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Copyright © for articles belongs to the respective author. All views expressed herein are those of the authors and do not necessarily reflect the views of the editors or sponsors. All other work, published in the journal, is provided under the terms of Attribution-NonCommercial-ShareAlike 3.0 Unported Creative Commons License (http://creativecommons.org/licenses/ by-nc-sa/3.0/deed.en). The Transatlantic Journal waives the condition of attribution. All correspondence or complaints should be adressed to the editors:

This edition of The Transatlantic was made possible by a generous grant from the Cambridge Political Economy Society Trust (CPEST) and a donation by Oxford Economic Papers (OEP). The Transatlantic is a publication by students from several universities, the Philosophy Society of the LSE Students’ Union, and the Columbia Economics Society.

The Transatlantic Journal LSE Philosophy Society c/o LSE Students’ Union East Building Houghton Street London WC2A 2AE United Kingdom

Printed by: Caric Press Ltd., UK LSE Students’ Union

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Columbia Economics Society

LSE SU Philosophy Society


the team

transatlantic

Editorial Board: Leoni Linek (University of York), Editor Jakob Schaefer (London School of Economics), Co-Editor Felix Holler (Academy of Visual Arts Leipzig), Editorial Design Simon Fuchs (University of York), Web Marketing and Development Alina Lipcan (Oxford University), Corporate Relations Liaison Ronan Bligh Sato (Oxford University), Special Events Coordinator Thalia Dergham (Columbia University), Marketing Director US Rayna Coulson (London School of Economics), Copy-Editor Matthew Buckley (Columbia University), Chapter Chair Columbia University Alexandra Dobra (University of York), Chapter Chair University of York Christoph Siemroth (Universität Mannheim), Web- and Newseditor; Reviewer Daniel Urban (University of Missouri-Kansas City), Web- and Newseditor Peer-reviewers and proofreaders: Felipe Goncalves (Columbia University) Jaiseung Bang (Columbia University) Philip Crone (Columbia University) Luca Uberti (London School of Economics) Danni Pi (Columbia University) Claire Field (King’s College) Eleonora Paganini (University of Edinburgh) Alan Daboin (Columbia University) Zhi Hui Ho (Oxford University) Nicholas Evans (King’s College) This journal is a publication by students from several universities and the Philosophy Society of the LSE Students’ Union.

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We dedicate this new issue of The Transatlantic to GROWTH – a topic ubiquitous and controversial on almost all dimensions. Although most economists take growth to mean an increase in Gross Domestic Product (GDP), there is much dispute about its causes, effects and hence desirability. Especially in the wake of the crisis, the growth debate has once again been reignited. In 2009 Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi released a noteworthy report, criticizing and reevaluating the use of GDP as a measurement of economic performance and social progress. They concluded that their work had just begun. It is widespread to take GDP not only as a measure of a country’s production, but also as a proxy for its wealth and development. This leads many to suggest growth as objectively imperative. Yet such an inference

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presupposes specific concepts of wealth and development, as well as their desirability. And what about the downsides: does growth cause resource depletion and further social inequalities? Tim Jackson, Professor at the University of Surrey, shows concern with this issue in his guest article “Beyond Growth” (p.42). By way of contrast, Professor Xavier Sala-i-Martin from Columbia University argues that growth is all about innovation and need not be resource-intensive, as he explained at our interview in New York (p.12). Sala-i-Martin was one of the first to show that economic growth and poverty are negatively correlated. Professor Francesco Caselli from LSE who met with us in London agrees that growth is generally desirable, but focuses particularly on the harmful effects of the discovery of natural resources (p.28).


editorial The student articles of this edition cover a wide variety of topics. They are not only concerned with growth – for example that of China and Japan (p.20) – but also with the history of growth criticism (p.8), alternative indicators of development (p.32) and the growth of macroeconomic knowledge (p.15). Finally, the relevance of Ibn Khaldun’s philosophical perspective on growth is discussed (p.38). With the release of the second issue of The Transatlantic, we are launching our new online service – The Transatlantic Blog. On the blog we hope to offer our readers more content, independent of the biannual editions, as well as the opportunity to participate in the discussion by commenting on our authors’ posts. Visit: www.thetransatlantic.org to find out more.

Finally, we would like to thank Cambridge Political Economy Society Trust (CPEST) and Oxford Economic Papers (OEP) for their support. The publication of this issue was only made possible by generous donations from CPEST and OEP. The upcoming issue will be on the topic Education & Innovation. If you would like to write an article on a topic such as human capital theory, intellectual property, brain drain, grade inflation or any other related issue, submit an abstract to us at submit@thetransatlantic.org by January 20. Undergraduates, postgraduates and academics from all universities and all fields of studies are welcome to write.

Jakob Schäfer, Christoph Siemroth & Leoni Linek

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con 3

the transatlantic team

5 editorial

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growth of anti-growth thought?

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interview with xavier sala-i-martin

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do we know more about the

economy today?

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high growth: lessons for china

from the japanese experience


tent 32

interview with francesco caselli

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two decades of human development

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the modern relevance of ibn khaldun’s

economic philosophy

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beyond the growth dilemma —

ecological enterprise and the cinderella

economy 51

call for articles

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growth of anti-growth thought? When Enough is Enough: a Brief History of Growth Criticism in Economics.

B Y B en E ckersley & G reer H anshaw

In Economic Growth, Robert Barro and Xavier Sala-i-Martin (Barro et al. 2004) declare: “Economic growth […] is the part of macroeconomics that really matters.” (Ibid., p. 6) It is not an exaggeration – for centuries, economists have extolled the importance of growth. But what conditions have sustained its prestige in economics for so long? Surely any science, and its constituent ideas, must be questioned to maintain rigor. As the following survey reveals, the history of criticism of economic growth within the field is a checkered one. Such critiques have arisen only when the costs of growth are manifest, and the immediacy and clarity of those costs determined the reception. As this brief analysis suggests, economics exists within the strict confines of history, and its most lauded thinkers contend with the issues and the limitations of their specific eras. 8

J. R. Hicks offers a thorough and precise summary of growth criticism up until the 1960s in his paper, Growth and Anti-Growth. He begins with Adam Smith in the Wealth of Nations: “The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining melancholy.” (Hicks 1966) Smith, Hicks properly notes, suggests that when the demand for labor exceeds the supply of labor, wages will grow; only when supply reaches demand will wages return to equilibrium. In order to promote continually higher wages, markets or policy makers must feed the gap between supply and demand of labor – they must prevent the stationary state. As the purported father of economics, Smith’s words still echo into the present, and his thoughts seem timeless. But his stance in history is clear; during this period, Smith,


like much of Europe, was caught in the winds of the Industrial Revolution. The free market lacked the rampant inefficiencies of mercantilism. Free trade and unobtrusive government seemed almost flawless. Market failures did not yet exist, and Smith could not anticipate the negative ramifications of economic expansion. For Smith, there were no costs – social, environmental or otherwise – to boundless growth; only the promise of competition and wealth. Ricardo enriched Smith’s argument; he used the Law of Diminishing Returns to explain how, when population increases, land becomes the fixed factor. According to this observation, Hicks explains, the marginal products of capital and labor (the added benefit of capital and labor with each incremental unit) will decrease as labor swells. External factors such as trade and investment cause the demand for labor to outpace the growth of population. Without these factors to push the equilibrium to support a larger supply, long-term population growth will cause wages to fall. According to the Lassalle/Ricardo Iron Law of Wages1 profits will consequently bear the brunt of this declining marginal product of labor and capital. The economy will enter malaise. His concerns are tangible – with industrialism came unfathomable squalor, unmitigated increases in population and insatiable want. But despite Ricardo’s prophecy of doom, there is hope. The continued, dutiful expansion of demand into international markets will protect it from excessive supply. Contrary to the Mercantilist model2, Ricardo’s new one saw trade as an economic, perhaps a moral imperative. By evading equilibrium, prices will remain artificially high, growth will increase and wealth will flow. Like Ricardo, John Stuart Mill is attuned to the paramount influence of population on the economy; however, his analysis of the stationary state is far more optimistic. As Hicks explains, “If population can once be controlled there is no need for the economy to go on expanding, in order that wages should be above the subsistence level. Instead of land being the fixed factor, so that (as in the Ricardian stationary state) surplus production is swallowed up in rent, it is labor that becomes the fixed factor, so that surplus production can be made to go, at least in large measure, to wages.” (Hicks 1966, p. 261) The stationary state is thus a positive outcome; it is a post-economic paradise, where people can grow infinitely richer through the expansion of technology. When we have achieved this comfortable balance, a sublime management of resources, laborers can continue to benefit from the gap between sup-

ply and demand without a tiring, greedy race for expansion. In the stationary state, the artificially small population can enjoy ever-growing affluence and technological innovation. But even this sudden, profound shift has its historical precursors. Among Mill’s contemporaries were Jeremy Bentham and his followers, the Benthamites, who strove to efface urban blight with sanitation and infrastructure improvement. With Mill, this group of social architects sought to implement a balance. While not averse to growth, they viewed expansion as a means to an end, indeed the end of tiresome competition and onerous need. The balance, the social equilibrium, served as their goal, and would remain a pivotal ambition among theorists for decades.

For centuries, economists have extolled the importance of growth. But what conditions have sustained its prestige in economics for so long? As Hicks points out, the generation of economists led by Marshall and Pigou did not zealously promote economic growth; indeed, rampant industrialism and colonialism had caused growth to balloon. In the style of Benthamites, this group of economists sought to balance the needs of the nation rationally. They were not socialists – they believed in the market. However, they acknowledged that limitations, market failures, could prevent society from achieving a proper social equilibrium. As such, economists impressed their social concerns onto their models. Marshall clarified observed relationships such as supply and demand and marginal utility. His work engendered a rigorous study of economic welfare, which Pigou continued; in Wealth and Welfare (Pigou 2009, first published 1912), he described social marginal products and costs. And his most significant contribution, the Pigouvian tax, wed harmoniously the need for intervention with the mechanisms of the market. This period in history saw the rapid enfranchisement of the industrial masses. The Third Reform Bill of 1884 extended suffrage to nearly every adult British male, providing greater political power to the potentially turbulent working class. Perhaps as a preemptive concession or political containment, economic management categorized the time. Indeed, while Marshallian economists enhanced their 9


models and their theories by incorporating social ramifications, leftist politicians, such as David Lloyd George, implemented aggressive redistributive measures. His People’s Budget of 1909 imposed heavy taxes on the wealthy, which funded an increase in social benefits. But, ultimately, the Labour Party failed to manage resources effectively during the 20s and 30s. The unsuccessful efforts of Labour, coupled with the crushing paucity of the Great Depression, reinvigorated the study of economic growth. A new generation of concern did not arise significantly until the 1950s, notably with John Kenneth Galbraith’s The Affluent Society. The dogma of economic growth, and its preeminence in politics, was, for Galbraith, anathema and he located, as its source, our primitive, anxious yearning for safety: it is “the culminating consequence of powerful historical and psychological forces.” (Gal-

