Growth, greens and living standards

Gerard Jackson
BrookesNews.Com
Tuesday 15 April 2003

Clive Hamilton's latest book (Growth Fetish Allen & Unwin) certainly reveals the determination of greens to slash the living standards of the masses. One of their more subtle contrivances to lower living standards is the GPI (genuine progress indicator).

Dr Clive Hamilton and Dr Hugh Saddler produced a paper in July 1997 for The Australian Institute (a Canberra-based green propaganda outfit) in which they outlined the case and the 'thinking' behind the GPI. The striking thing about the paper is that the authors did not reveal the slightest evidence of having any real understanding of economic growth, capital theory or the nature of cost.

They arrogantly make claims for the GPI that are patently false to any competent economist; their thinking bears a strong resemblance to the discredited quality-of-life thesis developed by socialist economic historians to try and malign the Industrial Revolution. In short, it is a shabby piece of green intellectual nonsense, the kind that progressive 'journalists' cheerfully swallow. It is no more than a green attempt to replace GDP with a phoney measure that will conceal falling living standards caused by green policies by promoting the myth that the quality of life is rising even though material consumption is falling.

I shall use 'Austrian' economic analysis in exposing the fundamental fallacy of GPI thinking. But first we have to concede the basic point that gross domestic production (the monetary measure of the value of goods and service produced in the economy) is far from perfect and does have serious flaws, one of which — as the 'Austrians' point out — is that it is not really gross at all in that it ignores an enormous number of transactions that take place between the stages of production.

That other flaws have been known since the introduction of national accounts. No economist ever claimed, for instance, that GDP is a measure of total welfare, only that it is just one of the components of total welfare. That its defects have been well-known for some time was made clear nearly 70 years ago by the eminent English economist A. C. Pigou who wrote:

". . . there is no guarantee that the effects produced on the part of welfare that can be brought into relation with the measuring-rod of money may not be cancelled by effects of a contrary kind brought about in other parts, or aspects, of welfare; and, if this happens, the practical usefulness of our conclusions is wholly destroyed...The real objection then is, not that economic welfare is a bad index of total welfare, but that an economic cause may affect non-economic welfare in ways that cancel out its effect on economic welfare" (The Economics of Welfare, 4th edition 1932). The Austrians would also point out, among other things, the impossibility of measuring welfare anyway.

From an Austrian perspective the greatest flaw in the GDP approach is that it does not measure economic growth, despite what most economists think. From an Austrian angle, economic growth can actually decline as GDP rises. This of course brings us to the real nature of growth, something to which Hamilton and Saddler seem to have given little if any serious thought. The Austrian school makes clear that growth is an increase in the amount of capital invested per head of the population.

This definition, however, leads us to the nature of capital. Austrians define capital as a heterogeneous structure consisting of stages of production. (Though the neoclassical school recognises the heterogeneous nature of capital goods it has turned away from the enormous ramifications of this vital fact). As savings increase more and more complex and productive stages are added to the structure. It is the addition of these stages that raises the marginal product of labour and hence real wages. (See Eugen von Bohm-Bawerk's remarkable three volume Capital and Interest*, also von Mises Human Action).

The stages of production consist of heterogeneous capital goods (the material means of production that by definition have to fit into the structure at particular locations. (Professor Ludwig M. Lachmann also pointed out that it was the increasing specialisation of capital goods that kept the law of diminishing returns at bay [Capital and its Structure]).

Only savings can fuel this process: there is no other way. And this brings us to the real cost of growth. In order to save we must forgo current consumption. Therefore the real cost of growth is forgone consumption. We thus define savings as a process by which resources are directed from consumption into processes that lengthen the capital structure therefore increasing the flow of consumption goods at a further point in time.

That Hamilton and Saddler are utterly clueless on the nature of growth was made painfully obvious by their assertion on page five of their paper that there has been "a failure to maintain investment in the national capital stock". But if this is so then the country has been consuming capital rather than accumulating it. In short, they are arguing, without realising it, that there is no economic growth.

