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

15. Disappearing Economic Growth Drivers and Emerging Barriers
The efficacy of incorporating external peoples and resources to drive economic growth in the world economy began to diminish in the 20th century. By the end of the century, the Western capitalist world had virtually completed the work of bringing everything and everyone on the planet into the world economy. Today, almost every square inch of the earth’s surface and every resource deposit above, below and on the earth are now under the control of a nation or an agreement among some set of nations; almost every person must answer to a national government; and almost every person participates in markets directly or indirectly to obtain a livelihood. The only frontiers (territories not yet fully incorporated) left are parts of the arctic regions, the bottoms of the open seas, and outer space.

The disappearance of a world of people and resources that is external to the world economy disabled the most powerful drivers for supply side and demand side growth. The burden of generating economic growth now falls almost completely onto governmental policy interventions that boost consumer incomes and facilitate technological innovations that expand access to resources and reduce resource use inefficiencies.

On the demand side of the world economy very few communities of people who live mainly by producing goods and services for themselves still exist, and those that do are very small. Today, new consumers are added almost exclusively through births.

This is an incremental process of consumer demand growth that is not keeping pace with the world’s growing production capacity because most births are in lower income families with very little purchasing power. In most cases, each new addition to the world’s population adds only a minimal level of consumer demand.

On the supply side, the growth of the nation-state system to encompass the entire earth has mobilized enormous resources for developing and implementing production technologies that displace human labor. For much of the expansion era, a large part of the energy used in producing goods and services came from humans, so increasing production required increasing the number of people at work. This was the supply side problem that slavery addressed. As slavery ended, wage workers provided more and more of the human energy used in production processes. Wage workers became consumers, so as production expanded consumption could expand as well.

Today, every national government and many subnational governments use tax money to subsidize and drive the development of new production technologies. Those efforts have increased the pace at which production technologies that displace human labor are being developed and implemented. These advances are rapidly destroying the role of supply side growth in driving demand side growth. They ramp up the production of goods and services much more than they ramp up consumer incomes.

Alongside the disabling of classic economic growth drivers, barriers to economic growth have emerged that are neither temporary nor localized; they are global in scope and epochal. And, they are formidable and becoming more resistant to policy interventions and less amenable to technological fixes with each passing year.

These barriers are the finiteness of the earth, entropic constraints, and insecure investment environments.

16. Finiteness of the Earth
The primary impact of the finiteness of the earth is on the supply side of economic growth. We have now reached a point in time when the list of resources essential to production that might become temporarily or permanently scarce, and thus much more expensive to exploit, is getting quite long. Among these resources are fossil fuels, fresh water, fish stocks, arable land, and water, land, and air masses that can safely absorb and disperse the byproducts and waste of global affluence.

We may succeed in developing alternatives to resources currently in use as they become more scarce, but transitions from currently used resources to alternatives cannot drive economic growth to the same extent that exploiting newly acquired, easily exploited resources can. One reason is that input substitution too often requires a wide-ranging overhaul of industries, technical skills, legal environments, and consumer behaviors. This absorbs much of the value of the substitute resource.

We are facing this reality now, with the efforts to replace fossil fuel vehicles with vehicles powered by electricity or hydrogen. Not only does this effort require oil and gas companies to write off the value of oil and gas fields and associated equipment, it requires training a new generation of automotive technicians, dismantling pipelines and storage tanks in a way that protects the environment, massive investments in whole new industries, and changes in the way people operate and maintain their cars, trucks and other vehicles.

17. Entropic Constraints
Every form of wealth degrades as time passes. Some forms, like perishable food, degrade quickly, others are more durable. The scientific term that captures the notion that the degradation of the world’s wealth is unstoppable is entropy. A nice overview of this issue was written by John Scales Avery in 2012.26

Entropy constrains economic growth through its impact on decisions about which goods and services to produce and on how we use the wealth we create. The items that make up a stock of wealth must be repaired or replaced at the rate at which they degrade. Otherwise, the stock of existing wealth diminishes. Thus, to maintain the public and private stocks of wealth at current levels, a portion of the economic activities that make up an economy must be devoted to repairing and replacing items of wealth that are being lost to degradation and destruction. For the world economy, repair and replacement costs have become a substantial and growing barrier to economic growth.

This barrier has emerged because the stock of global wealth has been growing for several hundred years and increased enormously in the last century. Most visible to us is the accumulation of manufactured wealth – hundreds of millions of automobiles, thousands of skyscrapers, hundreds of thousands of production and service facilities, endless miles of roads and bridges, hundreds of millions of homes and household appliances, billions of personal items, etc.