The dogma of economic growth, and its preeminence in politics, was, for Galbraith, anathema and he located, as its source, our primitive, anxious yearning for safety. braith 1976, p. 101) The roots of this primordial impulse towards security extend to the very beginning of civilization. In a world of scarcity, Galbraith reasoned, the expansion of goods is paramount, but in an affluent society, there is no need to stave off want. As he noted, with a sense of acerbic irony, more people die in America of obesity than starvation. (Ibid.) As such, he urged his reader to abandon economic growth as the dominant parameter of social wellbeing. However, this is not so easy. Although the gratification of material need has subsided as a goal, the doctrine of economic vitality continues to permeate our national discourse. And Galbraith recognized that both Conservatives and Liberals are complicit in its reverence. Keynesian economics won political favor in the 1950s and 60s; despite the cost of a balanced budget, it led the economy to new planes of industry. For the voter, this meant increased employment, the most important resource of the industrialized world stabilized. Indeed, Galbraith attributed Kennedy’s victory to “the promise of the increased production that eliminated unemployment.” (Ibid., p. 139) Conservatives, he suggested, are reluctant to abandon economic growth insofar as they represent the interests of the highest echelons, 10

which believe in economic want: “In the conventional wisdom of conservatives, the modern search for security has long been billed as the greatest single threat to economic progress.” (Ibid., p. 82) Scarcity and competition fuel innovation while security, the erosion of pressure, causes stagnation. Ultimately, Galbraith’s mission to dissever increased production from conventional wisdom could not overcome American apprehensions about communism and domestic security. He argued that, by necessity, the public sector must consume at least part of all spending; however, this amount is too frequently delegated for military expenditures. But while Galbraith questioned the militaristic undercurrent of economic growth, many of his contemporaries were less skeptical. During the Cold War, when the Soviet phantom haunted the American psyche, economic defense seemed the most reliable form of containment: “The ultimate survival of the free nations may well turn on their ability to develop their productive power. The Soviet leaders are counting heavily on the economic growth of the Soviet Union” (ibid., p. xxvii), remarked Robert Richardson, assistant Secretary of State in 1956. Following the original publication of The Affluent Society, the New York Times disparagingly remarked that Galbraith “obviously cares not a whit, on this or any other ground, that the Soviet Union is displaying a more rapid rate of growth than we are.” (Dale 1958, n. p.) Indeed, the ferocity of the Space Race and the proliferation of arms only secured the longevity of conventional wisdom. In his essay The Costs of Economic Growth economist E. J. Mishan criticizes growth from another angle. (Mishan 1971) He locates three problems with growth: its misguided pursuit as government policy, its negative externalities, that is, the social or economic costs imposed on society by the actions of an individual or firm, and growth’s subtle effects, more difficult to quantify. Mishan begins by criticizing an excessive focus on so-called “index economics”, quantitative measures of economic health such as GNP used to dictate policy. What is measurable is not always most evocative, and the ensuing costs from following these figures can be too great to bear. Academia tacitly approves of economic growth but many of its perceived benefits are not automatically ensured. Benefits through aid and investment to poorer countries are often not granted. The perceived need for growth to solve the fiscal and trade fluctuations of a national economy is unfounded when redistribution of present capital could suffice. He challenges the notion that “a per capita rise in real income is a good thing in itself; that in expanding the range of opportunities for ordinary people it increases


their welfare.” (Ibid., p. 36) With a paternalistic tone, he questions the inherent benefits of more freedom (albeit through wealth). But his central concern remains with indices and other quantitative measures, which he argues do not sufficiently account for serious costs. Furthermore, he remains skeptical that growth will, in the long-term, promote equal distribution of income and a more efficient allocation of resources, given the present global and domestic disparities. Secondly, Mishan describes negative externalities, specifically those associated with property rights, the urban landscape, “separate facilities” (ibid., p. 82), and social conflict. He rejects the Coase theorem3.Though he acknowledges that it is possible, its conditions are so rigorous as to render it insignificant. (Ibid., p. 53) Here there are many practical examples: pollution, alteration of the natural landscape, and “uglification” (Ibid., p. 6). He takes particular offense to the mechanization of life with regards to cars and their side effects: the proliferation of roads, noise, and emissions. Finally, with what he concedes is an “informal” (ibid., p. 173) discussion, he examines qualitative costs; the pervasive feeling that “enough does not suffice” (ibid., p. 175), the belief that problems are only “solved” by growth, and the public disinterest in changing the status quo. He also suggests that “the pursuit of efficiency, itself regarded as the lifeblood of progress, is directed towards reducing the dependence of people on each other, and increasing their dependence on the machine.” (Ibid., p. 175) He is both concerned with the effects of technology on the individual and on society, and frustrated with the inability to quantify its costs. It is this quantitative barrier that has restricted Galbraith, and particularly Mishan, from the mainstream. While they raise provocative points, their ideas remain neglected by policy makers and economic commentators because they lack saliency and urgency. The classical economists wrote at a time when short-term economic growth was an implicit quality of the economy. Although they possessed staggering foresight, and their fecund imaginations produced stimulating musings about the far future, material gratification and growth were immediate concerns devoid of immediate costs. But for economists, the historical context slowly evolved. As the costs, the externalities and the caveats of growth arose, Mill and his intellectual progeny realigned their priorities. By the turn of the 20th century, the Western World possessed growth – it now craved balance. Ultimately, this endeavor failed, and the Great Depression scarred the economy and the national psyche, while simultaneously revitalizing interest in growth

as an end in itself. By the time Galbraith and Mishan started their careers, much of the wealth envisioned by the classicists had been achieved, and the social costs of squalor were mitigated to some extent, by prosperity in America and welfare elsewhere. New problems arose; but they seemed indirect, obscure, even ephemeral. Diseases of affluence, materialism, obesity, isolation, lack meaning in the aggregate; environmental depletion, mass extinctions, climate catastrophes, lack impact for the individual. Indeed, increased wealth and equality have eroded the political capital of anti-growth thinking and afflicted society with myopia of responsibility.

But while they dabble in the realm of ideas, economists are ultimately participants in time. The intellectual limitations of their respective periods obscure their thoughts and stymie the potential for progress. The myth assures us that they can steer history; however, as this survey suggests, history does much to steer their ideas. It is tempting, even comforting, to view economists as intellectual vanguards, whose divine advice can direct the course of society. But while they dabble in the realm of ideas, economists are ultimately participants in time. The intellectual limitations of their respective periods obscure their thoughts and stymie the potential for progress. The myth assures us that they can steer history; however, as this survey suggests, history does much to steer their ideas. But if this is true, then the dogma of growth is presently imperiled. The limits of land, fearsome for Ricardo, and the negative externalities described by Mishan, demand increased attention. And once these problems become manifest, a new generation of economists, ever as sensitive to historical stimuli, will have no choice but to reconcile their models, engage their policy makers and solve these issues. t

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Endnotes 1 It states that in the long run, wages will tend towards an equilibrium based on the absolute minimum subsistence level for workers. 2 The mercantilist model encouraged governments to protect industries perniciously by limiting imports, maximizing exports and tyrannizing the seas. 3 The Coase theorem claims that, when property rights are clear, externalities are tradable and transaction costs are low, markets can reach social equilibrium, compensating externalities, through negotiation and without government.

Bibliography Barro, R. J. & Sala-i-Martin, X. 2004. Economic Growth. Cambridge: MIT Press, 2nd ed. Dale, E. L. Jr. 1958. Are We Living Too High on the Hog? The New York Times. Galbraith, J. K. 1976. The Affluent Society. Boston: Houghton Mifflin, 3rd ed. Hicks, J. R. 1966. Growth and Anti-Growth. Oxford Economic Papers, 18. 257 – 269 Mishan, E. J. 1971. The Costs of Economic Growth. New York & Washington: Praeger, 3rd printing. Phelps, E., ed. 1969. The Goal of Economic Growth. New York: W.W. Norton. Pigou, A. C. 2009. Wealth and Welfare. Ithaca: Cornell University Press, Reprint.

Ben Eckersley is an undergraduate student majoring in economics and environmental biology at Columbia University in New York. Greer Hanshaw is an undergraduate at Princeton University in New Jersey. He studies economics.

By the turn of the 20th century, the Western World possessed growth – it now craved balance.

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interview with xavier sala-imartin

Xavier Sala-i-Martin is Professor of Economics at Columbia University. He is a senior advisor to the World Economic Forum and author of the World Competitiveness Report, as well as founder and president of the non-profit organizations Umbele Foundation and CEOs Without Borders. Sala-i-Martin earned his PhD from Harvard University in 1990 and subsequently taught at Yale, Harvard and Barcelona before joining Columbia University. His contributions to modern growth theory and development economics, as well as his novel measurements of the world income distribution have challenged conventional wisdom in many ways. While the World Bank has long claimed that the absolute number of poor people and individual income inequality were increasing, Sala-i-Martin’s groundbreaking research showed that both were falling. Sala-i-Martin, being known for his flamboyant style and speech, was President of the Economic Commission and Treasurer of the Futbol Club Barcelona between 2003 and 2010. 14


»Growth does not mean buying more of the same – it means buying different and new things.«

Prof. Sala-i-Martin, you endorse a definition of growth that is different from that of other economists. How do you define ‘growth’ and why is it important? The definition of growth that I use is the increase in GDP, material objects. Now, the question is, how does that happen? Growth does not occur if a primitive society of hunter-gatherers hunt and gather more and more. Growth occurs through continual increases in the sophistication of business activity; that includes the sophistication of physical capital – machines now are different from machines last year – and sophistication of human capital – sophistication of the acquisition of skills by people. But I think that this is a widely accepted definition of ‘growth’. All of these contribute to all of us increasing our standards of living, and that’s what we call ‘growth’. People don’t want more and more of the same thing. People who are 1000 times richer don’t buy 1000 times more steaks. They buy airplanes, cars, iPods. If you are poor, you buy rice, if you are richer you buy rice and steaks – and if you are even richer you buy rice and steak and iPods. If you are very rich you buy rice, steaks, iPods, and airplanes. All of these are material things. But as we get richer, the sophistication of the material things we buy increases. ‘Growth’ does not mean buying more of the same – it means buying different and new things.

The thought that growth inevitably causes resource depletion is as old as Thomas Malthus’s essay on the Principle of Population. Still today many people fear that the greatest threat of continuous worldwide growth is an exhaustion of resources such as fossil fuels, and arable land. They argue that there are no genuine alternatives (yet) that could replace these resources for the entire planet’s consumption. What would you answer? I think that, like Malthus’s principle, this one will also be wrong. Fossil fuels are exhaustible, but what we need to produce in order to survive is not fossil fuels – it’s energy. Remember the principle of thermodynamics, which says that energy is neither created nor destroyed – it just changes. The amount of energy that we have on planet earth is almost infinite. And the amount of energy we don’t use is almost infinite. What’s going to happen, when we run out of fossil fuels is that we’re going to use alternatives. Solar energy will always be here. We will just learn how to do it better. And the price system will help us. Because when oil and gas start to become scarce, prices will go up. And at that point the alternative energies – which already exist – will become relatively cheaper. The key to understanding economic growth is that the ultimate engine of growth is neither energy nor material goods (material goods are the outcome) 15


but ideas. When we talk about ‘sophistication’, we think about ideas. We use the same old products, just new ideas. For example, cavemen used silicon to illustrate things on the walls of their caves. Now we use silicon to produce microchips. It’s the same natural resource, we just apply new ideas to transform it. The difference is not the physical thing; the difference is how we use the physical thing. Every time we have this kind of ‘fear mongering’, which has occurred repeatedly throughout history, ideas have saved us.

»The ultimate engine has to be the human mind. That is why I don’t think there is a limit to growth – I don’t think there is a limit to human imagination.« Is growth also crucial for sustained prosperity – or is it just necessary for overcoming extreme poverty? Economists like your colleague Jeffrey Sachs might argue that a large increase in growth can help developing countries to vault a poverty trap but might not be necessary in the long run. Sustained prosperity – maintaining positive growth for a sustained amount of time – the question is ‘how does that happen?’. Now, the physical accumulation of stuff, education, aid – all of these things have short-run effects. In the long run, the only way to have sustained growth is to have moreand-more and better-and-better ideas. You can grow for a while by investing, and building roads, and infrastructure, but soon you are going to run into diminishing returns if you do that. You can build growth through education, but if you only do education, then, once everyone has 3 Ph.D’s, you are going to run into diminishing returns. If the World Bank builds roads in Tanzania, it’s the same thing – you’re going to run into diminishing returns. The only way to have sustainable growth is to have ideas. And that is what we need to promote: ideas that may be useful in different ways or different countries. The ultimate engine has to be the human mind. That is why I don’t think there is a limit to growth – I don’t think there is a limit to human imagination. As you have argued, growth is necessary both for poverty elimination and sustained prosperity. But what about happiness? In the 1970s Richard Easterlin tried to argue that happiness and increases in income (let’s say, 16

growth) are correlated, although happiness stagnated at a certain level. Does this result surprise you? That was in 1974. The ‘Easterlin Paradox’ suggests that if you increase income, you reach a maximum level of happiness. There is a problem with the way this experiment was designed. Suppose I ask people “how happy are you on a scale from 1 to 10?” and they answer: “10.” Then if I ask them again the following year, after they have become richer and happier, they cannot answer “11”, but must answer instead “10.” So, by construction you are going to get this result. Now there is new research – a paper by Stevenson and Wolfers – that tries to measure happiness in other ways. They used questions like “how many times did you smile yesterday?” “Do you feel loved?” “Did you laugh?”, things of this sort. And their study produced the result that – both within countries and across countries – rich people are happier than poor people. And this positive relation does not seem to stop as income rises. In fact, it seems to accelerate. So the Easterlin Paradox is an old artifact from 1974 that I don’t think is true.