It quickly becomes clear that these green intellectuals see economic growth as the real enemy. On page three they give a list of the so-called costs of growth that amount to nothing less than an indictment. Let us examine some of these alleged costs that they claim their GPI takes into account. Displaying their total ignorance of capital theory they classify all natural resources as capital (p. 2).

As we have already seen, capital is the material means of production. Natural resources like oil and minerals are correctly classified by economists as land. Now the real cost of anything is what must be sacrificed to obtain it. Costs are therefore displaced values, what economists usually call forgone alternatives or opportunity costs. Once we grasp this concept we can see that natural resources like minerals and oil are costless in the sense that they do not have alternative uses. Hence 'depleting' them is a costless activity in that sense. (Obviously the use of the complementary factors needed to exploit natural resources are not costless).

Leaving them in the ground, however, is a very expensive policy. It would mean sacrificing all those higher-valued goods and services into which these natural resources would have been transformed. The Canadian economist Anthony Scott put it well when he wrote: "Why agree to preserve resources as they would be in the absence of their human users?" He went on to say: "Most of our progress has taken the form of converting natural resources into more desirable forms of wealth. If man had prized natural resources above his own product, he would doubtless remained savage, practising 'conservatism'"

As we can now see, the 'real' cost of exploiting non-renewable resources is what we have to give up as individuals to obtain the benefits of those resources. Therefore our revelation of cost as displaced values means that it is impossible to place a value on so-call resource depletion. Unless it could be shown that these resources have a higher-valued use if left in the ground.

In any case, the idea that we are rapidly depleting our natural resources is ludicrous. It has been reliably estimated that the top 1 kilometre of the earth's crust contained enough gold to last for 57,000,000 years at the current rate of consumption, 242,000,000 years for copper, 38,500,000,000 years for aluminium, 1,855,000,000 years for uranium, and so on (The US Geological Survey 1974). The Commodities Research Unit, London, also calculated that the top mile of the earth's crust held a million times more than the estimated reserves of most metals. An then there are the examples of methane hydrate and free methane, reserves of which are virtually in inexhaustible. Clearly any suggestion that we are depleting these resources in any sense at all is utterly ridiculous.

Moreover, Hamilton and Saddler totally ignore, as do other greens, that economic growth is a resource-generating process. Not only does it create resources by turning what were once useless substances into valuable resources, oil is striking example, it also uses technology to invent new resources and find substitutes for existing resources. The market process that gave us economic growth is therefore actually expanding resources — despite dishonest attempts by greens to persuade people to the contrary. This is why the prices of natural resources have been falling for decades. If the greens were right natural resource prices would have been rising. That they have fallen demonstrates increasing abundance and not rising scarcity.

History has clearly demonstrated that the Earth's resources are enormously elastic. It could scarcely be otherwise when we consider that it is technology that defines resources. Once that fact is accepted, it becomes equally clear that the planet's resources are not measurable, subject to mathematical laws or finite in any meaningful way. Not only do greens like Hamilton fail to see any of this they also fail to recognise the indispensable role that prices and capitalisation play in conserving resources.

Now these deep thinkers assert that logging old-growth forests adds to national income while the environmental losses are not recorded. This is followed by the usual green cant about land degradation. First, logging in Australian forests, 'old' or 'new' is not generating any environmental losses in the form of species extinction, land degradation, water pollution or anything else I can think of. Despite green claims to the contrary, Australian logging has not been responsible for the extinction of a single species of flora or fauna, unlike past Aboriginal hunting practices. But as man is the measure of all things on this world, any species only has value to the extent that it serves man's needs.

In other words, human welfare is the only welfare that counts. However, forests do raise an important point. Trees are not defined as land but as capital goods, a fact that would surprise many in the logging industry, and like all capital goods their value is derived from the services their final products render, which is capitalised. Meaning that we stand as much chance of running out of trees as we do of running out of chickens or cattle.

