Replacing the Concept of Externalities to Analyze Constraints on Global Economic Growth and Move Toward a New Economic Paradigm

11. Implications for Evaluating Prospects for Economic Growth
Discarding the concept of externalities and adopting the concept of an inclusive world economy gives us a different set of propositional statements on which to base an evaluation of prospects for economic growth in the current period. In general, this view elevates the importance of defining and observing global processes and discovering and measuring all of the outcomes associated with those processes. It leads us to describe and explain the activities and trends we observe in the world and the likely consequences with reference to system components, system processes, and system development outcomes.

Derivative propositions associated with economic growth include:

  • The concept of economic growth captures only one component of the development of the inclusive world economy; measuring economic growth has only limited (and thus error prone) use as an indicator of changes in human wellbeing.
  • The products and byproducts of global processes are distributed across the entire world economy through the network or relationships that make up the world economy; the products and byproducts of so-called national economies are only components of global products and byproducts.
  • Problems and solutions associated with supply and demand, economic activities and growth, societal outcomes, and conditions in the world of nature are properly defined as aspects of the development of the inclusive world economy
  • The global rate of economic growth in the current period is determined by world economy level processes; the global rate is not the sum of national rates; national rates are components of the global rate.
  • The global rate of economic growth in the current period constrains national and local rates of growth; national policies affect the distribution of global economic growth much more than they affect the global rate of economic growth – to a great extent, one nation’s gain in economic growth is another nation’s loss.

This conceptualization transforms the options available to the world’s institutions. Unilateral action is less efficacious. The information derived from defining processes as national and local becomes less informative for creating public policies for enhancing and protecting human welfare; public policies based on national and local measures of economic performance can even be counter-productive.

12. Technological Solutions in This View
Technological optimism is much more difficult to maintain with the concept of an inclusive world economy. Technological solutions in this view are responses to problems that are defined with an artificially limited scope; the consequence is that technological solutions are limited solutions and often illusionary solutions.

Particular institutions and organizations of people can use technologies to manipulate the distribution of harmful outcomes and developments to other institutions and organizations of peoples, but they cannot eject them from the inclusive world economy. Nor can they eject consequences of the actions of other institutions and organizations of people from the inclusive world economy. Everything done travels through the network of relationships among institutions, groups, and ecosystems that make up the inclusive world economy; everything done contributes to the historical development of the whole.

Within an inclusive world economy, nothing can be added or taken away through the use of technology. Technological fixes (including resource substitution) only change the symptomatic form of a problem so that it displays in another time and place in the world economy and/or in another form. They only create the illusion in a given place that certain effects of human activity have been safely contained in an external part of the world. They can push some consequences off into the seemingly external future, but, unfortunately, the future quickly becomes the present; its function as an illusory externality dissolves and yesterday’s exiled consequences come back into our midst.

13. Prospects for Economic Growth in an Inclusive World Economy
The inclusive world economy view leads to a conclusion that prospects for economic growth are now much more constrained than during the expansion phase of world economy development. The reason is that the key drivers of economic growth during the expansion phase are disappearing and barriers to economic growth that did not exist during the expansion phase or existed only in limited, manageable forms are now emerging. These new barriers are formidable and resistant to technological fixes.

Economic growth consists of more or less simultaneous increases on the supply and demand sides of the world economy. It takes place when owners of production facilities increase the volumes of goods and services they produce and introduce into the world’s markets and businesses and consumers buy those additional goods and services. Increases on the supply and demand sides are usually out of sync, but over the long run both have to increase by close to the same amount.

In the normal course of things, investors and owners of businesses make responsive investments to meet demand that exceeds available supply or make anticipatory investments, betting that demand to match those investments will develop in the near future. On the other side, businesses and consumers increase demand by making additional purchases using current additions to income or by borrowing against anticipated future income growth.