This stock of wealth is enormous, so the volume of economic activities that must be devoted to offsetting degradation and destruction is very large. More importantly, that volume is growing rapidly because the global stock of wealth is aging and because much of that stock of wealth was not designed to endure the extreme weather events that are now upon us or to endure the destructiveness of riots and wars.

Human creations are not the only kind of wealth that we must devote our income to maintaining, and possibly not the most costly to us. With each passing year, we are learning that the earth’s atmosphere, oceans, ecosystems, and species are increasingly a part of the stock of global wealth that must be maintained. Human activity has become such an enormous source of “damage” to these parts of the earth system that we must now count these things as wealth and invest income in maintaining them. Even the world’s most formidable mountain (Everest) now has maintenance costs because it has become an economic asset that is used and damaged by human activity.

Maintaining this enormous stock of human made and natural wealth consumes a very large and growing share of the world’s annual production of goods and services. The negative impact on economic growth is clear. The larger the proportion of total economic activity that must be devoted to maintaining current levels of wealth, the smaller the proportion that can be devoted to providing each new member of the global population with an average share of wealth.

On the supply side, investments in developing resource substitutes, exploring for new resource deposits, and constructing new production facilities are constrained. On the demand side, businesses and consumers are increasingly forced to devote more and more income to repairing and replacing the cars, computers, washing machines and other existing goods rather than to purchases that actually add to their wealth and wellbeing.

18. Investor Insecurity
The world economy’s basket of acceptable production investment opportunities is shrinking. In the first place, the slowing rates of demand side and supply side growth discussed above are reducing investment opportunities. In addition, the remaining investment opportunities are becoming more and more risky. Also, rising inequalities of income and wealth are increasing the amounts of money and other liquid assets being held by investors that must be matched with suitable investment opportunities.

“Economic growth can and will continue to take place, but it will not follow the pattern established in the 20th century.”

In recent decades, risk levels for production investments have been rising and investors have been moving their investment funds into non-production investment areas in the search for good returns and reasonable risk (government securities, real estate speculation, intangible assets, even cash).** The cause of this shift is an accelerating breakdown of the effectiveness of the predictive tools and strategies used by investors to estimate levels of risk and return in the production investment arena. This breakdown can be traced to four key factors: a) global climate change, b) the intensification of competition among producers of goods and services that has come with globalization, c) the increasing rates of innovation on both the supply and demand sides of the world economy, d) the continuing failure of governments to create conditions for economic growth.

19. Conclusion: A Slowing Rate of Economic Growth and Unprecedented Challenges to the Human Imagination
The concept of an inclusive world economy does not completely fit the world economy as it is today. The incorporation of everything and everyone into a single, all-inclusive economic system is not fully complete. This process is, however, sufficiently complete to warrant abandoning the concept of externalities and adopting the inclusive world economy concept as the better tool for analyzing the dynamics of change in the world today.

Remnants of the expansion phase of the development of the world economy are still with us, so the constraints on economic growth are not total. Economic growth can and will continue to take place, but it will not follow the pattern established in the 20th century. Over the long term, the world’s economic growth rate will decline. It is even likely that the world economy will enter more and more prolonged periods of economic contraction, periods in which the production of wealth does not keep up with population growth and the degradation of existing wealth, periods when the global stock of real wealth actually declines.

No one wants this conclusion about the future of economic growth. It is very difficult for any of us to imagine a world in which peace prevails, in which efforts to move more and more people out of poverty can succeed, and in which life in the middle class can be truly satisfying without a high rate of economic growth. It is much easier to imagine that a world without sustained and substantial economic growth is a world that is doomed to a fate of rising poverty, inequality, and conflict.

We imagine this fate is the only possibility because we are informed by an economic paradigm in which economic growth is a necessity for human wellbeing. That paradigm constrains our vision. It does not allow us to imagine an acceptable world in which economic growth is slowing toward zero because it assures us that the link between economic growth and increasing human wellbeing is unbreakable. Yet, we have very likely entered such a period of history, so we must be able to imagine that humans can still thrive. We must develop imaginations that can invent the institutions for a world without economic growth. Trading in the concept of externalities for the concept of an inclusive world economy can help us do that.

** “Right now, for instance, regulators across the globe are warning about inflated prices for potentially risky assets ranging from U.S. junk bonds to the debt of economically shaky countries such as Spain and Greece to real estate in China and London.” See Lisa Abramowicz, “Watching for Bubbles,” Bloomberg
26. John Scales Avery, “Entropy and Economics,” Cadmus 1, no. 4(2012): 166-179

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