In a truly free market no forest, 'old' or 'new', would be permanently cleared unless the value of the land in the new line of production exceeded its value as a source of timber or as a recreational good. (What people do not realise is that most of our 'old-growth' forests will be dead in about 50 years any way — killed by old age). Sacrificing the value of the forest's alternative uses is the true cost of felling the forest and is thus included in the accounts by the market process. The same goes for any other investment or consumption decision. To be logically consistent Hamilton would have to include in his GPI the costs of every single individual economic decision. Readers should note that though Hamilton and Saddler talk about the alleged 'cost' of using 'depletable' resources, they never mentioned the costs of not using them.

One of Hamilton and Saddler's the more ludicrous claims is that unemployment is one "of the social costs of the growth process[!]" Widespread persistent unemployment is caused by overpricing labour. It is fundamental in economics that if the price (including oncosts) exceeds the value of labour's product, unemployment will emerge. So long as there is sufficient land and capital available to employ labour mass unemployment cannot persist in a free labour market. (I define the unemployed as those able and willing to work).

Blaming growth for our unemployment level is as absurd as blaming growth for crime — which is exactly what they do! Despite the fact that according to their own conclusion there can have been no growth because there has been no net capital accumulation.

In order to paint as black a picture as possible of our economy Hamilton includes as costs the cost of unemployment, underemployment and overwork. (Underemployment occurs where people have been driven out of occupation or denied access to occupations where their productivity is of a higher value). As I have already pointed out unemployment and underemployment are costs are caused by overpricing labour. (It was only 12 years ago that the same Dr Hamilton was blaming economic rationalism [market economics] for unemployment [The Australian Financial Review, 9/9/91]. His then cure was a 7 to 8 per cent inflation rate, thus finally demonstrating his economic stupidity).

There are also the costs of commuting, of noise pollution, of transport accidents, industrial accidents and so on. That these are costs is indisputable, that they are getting worse is nonsense. There have always been such costs. What they ignore is that while growth eventually reduces them some of them are the really the products of higher living standards. Australians, for example, commute more because increased purchasing power has allowed them to move further out to more congenial surroundings, a development greatly aided by the much maligned car.

The alternative would be greater urban density. People have made it clear which they prefer. As for noise, cities are vastly quieter than they were 90 years ago; factories have certainly, from my own personal experience, become substantially quieter in the last 40 years and the number and seriousness of accidents has also fallen. And with genuine economic growth these things will get even better. Anyone with a sound knowledge of economic history can testify how much worse things were in the past. It is only economic growth that brought improvements.

Like all good greens, Hamilton and Saddler raise the spectre of pollution but no where do they tell us what it is. Pollution can be defined as the release into a locality of substances in such a quantity that they are damaging to health or property. Once again, regardless of green propaganda to the contrary, pollution is falling and not getting the worse. Pollution is basically a misallocation problem that involves the violation of property rights and the use of the optimum, things Hamilton really ought to know. The kind of 'pollution' problems that he refers to e.g., water and air, are as old as civilisation and are relieved by use of superior technology provided, once again, by growth.

Two things stand out: 1. Hamilton's GPI is an utterly worthless concept with no economic standing at all, seemingly designed to denigrate economic growth. 2. The use of so-called greenhouse emissions to bring into question the benefits of growth is another sickening example of green propaganda. I think it is now clear that both Hamilton and Saddler have, to put it mildly, nothing of any value to say on economics. They appear to have no real understanding of growth, costs or capital theory. Furthermore, I believe Hamilton's statist fundamentalist views are a severe barrier to acquiring such understanding.

Though comfortable middle class intellectuals like Hamilton and Saddler) feel free to attack growth, economists like Lord Peter. T. Bauer fully grasp its benefits. Bauer succinctly described growth when he said it was "an increase in the range of effective alternatives open to people". No one has the right to deny people those alternatives.

Gerard Jackson is Brookes' Economics Editor