The rate of economic growth is determined by drivers and barriers on the supply and demand sides of the world economy. Economic growth increases when the power of the drivers of economic growth exceeds the power of the barriers. When investors, business owners and consumers perceive that this is the case, they engage in activities that grow the world economy. When they perceive that the barriers outweigh the drivers, they pull back on those activities. In the worst case, existing investments are demobilized and business and consumer incomes are shifted from purchases to various forms of savings.

Perceptions get a lot of attention from economists and investment experts, but perceptions cannot go far afield for very long because objective factors always force corrections to misguided perceptions. Over the longer term, objective factors are the relevant drivers and barriers to economic growth.

14. Drivers and Barriers During the Expansion Period
During the expansion period of capitalism the incorporation into the world economy of lands, resources, and peoples outside the system was a major driver of economic growth. That dynamic process played a key role in generating new market demand. Waves of new consumer demand were created through a process of moving communities of people away from producing goods and services for themselves (no monetary value attached) to buying goods and services in the marketplace. In this process, economic enterprises did not so much expand the volume of goods and services being produced as take over existing home and community based production of goods and services and assign market values to them.

Most visibly, this was facilitated by bringing external peoples under the control of western nations through the imposition of colonial governments and later through the formation of dominant state-client state relationships. As is well documented, bribery, laws that enable deception and exploitation, intimidation, violence, and war played large parts in this history. Over and over, indigenous peoples were set to work transferring the indigenous resources of their own lands to the agents of imperialist nations in exchange for wages. Cut off from indigenous communities and associated production practices, and with no time left over after performing wage labor to engage in production for themselves, those peoples could only use their wages to buy the things they needed from the same or other agents of the imperialist nations. Thus, the monies paid to indigenous peoples pressed into wage work returned to the imperialist nations as new consumer demand (alongside the new flows of indigenous resource wealth).

The external world of peoples and resources was enormous in the first centuries of the era of expansion. Using their technological advantages in transportation and warfare, the emerging capitalist nations rapidly incorporated indigenous peoples and resources, fueling high rates of economic growth. For example, the slave trade mobilized the labor of millions of Africans in the Americas.

One estimate is that 6.5 million immigrants survived crossing of the Atlantic to the Western Hemisphere between 1492 and 1776. Of those, only 1 million were Europeans; the remaining 5.5 million were enslaved Africans. On average, 80 percent of these enslaved Africans were put to work as field-workers.23 By the end of the slavery era, almost 12 million Africans were brought to the New World.24

Slaves did not become consumers because they were not paid in money. However, the products of their work were sold on capitalist markets by the slave owners. Rapid income growth turned slave owners and ancillary shop keepers and craftsmen into consumers of goods produced in Europe and North America and into suppliers of the raw materials and food items that fueled the growing industrial and commercial centers of Europe and the Americas.

Another example of the role of external peoples and resources in driving economic growth was the economic impact of the flow of gold and silver from the Americas to Europe. According to one source, “Imported gold and, more significantly, silver probably affected the European economy more than all other foreign goods … the bullion bonanza … increased the profits of merchants selling on a rising market, thus greatly stimulating north European capitalism.”25

In that era of expansion, insurmountable barriers to economic growth did not exist in practice or in theory. Input shortages, political upheavals, wars, and supply and demand imbalances did produce interruptions to economic growth, but the worst case was (and seemingly would always be) a temporary and localized slowdown in economic growth. Untapped stocks and deposits of resources and populations of potential workers and consumers were just an explorer, a bribe, a military campaign, or a technological advancement away. Restoring the balance between supply and demand was just a policy intervention away. Growing both the supply and demand sides of the world economy was assured.

23. Howard Dodson, “How Slavery Helped Build a World Economy” National Geographic News February 3, 2003.
24. “Overview Essay: The Slave Trade, Slave Resistance: A Caribbean Study,” University of Miami Digital Collections
25. “Beginnings of North European Expansion,” International World History Project

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