Thoughts on economics and liberty

Although Nordhaus seemingly rejects Ehrlich’s panic, he does not realise that humans are themselves the ultimate resource

Here’s another piece by Nordhaus: Source. Once again, he comes out as a mediocre economist.

==EXTRACTS==

Is Growth Obsolete? – William Nordhaus and James Tobin

A long decade ago economic growth was the reigning fashion of political economy. It was simultaneously the hottest subject of economic theory and research, a slogan eagerly claimed by politicians of all stripes, and a serious objective of the policies of governments. The climate of opinion has changed dramatically. Disillusioned critics indict both economic science and economic policy for blind obeisance to aggregate material “progress,” and for neglect of its costly side effects. Growth, it is charged, distorts national priorities, worsens the distribution of income, and irreparably damages the environment. Paul Erlich speaks for a multitude when he says, “We must acquire a life style which has as its goal maximum freedom and happiness for the individual, not a maximum Gross National Product.” [Sanjeev: Does Nordhaus consider himself to be one of these multitudes?]

Growth was in an important sense a discovery of economics after the Second World War. Of course economic development has always been the grand theme of historically minded scholars of large mind and bold concept, notably Marx, Schumpeter, Kuznets. But the mainstream of economic analysis was not comfortable with phenomena of change and progress. The stationary state was the long-run equilibrium of classical and neoclassical theory, and comparison of alternative static equilibriums was the most powerful theoretical tool. Technological change and population increase were most readily accommodated as one-time exogenous shocks; comparative static analysis could be used to tell how they altered the equilibrium of the system. The obvious fact that these “shocks” were occurring continuously, never allowing the system to reach its equilibrium, was a considerable embarrassment. Keynesian theory fell in the same tradition, attempting rather awkwardly, though nonetheless fruitfully [Sanjeev: He’s a Keynesian] to apply static equilibrium theory to the essentially dynamic problem of saving and capital accumulation.

Sir Roy Harrod in 1940 began the process, brought to fruition by many theorists in the 1950s, of putting the stationary state into motion. The long-run equilibrium of the system became a path of steady growth, and the tools of comparative statics could then be applied to alternative growth paths rather than to alternative stationary states. NeoKeynesian macroeconomics began to fall into place as a description of departures from equilibrium growth, although this task of reinterpretation and integration is still far from a satisfactory completion. [Sanjeev: Nordhaus has co-authored many times with Keynesian Paul Samuelson]

By now modern neoclassical growth theory is well enough formulated to have made its way into textbooks. It is a theory of the growth of potential output, or output at a uniform standard rate of utilization of capacity. The theory relates potential output to three determinants: the labor force, the state of technology, and the stock of human and tangible capital. The first two are usually assumed to grow smoothly at rates determined exogenously by noneconomic factors. The accumulation of capital is governed by the thrift of the population, and in equilibrium the growth of the capital stock matches the growth of labor-cum-technology and the growth of output. Simple as it is, the model fits the observed trends of economic growth reasonably well.

The steady equilibrium growth of modern neoclassical theory is, it must be acknowledged, a routine process of replication. It is a dull story compared to the convulsive structural, technological, and social changes described by the historically oriented scholars of development mentioned above. The theory conceals, either in aggregation or in the abstract generality of multisector models, all the drama of the events —the rise and fall of products, technologies, and industries, and the accompanying transformations of the spatial and occupational distribution of the population. Many economists agree with the broad outlines of Schumpeter’s vision of capitalist development, which is a far cry from growth models made nowadays in either Cambridge, Massachusetts, or Cambridge, England. But visions of that kind have yet to be transformed into a theory that can be applied in everyday analytic and empirical work.

In any case, growth of some kind is now the recognized economic norm. A symptom of the change in outlook can be found in business cycle semantics. A National Bureau recession was essentially a period in which aggregate productive activity was declining. Since 1960 it has become increasingly customary to describe the state of the economy by the gap between its actual output and its growing potential. Although the word recession is still a source of confusion and controversy, almost everyone recognizes that the economy is losing ground —which will have to be recaptured eventually—whenever its actual rate of expansion is below the rate of growth of potential output.

In the early 1960s growth became a proclaimed objective of government policy, in this country as elsewhere. Who could be against it? But like most value-laden words, growth has meant different things to different people and at different times. Often growth policy was simply identified with measures to expand aggregate demand in order to bring or keep actual output in line with potential output. In this sense it is simply stabilization policy, only more gap-conscious and growth-conscious than the cycle-smoothing policies of the past.

To economists schooled in postwar neoclassical growth theory, growth policy proper meant something more than this, and more debatable. It meant deliberate effort to speed up the growth of potential output itself, specifically to accelerate the productivity of labor. Growth policy in this meaning was not widely understood or accepted. The neoclassical model outlined above suggested two kinds of policies to foster growth, possibly interrelated: measures that advanced technological knowledge and measures that increased the share of potential output devoted to accumulation of physical or human capital.’ Another implication of the standard model was that, unless someone could find a way to accelerate technological progress permanently, policy could not raise the rate of growth permanently. One-shot measures would speed up growth temporarily, for years or decades. But once the economy had absorbed these measures, its future growth rate would be limited once again by constraints of labor and technology. The level of its path, however, would be permanently higher than if the policies had not been undertaken.

