limits to human capital. Education and the growth in skilled workers have had a transformative effect on economic growth over the last two centuries, and if they can continue indefinitely, economic growth will continue at this rapid pace. I’d also want to know how effective computers will be at replacing human labor. I know only a little about artificial intelligence, but I know that a common area of debate is over whether there are fundamental limitations on the amount of intelligence that can be embedded in a machine.
3) Can infinite economic growth theoretically exist on a finite planet?
I think it depends on what you’re willing to assume about the nature of technological progress. If technological progress can continue forever, making production more efficient and human capital more valuable, its absolutely possible to have infinite economic growth. If technological progress has some fundamental limitations though, it’s less clear whether infinite economic growth is possible.
4) In your opinion is infinite economic growth actually possible on a finite planet?
Just like the last question, I think it depends on what you assume about technological progress.
5) Is economic growth inherently tied to resource extraction/consumption/GHG emissions?
In the near-term, there’s some amount of economic growth that is tied to consumption of natural resources, although it may be a relatively small portion. In the long-term though, it’s possible that new technologies could remove these constraints or enable us to extract resources in a sustainable way.
6) Have you heard of the sharing economy (like the tool library) what impact would an increase in this type of sharing have on the economy do you think? Would it inherently lead to decrease of growth?
This is a really popular notion right now with companies like Airbnb, Uber, and Kickstarter are all trying to make it easier to share, so that our resources are always in use. This makes a good deal of economic sense, since these resources might just be wasted otherwise. From an economic standpoint, it’s not entirely clear what’s going on, it could be one of two things. First, it could be that these services don’t actually increase the demand for their products, but they just shift demand into less wasteful units. For your tool library, this would be like saying that without the tool library, organizations would still use the same amount of tools, but they would each have to buy separate tools. In this scenario, the tool library is super useful, since now we only need one copy of the tool that everybody can share. The other possibility is that, in the absence of the tool library, organizations would use fewer tools. This means that with the introduction of the tool library not only do you have organizations able to share tools that they otherwise would have bought, you have some organizations using the tool who simply would not have bought that tool if the tool library didn’t exist. This is wonderful for your company, but when you apply it to the sharing economy more broadly, the sharing economy becomes less of a benefit than under the first scenario.
As an analogy, consider the case of pollution and hybrid cars. Suppose that hybrid cars emit 30% less pollution per mile driven than a regular car. You might think that by getting people to switch from regular cars to hybrids, overall emissions would go down by 30%. However, in actuality emissions would fall byless than 30%. This is because once people switch to hybrid cars, they drive more miles. Emissions still end up falling, but by less than you might anticipate.
For a car-sharing company like UberX, you might think that by sharing cars, it means there are fewer cars on the road. However, just like in the hybrid cars example, the introduction of the ride-sharing company leads people to use ride-shares when they otherwise would have walked, resulting in an increase in miles driven. On the whole, sharing companies like UberX are probably a net positive, but it’s not quite as great as it seems initially.
7) My third blog post will mostly be about this conversation with you and the idea of that split off between the correlation between GDP and Happiness, if you had to guess what would make up this uncorrelated part?
This is an area where there’s still a lot of ongoing research, and there are still plenty of open questions. I think that the likely candidates for factors that increase happiness other than economic growth would include 1) family friendly policies, 2) evenly distributed social standing, and 3) well-functioning communities. Family friendly policies do a lot for new parents, which can be one of the least happy groups (parents get happier as the kids grow older and leave the house, but initially they are not so happy). Making sure that social standing and respect are not too heavily tied to money, but instead evenly distributed, could increase happiness as in the case of many Scandinavian countries. Well-functioning communities help with both of the above categories, but they also do so much more to help support individuals and make their lives better (read Bowling Alone by Robert Putnam for more info on how poorly-functioning communities can do quite a bit of damage).
8) Have you heard of de-coupling (the movement towards trying to separate the economic growth from physical throughput) do you have any thoughts on this?
I think the process of de-coupling happens naturally to some extent. In the US, most of our economic activity comes from services, rather than production of physical goods. The advancement of human knowledge plays a huge role in pushing economic growth forward, and arguably costs next to nothing in terms of physical resources (expect for paper, pencils, and some Diet Cokes).