»The key to understanding economic growth is that the ultimate engine of growth is neither energy nor material goods but ideas.« You mentioned a number of reasons why you think ‘growth’ is important? Is inequality important also? Not by itself. It is not clear that this is bad. If I say “poor people increased at 5 percent and rich people increased at 10 percent in China”, then inequality in China has increased. Is this bad? Statements about inequality have to be qualified. Just measuring inequality doesn’t give us all the information we need. We need to talk about inequality in conjunction with the source of inequality. I can for example say unambiguously that “poverty went down by 5 percent”, and we should all be happy. If I say, without qualification: “inequality went up by 3 percent”, we should want more information. Therefore inequality by itself is a meaningless number. t

Interview by Matthew Buckley


»If you are poor, you buy rice, if you are richer you buy rice and steaks – and if you are even richer you buy rice and steakS and iPods.«

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do we know more about the economy today?

exploring the epistemological growth of macroeconomic thought

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Construction implies growth. It seems that the object of constructing new economic theories is to achieve epistemological growth of economic knowledge; can this be achieved given the evolution of economic knowledge? Perhaps a modified Kuhnian approach to the epistemology of economics is the answer. by Y uh Y iing L oh

SECTION I. Introduction1 This paper explores the nature and construction of macroeconomic thought in order to understand the growth of knowledge within macroeconomics. Employing theories of epistemological growth as the basis for assessing macroeconomic thought, this paper seeks to answer two key questions: 1 What is the nature of epistemological growth within macroeconomic thought? 2 Does the nature of macroeconomic thought allow us to know more about the economy today than we did before? Sections II and III will deal with the first question, and I will respond to the second question in Sections IV and V by offering a modified Kuhnian perspective to the analysis of the epistemology of economics. My initial hypothesis is that epistemological growth within macroeconomic thought can be described as evolutionary. In the case of macroeconomics – a dynamic and interactive field – knowl-

edge evolves not only through selection and survival of theories, but also in accordance with events and actions induced by economic agents. As Karl Popper had concluded, resultant theories can only be provisionally true, regardless of the extent of successful empirical testing. However, from a Kuhnian perspective, the evolutionary nature of macroeconomic knowledge seems to imply that we cannot know more about the economy today than we could before. The result is that macroeconomic knowledge does not seem to grow in terms of giving us an increasingly coherent body of knowledge that we may apply to current economic phenomena.2 Instead, what we may apply to current phenomena is merely the part of knowledge that is coherent with the current economic paradigm. Theories from preceding paradigms may be applied only to fail in the face of incommensurability across paradigms. My aim is to show that a modified Kuhnian framework (which relaxes some of the assumptions in Kuhn’s model) may be a possible explanation for the epistemic evolution of macroeconomic knowledge. 19


Popperian falsificationism is the notion that scientific knowledge is obtained via the process of falsification. Theories may never be proven necessarily true by the principle of induction that scientific methodology appeals to, but can be proven necessarily false.3 By rejecting falsified theories, Popper argued that we might arrive at a closer understanding of truth(s). Thus, Popper appealed to falsification as a means of contributing ‘negatively’ to knowledge. In doing so, theories can only ever be contingently true or necessarily false, i.e. no theories are necessarily true with falsificationism. This implies that we can never expect any theory to be applicable without abandon. (Popper 1959)

Calliope, the muse of heroic poetry, science and philosophy

SECTION II. Ways of Considering Evolution in Economics Herein we will take economics to be a social science, although it is possible that other frameworks are employed in analyzing economic knowledge. Social science may not qualify as a science per se; often the distinction lies in the nature of the phenomena studied. Social sciences tend to deal with human phenomena; the dynamism of interactions between the observer and the observed adds a dimension of complexity that draws the discipline away from being a ‘proper science’. Nevertheless, epistemological frameworks established for the study of the natural sciences can be relevant in our present analysis. The study of economics is often categorized under the positivist school; it is likened to science not by practice, but by its objective – to generalize a wide range of phenomena into suitably simplified models. (Perlman 1986) In the next section I will examine the field of economic knowledge through the two key frameworks found in scientific epistemology – Popperian falsificationism and Kuhnian paradigmatism.

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Kuhnian paradigmatism is the notion that scientific knowledge consists of several ‘paradigms’. A paradigm defines a set of scientific ideas that are logically coherent in explaining currently observed scientific phenomena, while remaining incommensurable with other paradigms. Scientific history is defined by periods of normal science that are punctuated by revolutions in which, following the discoveries of anomalies, a preceding paradigm is overthrown and a new paradigm is born. Science progresses within its paradigm as theories are used consistently to explain observed phenomena, but one is rendered incapable of drawing comparisons of truth and progress across paradigms due to incommensurability. (Kuhn 1962) Both sets of ideas suggest that some form of epistemological evolution is taking place in the field of knowledge studied, albeit in very different ways. Popperian ideas imply that knowledge evolves progressively, i.e. the future resembles the past in some ways, and advances by altering only the parts that have been falsified or shown to be empirically deficient.4 Kuhnian ideas, on the other hand, seem to imply that knowledge evolves somewhat randomly, i.e. entire sets of ideas are overthrown with the change of paradigms, and even when the future resembles the past, the entire ideological set has been altered such that any resemblance is only superficial.

SECTION III. The Nature of Macroeconomic Knowledge Having established the groundwork of our analysis, it is necessary to relate it more explicitly to the field of macroeconomic knowledge, in particular to the nature of macroeconomic knowledge. Understanding the nature of macroeconomic knowledge will help to explain why the discipline may be more


amenable to a particular epistemological framework. Hence, I will attempt to extract the nature of macroeconomic knowledge from a brief historical overview before applying it to the frameworks set out above. It seems to me that we can conceive of macroeconomic knowledge (herein taken from the Classical to New-Keynesian traditions) as being characterized by three broad chronological categories. (Backhouse 1996) The Classical tradition and some of its precedents may be considered to be the first category. They were then followed by the Keynesians, along with business cycle theorists as a second category. The recent rise of the New Classicalists and New Keynesians alongside certain postmodern schools may be considered as a third category. Macroeconomic knowledge under each category has been characterized by different traits. One way of comparing the three is to consider the implication of economic knowledge in each: advocacy of the invisible hand in the first category, prescription for government intervention in the second, and a move towards psychological and behavioral insights in the third. We may then apply the epistemological frameworks of Popperian falsificationism and Kuhnian paradigmatism against this trichotomy. Through the lens of a Popperian, macroeconomic knowledge seems to have evolved by means of falsifications. For example, the concept of aggregate supply as being fixed in both the short and long runs according to Classical analysis was ‘falsified’ by the empirical observation of price and wage stickiness in the real world economy.5 This then led to the postulation of the extreme Keynesian approach of a completely price or wage dependent aggregate supply (illustrated by the horizontal aggregate supply function). In the third period, however, the Keynesian and Classical approaches were fused under the Neo-Classical synthesis (which accounted for some degree of imperfection in goods and labor markets) to arrive at an upward-sloping aggregate supply function, whose result also cohered with similar theories, such as that of the Lucas supply function. We may also consider other instances of falsifications in macroeconomic knowledge, such as the rejection of the Phillips curve or the augmentation of the theory of money from Classical to Keynesian periods. However, it is not entirely true that knowledge in the examples shown has been falsified. While they have been proven false, such theories are still being employed in explanations of new economic phenomena. Thus, we may wish to seek an alternative explanation using the Kuhnian framework.

In the case of macroeconomics – a dynamic and interactive field – knowledge evolves not only through selection and survival of theories, but also in accordance with events and actions induced by economic agents. From the perspective of a Kuhnian, we may think of macroeconomic knowledge as having evolved through a series of changing economic paradigms. Paradigms are coherent idea sets marked by interparadigm incommensurability, and arise out of revolutions. The trichotomy defined can thus be considered three paradigms of macroeconomics. In the first instance we have a paradigm that rests on the assumption of perfect markets, and in the second we have one that rests on the assumption of imperfect markets. In these two instances it is evident that there is incommensurability across paradigms – the insights one achieves under perfect markets certainly cannot be spoken of in the same manner as those achieved under imperfect markets. For example, the concepts of a Natural Rate of Unemployment (NRU) and a Non-Accelerating Inflationary Rate of Unemployment (NAIRU) clearly illustrate incommensurability.6 Another example of incommensurability can be found in the notion of money neutrality (Classical) and money non-neutrality (Keynesian). However, it would be too much of a hasty generalization to assert that there are no grounds for inter-paradigm communication – for it is a known fact that differing paradigms contain similarities (e.g. price and wage are concepts that are used in the same way throughout paradigms, real and nominal distinctions notwithstanding). Thus it seems that some degree of redesign is required in order to explain macroeconomic epistemology through frameworks used in scientific epistemology.

SECTION IV. A Modified Kuhnian Approach to Economic Epistemology As we have seen earlier, neither the Popperian nor Kuhnian frameworks seem individually sufficient for an account of macroeconomic epistemology. Kuhnian ideas seem to find greater success than Popperian ideas but are nevertheless only capable of 21


offering an impoverished account. In order to give a better account of the evolution of macroeconomic knowledge, I propose a modified Kuhnian framework for the purposes of our analysis. The modified Kuhnian framework changes the definition of a ‘paradigm’ such that a paradigm is a logically coherent set of ideas that contains several subsets, each of which can be partially commensurable with preceding and/or succeeding paradigms. This implies that macroeconomic knowledge is still defined by periods of normal and abnormal ‘science’, punctuated by revolutions, which signify paradigmatic shifts. Paradigms are, however, only partially incommensurable with each other, and may not always be incommensurable on the same grounds. As long as any degree of incommensurability exists between two paradigms of thought, they can be considered distinct paradigms. Since paradigms are not entirely incommensurable but only partially so, some degree of communication across paradigms can be afforded. It is this allowance for communication that drives the revolution of macroeconomic knowledge – it acts as a door from the old paradigm to the new.

Kuhnian ideas, on the other hand, seem to imply that knowledge evolves somewhat randomly, i.e. entire sets of ideas are overthrown with the change of paradigms, and even when the future resembles the past, the entire ideological set has been altered such that any resemblance is only superficial. Yet this does not mean that there is any degree of linear truth progression within macroeconomic knowledge as a whole, for the partial incommensurability means that one cannot consistently hold the views of two paradigms in their entirety at the same time – only discrete parts of each. That is, (for example) I may not consistently agree that money is both neutral and non-neutral, however it may be possible for me to hold that aggregate supply is upward-sloping in the short run, but vertical in the long run. By 22

allowing for partial incommensurability, we would be able to avoid the problems that arise when we attempt to apply complete incommensurability across paradigms to macroeconomic knowledge, which is a key failure for direct Kuhnian paradigmatism in the context of macroeconomic epistemology.