Growth measures nearly always involve diversions of current resources from other uses, sacrifices of current consumption for the benefit of succeeding generations of consumers. Enthusiasts for faster

‘ The variety of possible measures, and the difficulty of raising the growth rate by more than one or two percentage points, have been explored by Edward Denison in his influential study, The Sources of Economic Growth in the United States and the Alternatives Before Us, New York, Committee for Economic Development, January 1962, Supplementary Paper No. 13.

growth are advocates of the future against the present. Their case rests on the view that in a market economy left to itself, the future would be shortchanged because too small a fraction of current output would be saved. We mention this point now because we shall return later to the ironical fact that the antigrowth men of the 1970s believe that it is they who represent the claims of a fragile future against a voracious present.

Like the enthusiasts to whom they are a reaction, current critics of growth are disenchanted with both theory and policy, with both the descriptive and the normative implications of the doctrines of the previous decade. The sources of disenchantment are worth considering today, because they indicate agenda for future theoretical and empirical research.

We have chosen to direct our attention to three important problems raised by those who question the desirability and possibility of future growth: (a) How good are measures of output currently used for evaluating the growth of economic welfare? (b) Does the growth process inevitably waste our natural resources? (c) How does the rate of population growth affect economic welfare? In particular, what would be the effect of zero population growth?

MEASURES OF ECONOMIC WELFARE

A major question raised by critics of economic growth is whether we have been growing at all in any meaningful sense. Gross national product statistics cannot give the answers, for GNP is not a measure of economic welfare. Erlich is right in claiming that maximization of GNP is not a proper objective of policy. Economists all know that, and yet their everyday use of GNP as the standard measure of economic performance apparently conveys the impression that they are evangelistic worshippers of GNP.

An obvious shortcoming of GNP is that it is an index of production, not consumption. The goal of economic activity, after all, is consumption. [Sanjeev: glad I can agree with Nordhaus on at least this thing, although without production there can be no consumption.] Although this is the central premise of economics, the profession has been slow to develop, either conceptually or statistically, a measure of economic performance oriented to consumption, broadly defined and carefully calculated. We have constructed a primitive and experimental “measure of economic welfare” (MEW), in which we attempt to allow for the more obvious discrepancies between GNP and economic welfare. A complete account is given in Appendix A. The main results will be discussed here and summarized in Tables 1 and 2.

In proposing a welfare measure, we in no way deny the importance of the conventional national income accounts or of the output measures based upon them. Our MEW is largely a rearrangement of items of the national accounts. Gross and net national product statistics are the economists’ chief tools for short-run analysis, forecasting, and policy and are also indispensable for many other purposes.

Our adjustments to GNP fall into three general categories: reclassification of GNP expenditures as consumption, investment, and intermediate; imputation for the services of consumer capital, for leisure, and for the product of household work; correction for some of the disamenities of urbanization.

I HAVE DELETED THE ENTIRE CHUNK OF ANALYSIS TO FOCUS ON KEY OUTCOMES. I THINK THE MEW ANALYSIS IS LARGELY POINTLESS.

On both counts, therefore, a reduction in population increase should raise sustainable consumption. [Sanjeev: Nordhaus NEVER CONSIDERED THAT POPULATION ITSELF WAS THE ULTIMATE RESOURCE] We have essayed an estimate of the magnitude of this gain. In a ZPG equilibrium sustainable consumption per capita would be 9-10 per cent higher than in a steady state of 2.1 per cent growth corresponding to 1960 fertility and mortality, and somewhat more than 3 per cent higher than in a steady state of 0.7 per cent growth corresponding to 1967 fertility and mortality.

These neoclassical calculations do not take account of the lower pressure of population growth on natural resources. As between the 1960 equilibrium and ZPG, the diminished drag of resource limitations is worth about one-tenth of 1 per cent per annum in growth of per capita consumption. Moreover, if our optimistic estimates of the ease of substitution of other factors of production for natural resources are wrong, a slowdown of population growth will have much more important effects in postponing the day of reckoning.

Is growth obsolete? We think not. Although GNP and other national income aggregates are imperfect measures of welfare, the broad picture of secular progress which they convey remains after correction of their most obvious deficiencies. At present there is no reason to arrest general economic growth to conserve natural resources, although there is good reason to provide proper economic incentives to conserve resources which currently cost their users less than true social cost. Population growth cannot continue indefinitely, and evidently it is already slowing down in the United States. This slowdown will significantly increase sustainable per capita consumption. But even with ZPG there is no reason to shut off technological progress. The classical stationary state need not become our utopian norm.

APPENDIX B: NATURAL RESOURCES B.1 The Role of Natural Resources in Economic Growth

In this appendix we consider the importance of natural resources in measured economic growth. In comparison with the usual neoclassical growth model, the laws of production are more complex. There are not simply constant returns to scale in capital and labor.

To the central question —How important are natural resources in measured growth? — we seem to get an unambiguous answer: less important than they were.

Sanjeev Sabhlok

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