The hopes of endless economic growth

William Keegan

The trouble with economic growth, as with many aspects of life, is that there are pros and cons to technological progress.

ECONOMISTS ARE great believers in new technology. Technological progress is the mainspring of economic growth. Politicians may claim the credit for the growth that occurs on their watch, but the fact is that the growth in productivity associated with new inventions and new methods (or better use of old methods) has allowed most advanced industrial economies to grow by 2 or 3 per cent a year for as long as most people can remember.

Such compound growth rates mean that the average standard of living can double over 25 to 30 years, though the distribution of the fruits of economic growth is another matter. The form and distribution of the fruits of economic growth are the stuff of domestic politics — and some members of the electorate acquire a lot more fruits than others.

Although policymakers often see their task as to try to increase the rate of growth of the economy, their main objective in practice is not to allow the economy to perform below par by operating inappropriate policies, such as allowing inflation to get out of control, or letting unemployment rise too high.

The statistics quoted to indicate economic progress are inadequate, but they are the best we have. More emphasis these days is placed on quality of life (the elusive achievement of `happiness') than on growth for growth's sake; and it is now widely accepted that uninhibited economic growth has a potentially disastrous effect on the environment. Equally, it can be argued that taking account of the environment, via new technologies and their application, will itself increasingly become a factor promoting growth.

The trouble with economic growth, as with many aspects of life, is that there are pros and cons to technological progress. Indeed, the economy is a bit like a balance sheet: the assets accumulate, but so do the liabilities.

The classic example is the way scientific progress produces more and more sophisticated weapons, not least nuclear weapons, which provide the capability to destroy on a large scale — but which are justified as providing the means of defending our threatened way of life.

During the past 20 years the most prominent example of technological progress has been that in information technology, which has contributed enormously to improvements in productivity, most notably in the United States. As a practitioner of political economy, I am supposed to embrace all these improvements, but personally regard many of them, or the way they are used, as a tiresome complication.

To take one example, I am lost in admiration at how large swathes of business and government have taken advantage of technological innovations to make life difficult for the customer. "Don't you realise my secret?" asked one tycoon not long ago. "By driving them on to the Internet, we make the customers do the work."

Yet to my amazement so many people seem to love sitting for hours in front of computer screens. Whatever they turn on seems to turn them on.
But I have to say that whenever I ask a relation or friend to demonstrate the wonders of the computer, something nearly always goes wrong.

Recently a good friend asked me to give him a test. "All right," I replied, "see if we can find the precise words used by the late President Nixon's economic adviser, Herb Stein, to the effect that `if something can't go on forever, it won't."' We searched and we searched. What we found were all sorts of versions, but not the original quote.

However, I am indebted to my old friend Professor Wynne Godley for what he believes is the original quote: "If something can't go on forever, it will probably stop." (Note the delicious use of `probably'.)

Now the reason why I had Professor Stein on my mind is partly that the death of President Gerald Ford brought his pardon of President Nixon back in the news, but also that this is the time of year when economists make predictions for the next 12 months, often accompanying them with shameless explanations of why their predictions of a year ago were so wide of the mark.

In the latest batch of predictions many commentators are blithely ignoring the dictum of the late Herb Stein and concluding that because something they expected to stop hasn't stopped, it will go on forever. (I exaggerate, but you know what I mean.)

So many forecasts of a halt, or even collapse, in the British housing market have proved premature that Professor Stein may turn in his grave. But if it turns out that the U.S. is heading for a recession, or the well below full-employment rate of growth economists call a "growth recession," then the rest of the world may not be immune from the repercussions.

One cannot be sure. But the financial markets, which seem to be largely ignoring the risks, should ponder the words of Professor Stein.

Guardian Newspapers Limited 2007