SECTION V. Inferences and Implications In sum, I have argued that developments in macroeconomic knowledge may be better understood in terms of Kuhnian paradigms, albeit with some caveats. What this implies is that there is in fact no ‘growth’ in the field of macroeconomic knowledge insofar as it refers to some progression towards truth and certainty across paradigms and the ability to prefer a newer paradigm to an older one on the basis of it being ‘more true’.7 I do not dispute that the body of knowledge grows trivially (in terms of an accumulation of possible theories), but have argued that the active and applicable parts of current debate are not directly comparable to those that have been debunked or proven to be lacking in empirical content. Yet, there is no reason why this conclusion ought to dissuade us from continuing our pursuit of new theories in macroeconomics. Although we have seen hitherto how the truth of theories does not seem to extend beyond their constitutive paradigms, the objective of macroeconomic knowledge differs from that of, say, scientific knowledge. The way it does so, however, does not jeopardize the value of pursuing new theories in the field. The primary objective of macroeconomic knowledge (or indeed, economic knowledge as a whole) appears to be the modeling of economic phenomena so as to prescribe possible policy approaches towards improving or stabilizing the economy. New theories will aspire to explain changing economic conditions that old theories may no longer be able to account for. As such, we may think of the evolution of paradigms as representing ‘growth’ in a different sense. As paradigms change, economic knowledge ‘grows’ by reinventing itself to retain practical relevance and value – factors that any policy maker will concede to be more important than a commitment to absolute truths in macroeconomic knowledge.

Yuh Yiing Loh is a second-year Philosophy, Politics and Economics undergraduate at the University of Oxford.


Endnotes 1My sincerest gratitude goes to Jarrod Lee and Aaron Chee for their time and effort in providing invaluable feedback and ideas on drafts of this paper. 2Herein I refer to ‘growth’ not in the classical sense (e.g. material growth in knowledge propositions regardless of relevance and application) but in an epistemological sense (e.g. growth by adding knowledge propositions to a superstructural epistemic foundation, or addition of new propositions to an existing web of coherent knowledge propositions.). 3The Problem of Induction, as introduced by Hume (1748): Premise I: There are no observations of the causal relation between two events, i.e. there can only be an observation of their (repeated) conjunct appearance. Premise II: Induction, by making a finite number of observation statements, is not a valid inference in deductive logic. Conclusion: Scientific theories cannot be verified by observations because causal relations can only be inductively inferred. 4In other words, it relies on the assumption that nature is uniform. 5Note that the Classical analysis was not entirely falsified (according to the Popperian definition) following the empirical observation of price and wage stickiness, thus the use of apostrophes. The Classical analysis was acknowledged to be deficient by its assumption of price and wage flexibility, but nevertheless continued to be a useful model for approximating market behaviour in ideal cases. Whereas if we stick to a strickt Popperian definition of falsification, the continued application of the Classical analysis would have been unacceptable – a unique feature of economic knowledge that will be explored further in Section IV. 6Natural Rate of Unemployment The Classical economists argue that the market clearing condition applies to the labour market, and assert that in the long run, the economy will tend towards the natural rate of unemployment (NRU). Non-Accelerating Inflation Rate of Unemployment The Keynesians, on the other hand, argue that wages are

sticky downwards and hence the market clearing condition does not hold; in the long run the economy tends to a non-accelerating inflation rate of unemployment (NAIRU – the level of unemployment required to stop rising inflation) as a result of a bargaining equilibirum achieved by workers and firms. These two measures of unemployment are incommensurable on the gounds that NRU relies on the market clearing assumption whilst the NAIRU measure denies the very same assumption. Since we cannot possibly affirm and deny the same assumption simultaneously, incommensurability arises between these two theories. 7Truth can be considered in two contexts: on one hand, truth can be objective, i.e. there is one truth and new paradigms become ‘more true’ by progressing towards this objective reality; on the other hand, truth can be subjective, i.e. it explains current economic phenomena accurately and thus one theory is ‘more true’ than another by explaining current economic phenomena accurately (though it might not be as accurate in explaining past or future phenomena). In this particular instance, I am referring to the former version of truth in economic knowledge.

Bibliography Backhouse, R. E. 1996. Interpreting Macroeconomics: Explorations in the History of Macroeconomic Thought. New York: Routledge. Dow, S. C. 1996. The Methodology of Macroeconomic Thought: A Conceptual Analysis of Schools of Thought in Economics. Cheltenham: Edward Elgar. Kuhn, T. 1962. The Structure of Scientific Revolutions. Chicago: University of Chicago Press. Perlman, Mark. 1986. Perceptions of Our Discipline: Three Magisterial Treatments of the Evolution of Economic Thought. Journal of the History of Economic Thought, Volume 7, Issue 02. 9–28 Popper, Karl. 1959. The Logic of Scientific Discovery. London: Hutchinson.

Some think knowledge is about coming closer to the truth.

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high growth: lessons for china from the japanese experience The People’s Republic of China emerging as the world’s second largest economy has shifted a longstanding paradigm of global economic superpowers. However, there is alarm that China’s runaway growth can overheat its economy. What can China do to ensure healthy, long term, positive growth? by M ichael M irochnik

I. Introduction This paper compares the period of high economic growth in Japan, between 1955 and 1973, to the high growth that the People’s Republic of China has enjoyed since 1990. The literature points to Japan’s relatively high household saving rate1 and low and steady population growth rate for its economic success, when real GDP increased annually at an average of 9.3 percent2. Similarly, China’s astounding household saving rate has promoted high investment per capita while its “one-child family policy” has resulted in a decreasing population (Ding and Knight 2009), and both have contributed to real GDP growing annually at an average of 9.9 percent3. These factors predict per capita growth within the standard exogenous growth Solow-Swam Model, but there must be another factor at work, namely technological acquisition, which explains why such 24

sustained high growth is still possible in light of diminishing returns. Thus, I utilize economic growth accounting to gauge the countries’ technological acquisition, and then subsequently consider GDP decomposition, thereby revealing an emerging, unusual consumption pattern in China. I conclude by drawing lessons from Japan’s high growth period to form prescriptions for China to further foster positive economic growth. In doing so, this paper contributes to the literature on growth theory and the ongoing debate (Engardio et al 2009, Tasker 2009 and Xie 2009), as to whether China is doomed to tread the path of its East Asian neighbor or is able to ensure enduring economic growth. II. Economic Growth Accounting During high growth, Japan’s per capita GDP and per capita disposable income moved in tandem


with its household saving rate while its population growth was fairly steady and low, and the latter remained so even after 1973. This suggests that a decreasing saving rate was a major contributing force in Japan’s fall from high growth. China, on the other hand has not been as sensitive to its saving rate, which is evidenced by the country’s increasing per capita GDP and per capita disposable income in light of a recently decreasing household saving rate. Furthermore, China has benefitted from a low population growth that continues to decrease. This section will expand the existing analysis within growth literature by considering the two countries’ growth via technological progress and acquisition. Any combination of growth in an economy’s technology, capital stock, and labor force results in output growth. Economic growth accounting is based on the following relationship (Weinstein 2009): G y =G A +S k G k +S l G l where G y is the growth rate of GDP, G A is the growth rate of technology, or Total Factor Productivity (TFP), Sk is the capital share of GDP, G k is the growth rate of capital stock, Sl is the labor share of GDP, and G l is the growth in labor force. Data for all the variables, save G A , are available via an economy’s National Accounts. Thus, TFP can be derived as a residual, or the growth in GDP unexplained by either capital stock or labor force growth: G A =G y - S k G k - S l G l The decomposition of economic growth for both Japan, from 1949-1983, and China, from 1980-2007,

may be found in the Appendix. For practical purposes, total disposable income is used as a proxy for total capital stock in the economy and total population is used as a proxy for the size of the labor force. Growth decomposition for the high growth periods is displayed in Table 1. Both economies experienced comparable growth rates of output, capital, and labor force. The high contributions to growth from capital for both Japan and China denote that capital accumulation was the key to growth, much more so in the case of China. Capital, however, exhibits diminishing returns to scale, whereas technology fuels long-term, sustained economic growth. An important difference between the two periods of high growth is Japan’s significantly higher contribution to growth from TFP compared to that of China, which suggests that Japan was on track for further sustained growth but was thwarted by its decreasing saving rate and the oil crisis of 1973, an exogenous event that stymied global technological progress. Table 1 further shows that China has yet to truly wield the potential of technological progress, as only 1.6 percent of output growth from 1990-2007 can be contributed to TFP. As seen in Table A.1 and A.2 in the Appendix, Japan experienced a notable decrease in TFP from 1974 to 1975 and it continued decreasing as Japan moved further from high growth. The year-on-year TFP values for China have varied, but they are mostly small and even negative – suggestive of technological acquisition underutilization in promoting growth. China, therefore, is growing mainly due to vast capital accumulation, but such

Table 1: Growth Decomposition for Japan and China during High Growth Data presented as average annual values

Growth Rates of Output Capital Labor

Japan (1955-1973) 15.13% 15.43% 1.45%

China (1990-2007) 16.37% 16.72% 1.30%

Contribution to Growth from Capital Labor Technology

9.24% 0.58% 5.31%

14.60% 0.17% 1.60%

Source: Historical Statistics of Japan and China Statistical Yearbook 2008.

The high contributions to growth from capital for both Japan and China denote that capital accumulation was the key to growth, much more so in the case of China. 25


Table 2: Decomposition of Japan’s GDP

and should adopt a technological acquisition agenda comparable to Japan’s during high growth.

All values represent percentages of GDP III. Decomposition of GDP for Japan and China Year 1955 1960 1965 1970 1973

Consumption 65.7 58.7 58.5 52.3 53.6

Post High Growth 1975 57.2 1980 58.8 1983 60.2

Investment Government Spending 23.6 10.1 32.9 8.0 31.9 8.2 39.0 7.4 38.1 8.3

Net Exports 0.5 0.5 1.4 1.3 0.0

32.8 32.2 28.1

0.0 -0.9 1.8

10.0 9.8 9.9

Source: Historical Statistics of Japan.

growth is unsustainable as diminishing returns to capital are a reality. To promote long-term sustained growth, China should take advantage of the fact that its saving rate has not yet begun to consistently drop like Japan’s did towards the end of its high growth

26

In the previous section I considered Total Factor Productivity growth – an essential driver of sustainable economic growth – for high growth in Japan and China. I will now consider each country’s national accounts to see where the high growth periods left each economy. During Japan’s high growth period both real and nominal GDP, along with the elements that comprise the expenditure calculated GDP, experienced a general upward trend. Nevertheless, important changes in the composition of nominal GDP occurred during and after high growth, as seen in Table 2 below. From 1955 to 1983, government spending and net exports accounted for a roughly consistent proportion of GDP, with net exports in 1980, comprising -0.9 percent of GDP, presenting an exception. Concordant with Japan’s increasing saving rate during high growth, the data shows consumption as a proportion of GDP decreased, from 65.7 percent of GDP in 1955 to 53.6 percent of GDP in 1973, while investment rose, from 23.6 percent of GDP in 1955 to 38.1


percent of GDP in 1973. The decreasing saving rate that contributed to the end of Japanese high growth reversed these trends – consumption and investment as proportions of GDP increase and decrease, respectively, in post high growth, with the former comprising 60.2 percent of GDP and the latter comprising only 28.1 percent of GDP by 1983. This is not only consistent with the changes in Japan’s household saving rate but also coincides with the life cycle hypothesis, which holds that the “aggregate household saving rate will be higher in a country with a young population because the young typically work and save, whereas the elderly typically retire from work and dissave” (Horioka 2008).

cable in Japan well after the end of its high growth (Horioka 1997). China, however, does not appear to adhere as closely to the life cycle hypothesis.

As seen in Table 3, after 1975, when the elderly population surpassed 7 percent of Japan’s total population, the household saving rate began decreasing from a high of about 23 percent to roughly 13 percent in 1990 as the elderly population continued to comprise an increasing proportion of Japan’s total population. Population aging did not necessarily force Japan from high growth, but there is a noticeable negative relationship between Japan’s growing elderly population and the saving rate following high growth. The life cycle hypothesis remained appli-

Since 2007, the proportion of elderly in China’s population has surpassed that of Japan in 1980, by which time the latter’s saving rate experienced a noticeable cut. China’s saving rate, though lower in 2007 than it was in 2005, has experienced significant increases throughout its high growth and continues to have the extremely high level of 69 percent, even with over 9 percent of its population being over age 65. This has contributed to China’s particular GDP decomposition throughout high growth; GDP and all of its components have experienced a general up-

China is growing mainly due to vast capital accumulation, but such growth is unsustainable as diminishing returns to capital are a reality.

