Understanding the necessity of economic growth

Oxford economics professor Daniel Susskind’s recent book, Growth: A History and A Reckoning, underscores both the historical novelty of the concept of sustained economic growth and why democratic capitalism needs it to continue to be a priority.

Susskind begins by explaining how new a phenomenon sustained economic growth is. For millennia before the Industrial Revolution, stagnation was the norm, with brief periods of higher living standards punctuated by setbacks due to supply constraints, population growth or pillage by thieves or invaders. In an image owing to economic historian Jonathan Levy, the result was economies that expanded and contracted like accordions, with no continuing progress overall.

Permanent stagnation resulted in all human cultural narratives assuming the economy was a zero-sum exercise in which the only way of improving incomes was at the expense of someone else. As sociologist Jack D. Douglas put it, “the zero-sum game is really the most ancient way of thinking, found in all primitive societies and highly exaggerated in peasant mentality.”

Ubiquitous belief in the zero-sum model was self-reinforcing: the resulting focus on redistribution limited the possibility of sustained growth. Oxford’s Eric Beinhocker argues this is because “societies that believe in a fixed pie of wealth have a difficult time engendering cooperation and tend to be low in mutual trust,” both of which are required for capitalism and trade to flourish. In addition, economic historian Deirdre McCloskey suggests, the denigration of rich people “as clever thieves or obsessive misers or lucky inheritors” discouraged people from striving to join their ranks.

The reflexive reversion to redistributing instead of creating incomes resurfaces during periods of slow economic growth. But emphasizing redistribution further drains life from what the German sociologist Max Weber called the optimistic “spirit of capitalism,” something clearly evident in the malaise that infects much of the western world today. In the fast-growing 1950s John Kenneth Galbraith lamented that “inequality has ceased to preoccupy men’s minds.” You will know Canada’s economy has regained its potential when inequality and redistribution recede from our public debate.

In his new book, Susskind emphatically rejects the recent “de-growth” movement’s belief in shrinking the economy. The permanent recession that would result would have enormous consequences. During the long slump in the 1930s, not to mention the slow growth of the last 10 years, people became susceptible to the siren call of dictators and autocrats promising to deliver higher incomes even as they undermine the values supporting democratic capitalism. As the economist Diane Coyle says, the luxury of “no growth is for the rich,” not the masses.

Susskind does an admirable job describing the evolution of “growth theory” in economics, beginning with how the classical economics that dominated the profession until the 1870s ruled out the possibility of growth. The belief the economy could not exceed a given ceiling led the London School of Economics’ Lionel Robbins in 1935 to call economics “the science of scarcity,” a definition widely used to this day. Soon after, the “Harrod-Domar model” highlighted the supposed instability and improbability of sustained growth. In its turn, Robert Solow’s post-war model acknowledged the possibility of sustained growth resulting from technological change and productivity gains—though the actual drivers of these forces remained a mystery. More recently, Robert Lucas and Paul Romer partly opened the black box of productivity growth by emphasizing the importance of human capital and ideas, while Joel Mokyr and Edmund Phelps have stressed the importance of culture and institutions in creating an environment in which ideas and innovation can flourish.

According to the philosopher Michael Novak, the breakthrough idea of capitalism was not the profit motive (which has existed forever) but the very idea that sustained growth was possible. And yet, Susskind concludes, economists still have not developed a fully-satisfying working model of what sustains economic growth since “the deeper you go, the less useful these explanations become” about what creates the right culture and institutions. And perhaps that’s to be expected. After all, the Industrial Revolution launched without the advice or encouragement of economists.

Though we still may not be able to explain growth, we do know that in its absence, societies revert to ancient zero-sum narratives about redistributing a perceived fixed amount of income, which only compounds the economy’s weakness and undermines democratic institutions.