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Table 3: Population over Age 65 and Household Saving Rate for Japan Year 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Population of the Population over Age 65 4.89% 5.27% 5.72% 6.29% 7.06% 7.92% 9.10% 10.30% 12.05% 14.54%

Household Saving Rate 14.74% 13.89% 17.30% 17.05% 20.28% 23.11% 18.45% 16.01% 13.24% 14.68%

Source: Historical Statistics of Japan and Long-Term Economic Statistics of Japan since 1868, Vol. 1.

Table 4: Population over Age 65 and Household Saving Rate for China Year

Population of the Population over Age 65

Household Saving Rate

1982 1990 2000 2007

4.91% 5.57% 6.96% 9.36%

13.39% 38.14% 64.84% 69.14%

This GDP decomposition further confirms the change in Japan’s saving rate. I have also confirmed that the life cycle hypothesis is applicable to Japan. This, however, is not the case for China’s saving rate which, though having fallen slightly since 2005, has had general growth and remains high in spite of an aging population. This highlights its insufficiency of old-age benefit programs and trepidation of consumption spending. The GDP decomposition for China also reveals that its investment proportion of GDP has been higher than consumption’s proportion of GDP since 2004, putting it at a greater risk of more abrupt movements in its economy.

Source: China Statistical Yearbook 2008.

Table 5: Decomposition of China’s GDP

IV. Conclusion

All values represent percentages of GDP

Year 1990 1995 2000 2005 2007

Consumption 50.6 46.7 46.2 38.9 37.4

Investment Government Spending 36.1 14.1 41.9 13.8 35.1 15.8 44.0 14.5 14.1 44.7

Source: China Statistical Yearbook 2008.

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ward trend since 1990, but an unusual consumption pattern has emerged. Table 5 above shows that like in Japan, government spending has comprised a fairly consistent proportion of GDP during China’s high growth. Net exports, however, have contributed more to GDP in China and have become more important since 2005, accounting for 9.4 percent of GDP in 2007. Similar to Japan, China has experienced decreasing consumption, from 50.6 percent of GDP in 1990 to 37.4 percent of GDP in 2007, and increasing investment, from 36.1 percent of GDP in 1990 to 44.7 percent of GDP in 2007, during high growth. However, China has been unable to maintain normal consumption. Normal consumption is such that consumption accounts for a larger proportion of GDP than does investment. Since 2004, China’s level of investment has contributed more to GDP than has consumption, and this has continued through 2007. This is directly related to China’s persistently high saving rate. Although this does contribute to China’s rapid growth, having a GDP most dependent on investment makes China’s economy more susceptible to drastic shifts, as investment is pro-cyclical and more volatile than consumption.

Net Exports 2.7 1.6 2.4 5.6 9.4

The foregoing analysis served an important, informative purpose in understanding the high growth periods of both Japan and China. Japan’s high growth was mainly fueled by a high and increasing saving rate. Furthermore, Japan’s technological acquisition similarly contributed to its rapid growth. Nevertheless, Japan’s household saving rate – possibly due in part to its aging population – began decreasing after a 1973 peak and prompted Japan’s fall from high growth. A subsequent decrease in TFP exacerbated the situation and shifted Japan further from its ‘economic miracle’.


Japan’s East Asian neighbor, China, has experienced remarkable growth during its own high growth period. China’s rapid growth may be attributed to its extremely high saving rate – although China appears less dependent on the household saving rate than was Japan – and a low and slowly decreasing population growth rate. Furthermore, China’s growth has been facilitated almost exclusively through capital accumulation while technological acquisition has largely been neglected. The high saving rate that assists in China’s large-scale capital accumulation has resulted in investment composing a greater proportion of GDP than does consumption, and thus producing a potentially more volatile economy. The potential of more erratic shifts in China’s economy is unsettling, but important lessons from Japan’s high growth may be applied to promote further positive growth in China. China should take advantage of its current high saving rate and adopt a technological acquisition agenda comparable to that of Japan during high growth. Technology is a longterm growth mechanism for China, especially since diminishing returns are inherent in capital accumulation. To protect its economy from erratic movements, China should strive for normal consumption by raising income levels, thereby tightening the gap between per capita disposable income and per capita GDP growths; this would also allow its population to dissave. Finally, China should establish stronger safety nets and social welfare programs, especially for the elderly, as it is now clearly not following the life cycle hypothesis. If the government were to assist citizens in potential future emergencies, the high saving rate would likely be curtailed (Prime and Qi 2009) and current consumption induced, thereby working against the formation of a possible bubble economy. If growth is simply measured using current output levels or Gross Domestic Product as a marker, then one may conclude that China is faring excellently and should continue enjoying its economic fortunes. However, examining China’s growth and GDP decomposition reveals that its high growth is distinct from that of Japan. Japan was thwarted from high growth, in addition to the aforementioned reasons, by means of the exogenous oil crisis of 1973. China may befall a similar fate, but it possesses resources that Japan has lacked throughout its history and thus may prove more robust to exogenous shocks. Further, so long as China redirects some efforts from capital accumulation to technological acquisition while simultaneously allowing its citizens to enjoy the benefits of its flourishing

economy, the People’s Republic of China may likely establish itself as a lasting economic superpower. By following these prescriptions, China will be able to sustain high growth for the immediate future, as any decrease in growth from saving rate decline can be offset through greater technological acquisition, and ensure a healthier, more stable economy in the t long run.

Endnotes 1 Horioka, Charles Yuji. „The Flow of Household Funds in Japan.“ Public Policy Review 4.1 (2008): 37-52. Policy Research Institute, Ministry of Finance, Japan. 2 Author’s calculation based on Historical Statistics of Japan. 3 Author’s calculation based on China Statistical Yearbook 2008.

Bibliography Ding, Sai & Knight, John. 2009. Can the augmented Solow model explain China’s remarkable economic growth? A cross-country panel data analysis. Journal of Comparative Economics, Volume 37. 432 – 452 Engardio, Pete, Roberts, Dexter & Zhe, Huang. 02/11/2009. The China Hype. Business Week. Horioka, Charles Y. 2008. The Flow of Household Funds in Japan. Public Policy Review, Volume 4, Number 1. 37 – 52 Horioka, Charles Y. & Watanabe, Wako. 1997. Why Do People Save? A Micro-Analysis of Motives for Household Saving in Japan. The Economic Journal Volume 107, Issue 442. 537 – 552 Japan Statistics Bureau. 1996–2008. Historical Statistics of Japan. Ministry of International Affairs and Communications. National Bureau of Statistics of China. China Statistical Yearbook 2008. China Statistics Press. Prime, Penelope B. & Qi, Li. 2009. Market Reforms and Consumption Puzzles in China. China Economic Review, Volume 20, Issue 3. 388 – 401 Ohkawa, Kazushi, Takamatsu, Nobukiyo & Yamamoto, Yuzo. 1974. Estimates of Long-Term Economic Statistics of Japan Since 1868. Volume 1. Tokyo: Toyo Keizai Shinposha. Tasker, Peter. 03/11/2009. China rushes towards a Japan-style bubble. Financial Times. Weinstein, David. 2009/10/13. Class Lecture, Japanese Growth. Xie, Andy. 2009. Fortune is favouring China, but is it due for a reality check? Financial Times.

Michael Neal Mirochnik is a senior at Columbia College in the City of New York. He will receive his BA in economics and complete his concentration of Russian language and culture by May 2011.

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Appendix Table A.1: Economic Growth Accounting for Japan (1949-1983) Year

Growth Rate of GDP

Growth Rate of Capital

Growth Rate of Labor

Contribution to Growth from Capital

Contribution to Growth from Labor

Total Factor Productivity Growth

1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

26.68% 16.88% 37.91% 15.01% 12.72% 11.07% 6.81% 12.58% 15.24% 6.26% 14.32% 21.37% 20.78% 13.48% 14.45% 17.63% 11.25% 16.14% 17.19% 18.43% 17.47% 17.86% 10.03% 14.49% 21.76% 19.33% 10.49% 12.30% 11.44% 10.12% 8.39% 8.41% 7.41% 4.90% 4.13%

39.55% 23.59% 33.81% 9.70% 16.75% 12.67% 14.62% 12.12% 15.57% 4.40% 14.86% 22.01% 20.51% 11.92% 15.04% 15.33% 11.11% 16.15% 18.15% 17.80% 17.25% 18.69% 9.27% 15.22% 23.17% 17.93% 10.63% 13.42% 10.97% 10.46% 8.48% 7.80% 6.61% 5.11% 3.93%

4.59% -0.77% 1.22% 3.14% 5.67% 1.65% 3.43% 1.76% 2.23% 0.55% 1.05% 1.76% 1.13% 1.14% 0.82% 1.25% 1.63% 2.17% 1.88% 1.57% 0.73% 1.08% 0.64% 0.25% 2.44% -0.30% 0.24% 1.03% 1.38% 1.47% 1.16% 0.96% 1.01% 1.17% 1.99%

26.15% 15.13% 22.51% 6.17% 9.92% 7.52% 8.86% 7.24% 9.47% 2.61% 8.92% 13.65% 12.89% 7.28% 9.10% 9.33% 6.56% 9.60% 10.93% 10.84% 10.49% 11.22% 5.29% 8.57% 12.73% 9.33% 5.30% 6.69% 5.50% 5.36% 4.38% 4.04% 3.43% 2.63% 2.01%

1.56% -0.28% 0.41% 1.14% 2.31% 0.67% 1.35% 0.71% 0.87% 0.22% 0.42% 0.67% 0.42% 0.44% 0.33% 0.49% 0.67% 0.88% 0.75% 0.61% 0.29% 0.43% 0.27% 0.11% 1.10% -0.14% 0.12% 0.52% 0.69% 0.71% 0.56% 0.47% 0.49% 0.57% 0.97%

-1.03% 2.03% 15.00% 7.70% 0.49% 2.88% -3.40% 4.62% 4.90% 3.43% 4.98% 7.06% 7.47% 5.76% 5.02% 7.81% 4.02% 5.66% 5.51% 6.97% 6.69% 6.21% 4.46% 5.81% 7.93% 10.15% 5.07% 5.09% 5.25% 4.04% 3.45% 3.91% 3.49% 1.70% 1.14%

Source: Historical Statistics of Japan.


Table A.2: Economic Growth Accounting for China (1980-2007) Year

Growth Rate of GDP

Growth Rate of Capital

Growth Rate of Labor

Contribution to Growth from Capital

Contribution to Growth from Labor

Total Factor Productivity Growth

1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

11.89% 25.08% 9.86% 16.68% 23.61% 31.24% 36.41% 26.13% 17.08% 10.95% 6.87% 6.25% 10.64% 10.52% 9.74% 12.87% 17.71% 14.60% 15.67% 17.75%

25.80% 24.60% 24.07% 10.79% 18.01% 25.94% 38.04% 29.10% 21.57% 11.31% 7.83% 8.76% 8.37% 10.87% 12.79% 11.83% 14.38% 14.13% 13.89% 19.35%

2.75% 3.55% 5.97% 1.15% 1.01% 0.99% 0.97% 0.90% 1.30% 1.26% 1.17% 1.07% 0.97% 1.30% 0.98% 0.94% 1.03% 0.83% 0.76% 0.77%

21.42% 20.82% 20.27% 9.15% 15.37% 22.33% 32.79% 25.22% 18.82% 9.96% 6.97% 7.79% 7.47% 9.70% 11.39% 10.55% 12.86% 12.60% 12.37% 17.16%

0.47% 0.54% 0.94% 0.17% 0.15% 0.14% 0.13% 0.12% 0.17% 0.15% 0.13% 0.12% 0.10% 0.14% 0.11% 0.10% 0.11% 0.09% 0.08% 0.09%

-9.99% 3.72% -11.35% 7.36% 8.09% 8.77% 3.49% 0.79% -1.91% 0.84% -0.22% -1.66% 3.06% 0.68% -1.76% 2.22% 4.74% 1.91% 3.22% 0.50%

Source: China Statistical Yearbook 2008.

If growth is simply measured using current output levels or Gross Domestic Product as a marker, then one may conclude that China is faring excellently and should continue enjoying its economic fortunes.

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interview with francesco caselli

Thursday, October 14, at 3:30 pm Francesco Caselli is professor for economics at the London School of Economics and Political Science and the Director of the Macroeconomics Program of their Center for Economic Performance (CEP). Caselli obtained his PhD in economics from Harvard University in 1997 and from 2009 to 2010 he was Banco de Espa単a Visiting Professor at the Centre de Recerca en Economia Internacional (CREI). Caselli is Managing Editor of the Review of Economic Studies since 2010 and Member of the Council of the European Economic Association.

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Professor Caselli, thank you for dedicating your time to answer some of our questions. What struck me as especially interesting among your writings with regard to growth can possibly be found in both your unpublished paper from 2006,”Power struggles and the national resource curse”, and a paper you published in 2009 together with Tom Cunningham, called “Leader behavior and the national resource curse”, which seems to build up on the former. So could you maybe very shortly say what the national resource curse is? Yes, the national resource curse is really a conjecture. It arises from anecdotal observation, from casual observation, about many countries that seem to be very rich in natural resources. And a simpleminded chronology of all the events seems almost to suggest that living standards, at least on average, have very surprisingly, paradoxically, gone down or at least certainly not improved as much as could be expected after a resource windfall, may this be a resources discovery or a large increase in the price of the resource the respective country produces. For economists this is an incredibly puzzling thing because if something hurts you, why don’t you leave it underground? That is the natural resource curse. Now, I stress, this is a conjecture. It is always very hard to establish causality in cross-country empirical data. There are also other things happening in these countries. So I don’t treat the resource curse as a fact but as a conjecture. Could one not instead try to give an account of the phenomenon by saying that natural resources discoveries in what we call development countries happened largely after other countries with less natural resources had already won an advantage over these countries, exercising a certain control over them, e.g. after colonisation? This predominance could then be identified as original negative effect of the resource discovery. There are a few things that you can say about this: Firstly, without challenging your statement about the control, even if I were to agree with that view I would still say there is no reason why within the set of developing countries such countries which discover natural resources do perform worse than the others. Secondly, and this is to challenge your point more, I don’t know if you can say about any country in this world to be so strongly controlled by other countries that this control can account for the phenomenon of the natural resource curse. Certainly, you cannot say this about Russia, Venezuela, Saudi-Arabia, which are standard examples of the natural resource course.

Why is for instance Saudi Arabia a standard example for the natural resource curse? Well, it’s a country that is obviously awash in oil. The amount of wealth is incredible. The various thousands members of the royal family are impressively rich. But I don’t get the impression that this wealth has enriched all parts of society equally as you might have expected it to do. Also, the sheer growth rate of the economy is not especially high. And I guess when I talk about Saudi-Arabia I am also thinking about democracy because I am one of those who think of democracy a little bit as of a normal good, which people start wishing to consume when they are richer.

»if something hurts you, why don’t you leave it underground?« In the most recent paper of you that I cited you are also giving an explanation of what kind of incentives political leaders have to induce greater investment in assets that favor growth. With respect to countries such as Russia, Saudi-Arabia, Venezuela, would you say these incentives are lacking? If yes, why? A key consideration is the extent to which the elite feels secure. A possible example of a political leadership that may not feel super secure is that of Chavez in Venezuela: these are individuals who have to worry about political challenges and have to contemplate the possibility of losing power. As policymakers that makes them very short-sighted because they have to focus more on maintaining power. That may discourage investment in development and capital accumulation. As regards Saudi-Arabia, that is less clear because they are so rich that they can practically speaking completely assure themselves against every political challenges by putting together an oppressive apparatus which is extremely effective – which is what happens in Saudi-Arabia. Saudi-Arabia is a very repressive country and the royal family is pretty secure. So, practically speaking you would expect to see more investment in Saudi-Arabia and maybe you actually see a little bit more there. What would the incentives be for political leaders to attract investment which favors growth and how do you model them economically? How do you put all this theory into a model?

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Economics is a discipline of objective functions and constraints. Any problem can be put into a model according to the questions: Who are we actors? What are these actors’ objectives? And eventually it amounts to writing down a mathematical formula which captures the mapping into the things these people make choices of and then be very specific about the constraints these actors face. So, in the particular example we are talking about, these political leaders may care about some present value the available resources have for them, which of course will also depend on any actions they take to secure their survival in power. And then the constraints they face – what is the flow of these resources, how can these resources be turned into investments, human capital, infrastructure and so on. And then there are the political constraints: If I do that, what are the chances that I stay politically in power?! If you want to capture this to put it into a model, you have to solve this as a maximization problem.

»I am tempted to say what economists always say, which is that economics is not about predictions but about explaining things.«

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cannot abstract from and what will just complicate your life without adding important insight. You also wrote a paper in 2005, called “Accounting for cross-country income differences”, which seems to relate to your research on the natural resource curse. In the paper you make a difference between development accounting and growth accounting. What is this difference? Basically, this just means to ask the same question but in different domains. Accounting for growth applies to the time domain, whereas accounting for development applies to the cross-country domain. But the question is the same, which is: whenever you have a difference in income how much of this difference can you explain with differences in capital (physical or human) and how much by the efficiency with which capital is used? If you compare across countries, the question is whether some countries perform better because they use more capital or because they use it more effectively. So, how would you describe the correlation between improvement of a country over time and in terms of efficiency? There is a very strong correlation. The evidence shows that rich countries are rich as much because they have more productive resources as because they use the resources they have more productively.

So, what kind of very basic assumptions do you have to make then to construct these models? Do you have to assume that agents act rationally and secondly what major mathematical problems do you encounter when constructing these models?

China is a country with a very high growth rate. Nonetheless, some people seem to warn that China might encounter a similar blow to its economy that Japan encountered in the past. What is your opinion on this?

In terms of the assumptions, I don’t think you need to assume that agents are fully rational, in the sense that 90 plus per cent of the results in the current literature would probably survive some deviation from the extreme version of rationality that we use in our models. But that would come at the cost of making our models much more complicated. So, precisely because it is quite plausible to suppose that most of the results and insights are true even if you allow some deviation from the assumption of rationality it is preferable to work with this assumption because it saves you lots of computational complications. The big challenge regarding mathematical modeling is always the following: we always write ridiculously simplified versions of reality and the challenge is to identify what is of the essence that you

I am tempted to say what economists always say, which is that economics is not about predictions but about explaining things. But, I will venture that it is not realistic to expect China or any country to keep growing at a rate of 10 per cent per year. However, there is no reason why it shouldn’t eventually converge to a more normal growth rate of 2 per cent, like the US or the UK. There is no reason why they should not adjust to this rather normal growth rate. Of course, there are possible policy mistakes that could be made, but China is run by very smart people and they have the benefit of seeing what happened with Japan. Doesn’t it seem a little strange to you that under such a seemingly communist regime there have been incentives for the leaders to attract investment into growth?


That would actually be very consistent with my model. Because China is actually not a country abundant with natural resources. China is sucking natural resources from all over the world at a very high rate. My model would predict in such circumstances that the best bet for a political leader is to develop the country in a way so that others who might have political ambitions are given high incentives to go into the private sector and make efforts to become very, very rich. So, very simplified and of course a caricature of what is actually going on is to say that the political elite is saying to the outsiders who might have political ambitions: look, we are providing you with the kind of service and infrastructure and institutional framework for you to become rich and so you don’t need to engage in politics. Would you say then that people who focus on becoming rich would feel safer in their pursuit in a communist regime such as China than in a liberal democracy? I am not sure because as far as I know many of the features which are ascribed to a socialist system have, by and large, been already removed in China. China is communist or socialist only by its name. It is ruled by an autocratic elite, who is very keen on preserving political power and privileges. How do they do it? They do it by allowing a large amount of private capitalism with less and less socialist-like restrictions. All the hallmarks of socialism in terms of free health, education, pensions are being dismantled, partly as a result of millions of people moving to the cities. Meanwhile, growth in the private economy is going through the roof. This does not look like a socialist system. I come to my last question, which is a very broad one and which you might thus not be able to answer in a few words: do you think growth is generally desirable for every country?

» Positive growth means per capita income is going up and higher per capita income buys you health, buys you education, buys you safety from shocks, eventually buys you democracy – which are all very valuable things. «

Yes. (Smiling) Without question. Positive growth means per capita income is going up and higher per capita income buys you health, buys you education, buys you safety from shocks, eventually buys you democracy – which are all very valuable things. Thank you for the interview, Prof. Caselli.

t

Interview by Jakob Schaefer 35


two decades of human development Over the last two decades, the Human Development Index has gained tremendous popularity, challenging the notion that economic growth indicators alone can univocally account for human development. But is the use of a composite index better than several independent measures of human development? by V ignesh A shok

The objectives of growth Since its emergence in the second half of the twentieth century, the field of development studies has tried to answer two questions: what is the end-goal of human development and how can we achieve it? The former question is addressed in the 1990 Human Development Report that calls for the “widening [of] people’s choices and their level of achieved well-being� (United Nations Development Programme 1990, p. 10). The report claims to distinguish itself from its predecessors by viewing growth in income as only one of the many components of development. Its central argument rests on the idea that economic growth indicators, such as Gross National Product (GNP) and Gross Domestic Product (GDP), do not sufficiently reflect the plurality of concerns surrounding human development. To address this, the UNDP introduced the Human Development Index (HDI), a composite metric that aims to reflect the capabilities of a collective by incorporating three dimensions that are equally weighted: life expectancy, knowledge and standard of living (United Nations Development Programme 2007/2008, p. 355). 36

The criticisms leveled against the HDI are predominantly centered on two broad themes. The first is that the HDI, while ostensibly aiming to be a better measure of human development, simply repackages traditional assessments of development based on economic growth under a new label (Srinivasan 2001; Gelman 2009; Wolfers 2009). The second criticism, based on the mathematical computation of the index, relates to the paradoxical results that are obtained when boundary conditions are encountered (Noorbaksh 1998). While both these criticisms have been popular, neither has thwarted the widespread use and increasing prevalence of the HDI. Despite the HDI being widely used to influence both policy decisions and academic research in the field of development, the proponents of the composite metric have been unable to show why a composite measure is better than several independent measures of human development. In this paper it is argued that while it is necessary to factor in measures other than GDP and GNP, a single composite measure of human development does not accurately prioritize developmental concerns. It encourages the belief that an HDI-rated stage of development


univocally determines the optimal set of policy responses irrespective of the HDI metric’s components. Focusing on the developing world, it will first be shown that income growth alone cannot improve the ‘capabilities’ of an individual, where ‘capabilities’ are defined as the substantive freedoms necessary to enable individuals to enjoy the kind of life he or she values (Sen 1999). Second, it will be shown that the philosophical grounding for the rejection of purely economic indicators of development also apply to composite metrics such as the HDI. Furthermore, it will be argued that it is often the case that progress can only be achieved by prioritizing certain capabilities; hence a case-by-case approach to development sets minimum standards of attainment for each developmental concern and better describes the endogenous relationships between different concerns. In essence, this paper argues for the replacement of the HDI with several independent measures, each reflecting progress made on distinct problems that obstruct development.

Income growth alone cannot improve the ‘capabilities’ of an individual, where ‘capabilities’ are defined as the substantive freedoms necessary to enable individuals to enjoy the kind of life he or she values. Beyond the economy: do economic growth indicators give us the whole picture? Several economists have pointed out that rankings based on the HDI do not enlighten us any further than those based on traditional metrics such as GDP. It has been noted that the HDI simply tries to reinvent the wheel (Srinivasan 1990). Srinivasan argues that economists and policymakers have never seen income as the sole indicator of development and that the HDI does not show us anything that we 37


Who benefits from development?

did not know already. To some extent, this argument is indeed accurate. A study at the Applied Statistics Center at Columbia University compared U.S. state rankings based on average income to the rankings based on a human development measure and found an 86% correlation. (Gelman 2010) When these results were extrapolated to an international scale, it was found that the correlation between a country’s ranking on the HDI scale with its ranking on average income was even stronger – nearly 95% (Wolfers 2009).

It seems logical that countries can enjoy growth in per-capita income while not enjoying better health-care, school/university enrolment rates and literacy rates. It is only when we look at the rates of change of the HDI and GDP that differences between them emerge. The 86%-95% correlation between HDI and GDP at the present time, although perhaps of some statistical significance, will arguably decrease with time, since HDI and GDP change at two different rates. Rodriguez (in Wolfers 2009) points out that the correlation between the rate of change of HDI and the growth rate of per-capita income is only 43%. The correlation between changes in the nonincome components of HDI and the growth rate of GDP is 3%. The conclusion that can be drawn from 38

this is that HDI-growth curves and GDP-growth curves are different in that they are plots of two different functions. The differences in the information captured by the HDI and GDP do not seem to lend credibility to the HDI as such. Given that the information contained in changes in health and education indicators appears to be independent of that contained in changes in income indicators, it seems logical that countries can enjoy growth in per-capita income while not enjoying better health-care, school/ university enrolment rates and literacy rates. If we would not intuitively say that a country is thereby ‘developing,’ then this would seem, prima facie, to score a point for the HDI. However, it is important to recognize that all this shows is that factors other than income serve to explain, and provide a metric for, what we mean by development, rather than the HDI as such. It does not tell us why using a single composite metric is the best mechanism to assess development levels. It could be argued that HDI is a better measure of human development than GDP insofar as any composite metric that takes into account factors other than income is better than one that focuses on economic growth alone. This argument is addressed in the next section where it will be shown that the same problem exists in measuring developmental stages regardless of whether a composite index or a singular index is used.


Does the HDI change the way we measure development? The tendency to evaluate alternate policy outcomes using a strictly economic calculus is problematic for several reasons. For one, it presumes that there exists, for some obligatory reason, a need to concentrate on economic indicators alone when evaluating the degree to which a collective is ‘developed’. Efforts have been made, often tenuous, to present positive correlations between GDP and other developmental concerns such as literacy, life expectancy, political freedom, etc. Indeed, if we were forced to restrict our focus to a single variable, a good place to start would be to maximize income. However, this ‘monoconcentrationist’ approach, argue the authors of the Human Development Report, is neither desirable nor necessary (Sen 2000). In order to assess whether the HDI serves as a better measure than economic indicators alone, it is important to first identify the crux of the problem in using monoconcentrationist measures of human development. The rejection of the monoconcentrationist measure of human development is centered on the idea that we cannot accurately predict the range of observable socio-economic properties of a society by measuring only a single aspect of human development. Indices such as GDP or GNP attempt to measure what philosophy of science would generally categorize as an ‘unobservable property’. One cannot measure ‘development levels’ directly, through mere experiential observation, in the same way as the speed of light cannot be measured with the naked eye. Thus any measure of human development can be understood as a mechanism to describe, using a value, a certain stage of development, together with a suitably constructed model. The resulting value should attempt to provide us with information and allow us to predict a range of observable socioeconomic properties of the society in question. The fact that countries can share similar levels of GDP and yet have large variations in other observable attributes, such as equality, education levels, literacy rates, life expectancy or political freedoms, is precisely the reason why using a monoconcentrationist approach to human development is deemed to be undesirable. Does the HDI enable us to better predict the situation on the ground? No, for the very same problem present in using singular metrics of human development is also present when we employ the HDI. Using the HDI, Country A with a very high GDP per-capita, moderate education levels and low life expectancy would be considered to be equally developed to

Country B with moderate levels of GDP, education and health. Despite having similar values for their HDI indices, they have substantially different problems. Country A might have poor health infrastructure that consequently results in low life expectancies whereas Country B may have moderately good health, education and economic infrastructures. In these cases, a HDI value does not allow us to predict the observable socio-economic features of the society and consequently the developmental concerns that need to be addressed.

Uganda is a good example of how donors’ efforts in increasing longevity are falling apart. The need for triage Uganda is a good example of how donors’ efforts in increasing longevity are falling apart. The ‘golden window’ of the last decade that witnessed the number of people on anti-retroviral medication increase from 10,000 to nearly 200,000 is coming to an end. Donors have decided that the cost of treating AIDS is too high; that concentrating on child-killers like pneumonia, diarrhea, malaria, measles and tetanus can save more lives (McNeil 2010). Alongside this, UNAIDS determined that for every 100 people put on antiretroviral treatment each year, 250 are getting infected (UNAIDS 2010). The situation in Kampala reflects how donors try to maximize each capability without taking a closer look at the interplay between different capabilities and their chronological importance. The capital for generating longevity in the case of Uganda ought to be heavily biased toward removing the causes of HIV, of which unsafe sexual practices remain the most notable. People refuse to practice the simple A-B-C (abstain, be faithful and use a condom) or the new fourth C (circumcision) (McNeil 2010). In such a scenario, policies that aim to generate the capability of knowledge are potentially cheaper to implement and can go further in the long run to increase life expectancy than policies that directly engage in creating longevity. Let us now look at the conceptual problems that arise as we attempt to apply the HDI metric to this case-scenario. A composite index fails in this context for two reasons: it does not sufficiently reflect the variations in the importance of enhancing each component of the HDI and the interplay between them. With regard to the first problem, the use of the HDI prompts policy makers to channel aid to those areas 39


that help the numbers look better (and faster), instead of focusing on more systemic and comprehensive long-term objectives. Investments into development and the ensuing returns are measured from the perspective of ‘the importance of raising HDI’ rather than ‘the importance of raising enrollment rates, longevity or per-capita income.’ Consequently, development policies fail to ensure that a country reaches a minimum level of attainment in each of the indicators. In the current system, based on the illustrations of Country A and Country B presented in the previous section, the capability set available to the people of Country A could be far less than that available to Country B if the length of their lives does not allow them to meaningfully make choices and expand their freedoms. A piecemeal approach avoids this problem by setting standards of attainment in each of the three components. This is important because human development requires a basic foundation to build upon. For instance, it would be difficult to generate the capability of longevity, as is the case in Uganda, unless there is a basic degree of education that encourages the use of safe and hygienic sexual practices. Similarly, it would be difficult to generate greater per-capita income if a very low life expectancy does not give enough time to increase income. Only when minimum standards are established can we develop efficiently. With regard to the second problem (i.e. the interplay between the components of the HDI metric) the use of HDI can conceal relevant causal relations between socio-economic factors. Assume that, if GDP per-capita increases, literacy rates increase as a result. Then the HDI will increase both in response to per-capita GDP increase, as well as the increase in literacy rates. However, the way HDI is presented masks such interplay, so that donors may not be aware of the interplay even though the final HDI measure captures it. On the other hand, if we used several independent metrics to evaluate each component, this interplay becomes more evident. To illustrate this, consider a low-HDI country where the donor community has implemented a private sector development program and at the same time, has not implemented new policies or modified old ones to improve literacy rates or educational enrolment. As a result of greater employment, if more people can afford to send their children to schools, we record an increase in both income and school enrolment despite not implementing policy changes for the latter. This could potentially give us an idea regarding the endogenous causal relation between raising GDP and its effect on education; something we would not get from the use of an all-encompassing HDI. 40

However, it should be acknowledged that using separate indices does not always provide us with this information. For instance, consider a situation where two policies, one to improve GDP per-capita and another to improve literacy rates, are implemented simultaneously. As a result, both literacy rates and GDP increase. In such a scenario, using non-aggregative indices does not make it any easier for policy-makers to evaluate the individual causal efficacy of either policy. The point, however, is not that separate indices give us information about causal relations in every single case but that in those cases where policies are not implemented simultaneously, there is a greater likelihood that these relations are easier to observe when non-aggregative indices are used.

The case for change Santosh Mehrotra (2010, p. 1), of the Institute of Applied Manpower Research in New Delhi, points out that “since the HDI is a broad indicator of development, it inevitably commands more attention from both governments as well as journalists, and hence, the media within each country watches out for that country’s HDI rank within the global league table – and the HDI is regularly remarked upon by commentators from different disciplines.” The HDI’s accelerated popularity within academic and bureaucratic circles has resulted in its overuse well beyond the scope for which it was devised. Today, HDI maximization has replaced comprehensive approaches as the tool which shapes donors’ aid agendas and formulates the developing world’s domestic policies. The proponents of the development index were aware of the pitfalls of overreliance on the composite index. Sen (2000, p. 22) recognized that “it would be a great mistake to concentrate too much on the Human Development Index, or on any other such aggregative index. These are useful indicators in rough-and-ready work, but the real merit of the human development approach lies in the plural attention it brings to bear on developmental evaluation, not in the aggregative measures it presents as an aid to digestion of diverse statistics.” Dr. Sen’s concerns are echoed in the four points highlighted in this paper. First, the supposed greater intuitive adequacy of the HDI (over GDP) in explaining which socio-economic dynamics qualify as ‘development’ does not lend credence to the HDI itself. Nonetheless, it points to the fact that other underlying economic and social factors, over and above GDP per capita, have to be called on to evaluate development. It may seem that using an aggregative index


that incorporates concerns other than economic growth is a better measure of human development. However, HDI as an aggregative index fails since it runs into the same problem that afflicts all monoconcentrationist measures, namely, that they cannot univocally describe different states of development. Different societies that are at different stages of development may receive the same HDI rating.

McNeil, D. G. 2010. At Front Lines, AIDS War Is Falling Apart. Available: http://www.nytimes.com/2010/05/10/world/ africa/10aids.html?_r=1&scp=1&sq=AIDS%20Uganda&st=cse. Last accessed 9 May 2010. Mehrotra, S. 2010. The Impact of the Human Development Index (HDI) 1990-2009. Available: http://www.norrag.org/issues/ article/1296/en/the-impact-of-the-human-development-index(hdi)-1990-2009.html?PHPSESSID=3b907a9dcdbb6721cb7aa81d2 6d7165d. Last accessed 4 July 2010.

The use of the HDI prompts policy makers to channel aid to those areas that help the numbers look better (and faster), instead of focusing on more systemic and comprehensive long-term objectives. Furthermore, because of its indeterminacy, the HDI also brings different capability-enhancing policies to the same level, although they might require different priorities. In other words, one can say that, due to its indeterminacy, it lacks moral cogency. Lastly, it is argued that the HDI conceals endogenous causal relationships between different problems that obstruct development. These relationships are more likely to be evident when we use independent measures of human development. The time has come for a cognitive shift in our approach to development from wholesale to retail – in order to take the abstract promises of capability generation stored in the warehouses of academic thought and deliver them to the developing world. Development studies should go beyond increasing the HDI to generating capabilities using a more fundamental understanding of the interplay between capabilities and their relative importance. The inadequacy of the HDI in reliably explaining the set of observable socio-economic conditions should be recognized and its use should be qualified or, better still, replaced with several independent indices of human development. t

The New York Times – Video. 2010. The Battle Against Aids is Failing. Available: http:// video.ny times.com/video/2010/05/09/ world/1247467804332/the-battle-against-aidsis-failing.html. Last accessed 16 June 2010. Noorbaksh, F. 1998. The Human Development Index: Some Technical Issues and Alternative Indices. Journal of International Development, Volume 10. 589 – 695 Sen, A. 2000. A Decade of Human Development. Journal of Human Development. Volume 1, Issue 1. 17 – 23

Sen, A. 1999. Development As Freedom. Oxford: Oxford University Press. pp. 131-134. Srinivasan, T. N. 1994. Human Development: A New Paradigm or Reinvention of the Wheel? American Economic Review. 84 (2), pp.238-243. United Nations Development Programme. 1990. Human Development Report 1990. Available: http://hdr.undp.org/en/reports/global/hdr1990/. Last accessed 3 July 2010. United Nations Development Programme. 1990. Human Development Report 2007/2008. Available: http://hdr.undp.org/en/ media/HDR_20072008_Tech_Note_1.pdf. Last accessed 3 July 2010. United Nations Department for Policy Coordination and Sustainable Development. 1998. Indicators of Sustainable Development – Framework and Methodology. Available: http://www.rrojasdatabank.info/susun3.htm. Last accessed 4 July 2010. Wolfers, J. 2009. Another Perspective on the Human Development Index. Available: http://freakonomics.blogs.nytimes. com/2009/06/01/another-perspective-on-the-human-development-index/. Last accessed 4 July 2010. Wolfers, J. 2009. What Does the Human Development Index Measure? Available: http://freakonomics.blogs.nytimes. com/2009/05/22/what-does-the-human-development-indexmeasure/. Last accessed 4 July 2010.

Bibliography Gelman, A. 2009. Debunking the so-called Human Development Index of U.S. states. Available: http://www.stat.columbia. edu/~cook/movabletype/archives/2009/05/debunking_the_s. html. Last accessed 3 July 2010. Haugen, G & Boutros, V . 2010. And Justice for All – Enforcing Human Rights for the World’s Poor. Foreign Affairs, Volume 89, Number 3. 50 – 62

Vignesh Ashok is a master’s candidate at the University of St. Andrews where he is reading for a degree in Peace & Conflict. He has previously studied at Lady Margaret Hall College, Oxford University where he received the Sir John Johnson Award for Academic Excellence for his work on diplomatic theory. He also holds an Honours degree in Engineering from the National University of Singapore.

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the modern relevance of ibn khaldun’s economic philosophy Ibn Khaldun’s Muqaddimah, or Introduction to History, contains some of the earliest consideration of the impact of economic factors on the course of human history. This makes it an illuminating source of reference when considering the future growth of economics. by D avid A bramsky

Ibn Khaldun’s Muqaddimah or Introduction to History contains some of the earliest considerations on the impact of economic factors on the course of human history. This makes it an illuminating source of reference when considering the future growth of economics. We read in the last issue of this journal that “many economists accept that the modern discipline of economics is not in a healthy state” (Lawson 2010, p. 1), and that there is “widespread dissatisfaction with...the way economics is taught” (Skidelsky 2010, p. 1). This article seeks to put forward the work of Ibn Khaldun as part of a wider remedy to these shortcomings. 42

Those thinkers who demonstrated economic thought without even the awareness that they were doing so may have the most unbiased view of what economics is, as well as what it is for. Among these thinkers, there is possibly none more original or perceptive than Ibn Khaldun. Perhaps his greatest innovation was an empiricist approach to the study of economic phenomena. Ibn Khaldun says of his “original science” (Ibn Khaldun 1958, p. 78) of al-umran (roughly, civilization) that “penetrating research has shown the way to it. It does not belong to rhetoric.” (Ibid.) Each assertion on the laws that guide the course of human events is confirmed with refer-


ence to an historical example. Lacoste notes that “this is why his work seems so extraordinarily modern.” (Lacoste 1984, p. 160) This approach sets him apart from earlier philosophers whose work included economic consideration, such as the Indian thinker Kautilya, or Greek philosophers such as Xenophon and Aristotle. Ibn Khaldun was familiar with Aristotle’s work, referring to it specifically in the Muqaddimah (Ibn Khaldun 1958). However, he advanced greatly on it by referring a priori principles to the empirical data of history. In this respect his work can be seen as an alternate branch to the modern school, since both built upon the observations of the Ethics. (Langholm 1979) There are also undoubtedly similarities between Kautilya and Ibn Khaldun, though the latter was not aware of the former. Kautilya’s decree that “collection of revenue at a season when people were unable to pay is forbidden because it injures the source and causes immense trouble” (Gopal 1935, p. 24), for instance, foreshadows Ibn Khaldun’s discussion of the impact of excessive imposts on cultural enterprise. (Ibn Khaldun 1958) But whereas Kautilya writes in unverified, though often perceptive, axioms such as the one above, Ibn Khaldun follows up his observations with reference to specific examples of over-taxation and its effects on tax revenue in the Abbasid, Ubayyid and Almoravid dynasties. It is this investigative rigor that sets him apart as a new kind of economic observer. It is in Ibn Khaldun’s empirical methodology that we encounter the clearest way in which his work is relevant to the modern economist. The reason he used it was as a direct response to perceived short-

comings in some of the accounts of contemporary historians, which in turn led to unsound conclusions about the causes of events. Ibn Khaldun identified the rigorous study of historical fact as an essential check on any economic theory.

Those thinkers who demonstrated economic thought without even the awareness that they were doing so may have the most unbiased view of what economics is, as well as what it is for. In the modern field, the limitations of mathematical modeling in explaining and predicting human systems have been widely acknowledged1. Perhaps a greater emphasis on the study of historical events could provide a partial remedy. Lord Skidelsky identifies the prevalence of Chicago School economic principles in undergraduate teaching, and notes that this school rests on assumptions of “perfect information, perfect competition, and complete markets.” (Skidelsky 2010, p. 1) But Friedman, the pioneer of this school, justified and qualified his premises through groundbreaking and extensive empirical research of markets and their history. (Friedman and Schwartz 1993) For instance, in order to understand the conclusions he reached with regards to

Ibn Khaldun on a Tunisian 10 Dinar note.

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the causes and likelihood of financial bubbles, one had to be familiar with the history behind them. For example, inclusion in undergraduate courses of Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, detailing such phenomena from the foundation of the ill-fated South Sea Company in 1711, would be an excellent counter-balance to the potential complacency that mathematical modeling or the seemingly intuitive conclusions of the Chicago school can instill.

Reading the Muqaddimah instills some of the importance of approaching economic questions with a detachment from orthodoxy and formalism. Methodology aside, some of Ibn Khaldun’s discussion does seem to presage the classical school of Smith and Ricardo. Oweiss goes so far as to argue that his economic observations make him “the father of economics.” (Oweiss 2009, p. 1) This seems a strong claim (perhaps intentionally so) for a thinker who was not widely translated into any European language until the 19th century. (De Slane 1862) In the interests of consistency, it must be acknowledged that just as Ibn Khaldun’s work was a significant advance from that of, for example, Kautilya or Aristotle, because of the added depth and methodological rigor, The Wealth of Nations stands as a far more complete and detailed analysis of markets and commerce. Ibn Khaldun’s definitions of profit, capital and commerce are often cited by those seeking to emphasize his modernity, but on the macroeconomic scale all overarching theories will share basic principles and definitions. However, there are striking parallels on the ‘micro’ scale too. Even in very specific matters, Ibn Khaldun sees to the economic heart of things. His discussion of labor and its return in different markets is fascinating in this light. Ibn Khaldun identifies the disparity in the preponderance of certain crafts between different markets, observing that “the activities required for the necessities of life [...] exist in every city. But activities required for luxury customs and conditions exist only in cities of a highly developed culture.” (Ibn Khaldun 1958, p. 302) Perhaps this seems obvious to modern readers, but it was not so well-understood that Smith felt it could go unsaid some four hundred years later. In fact, Smith 44

describes the same phenomenon when he writes that “There are some sorts of industry, even of the lowest kind, which can be carried on nowhere but in a great town. A porter, for example, can find employment and subsistence in no other place.” (Smith 1776, Bk. 1, Ch. 3, Sec. 1.3.2) Ibn Khaldun is also aware that identical occupations provide different wages in different places, because prices differ due to the amount of available labor. Again he exemplifies the principle empirically. He cites the difference in judges’ wages between Tlemcen, a small town in Algeria, and Fez, the thriving economic hub of the Maghreb, “the only reason for [which] is the difference in labour available in the different cities,” (Ibn Khaldun 1958, Vol. 2, p. 273) which has a knock-on effect on the cost of living. Having already explained the meaning of terms such as labor, profit, capital and commerce, Ibn Khaldun demonstrates an understanding of the impact of the specific market on any transaction. Ibn Khaldun similarly understood the significance of transportation to the return on goods. He first observes that merchants limit the goods which they transport to those of “medium quality,” which will have the widest customer base, since “if [a merchant] restricts his [transported] goods to those needed only by a few, it may be impossible for him to sell them, since these few may for some reason find it difficult to buy them. Then, his business would slump, and he would make no profit.” Further, he notes that the most profit is obtained by the most difficult transportations, such as through the dangerous Sudan or across the long route to the East, made at the least possible expense. Smith similarly explores the increase in feasible commerce enabled between London and Calcutta solely by the availability of reliable water-carriage as opposed to land transport. There are many parallels of the sorts described above, as Ibn Khaldun goes on to discuss commerce, hoarding, taxation, price fluctuation and many of the other questions which also preoccupied Smith. Oweiss gives a more complete account of this overlap, which attests to the universality of many of Smith’s more general maxims. Ibn Khaldun achieved such insight because he possessed something anachronistic for his time: a truly international and impartial understanding of social science. It was in part the wider prevalence of such an understanding which prompted the birth of pure economic thought in the 18th century. There was no perspective he felt bound to; as a matter of fact, he was highly critical of many aspects of Arabic culture and economic practice. This approach was a result of the philosopher’s unusual life; he travelled constantly, exercising his ambition in numerous fields in many different courts, from


Muslim Spain, to the Middle East and North Africa. Rosenthal notes that this “gave him a remarkable detachment with respect to the historical events that took place before his eyes. In a sense, it enabled him to view them as an impartial observer.” (Ibn Khaldun 1958, p. xxxvi) This is the second major reason why his thought is beneficial to an insightful study of economics in this age. The “autism” and premature specialization of economic teaching that was lamented by Lord Skidelsky can undermine the impartiality that Ibn Khaldun applied to his study. Students are encouraged to focus too soon on very particular and vocational approaches to economics, mostly based on work from the past century coming from the Western hemisphere. The conclusions of these schools of thought are then taken for granted. For example, in the widely used first year textbook Economics: A Student’s Guide, it is openly acknowledged that “neoclassical economics [...] [has] created the mainstream economics that dominates this and most other textbooks.” (Beardshaw, Brewster, Cormack and Ross 2001, p. 705) It then goes on to briefly outline the primary heterodox approaches. The problem is not that priority is given to this school, which deserves its preeminence, but that insufficient acknowledgement of the existence and potential insight of other schools is instilled. In the textbook, this passage acknowledging this emphasis, and detailing alternatives, comes on page 705 and lasts 7 pages. Over the previous 700 pages all the basic principles of economics have already been laid out as though they were scientific givens. This embodies the flaw in attitude of undergraduate economic study. Reading the Muqaddimah instills some of the importance of approaching economic questions with a detachment from orthodoxy and formalism. However, despite the overlap between Ibn Khaldun’s work and that of later economists, a sentenceby-sentence comparison can be misleading. The similarities should not be overstated. For every sentence in The Wealth of Nations that appears foreshadowed by one in the Muqaddimah, and there are many, there are many more that would have meant little to Ibn Khaldun. This is largely because a detailed account of how a commercial economy functions was never his intention. The aim of his economic investigations was to improve historiography. The economic and social laws he documented were to be applied as a test to future historical accounts, to establish whether they seemed reasonable and should be trusted. This makes the depth and accuracy of his observations even more impressive; to him, they were only a means to an end.

The real relevance of his work lies not in how much credit is due to him for economics as it is today. The simple answer is that, since the major advances on which the modern field is founded were made in ignorance of his work, little credit is due. Equally, how much he ‘got right’ by modern standards is not the best judge of merit. The most value that can be gleaned from his book lies in the incredibly fresh perspective it grants on the field of economics. The economic philosophy of the Muqaddimah provides an excellent counterweight to many of the weaknesses and blind spots in modern economic thought and methodology. Certain attitudes are incredibly hard to remove, and direct controls such as increased and improved regulation must play a large part in response to the crisis we have recently witnessed. However, to avoid future bubbles, both in the financial system and in economic thought itself, the wider study of such works would also be of great value. t Endnotes 1Among these false predictions were the continued rise of property values, and the value of what proved to be wholly toxic financial derivatives. See In Modelling Risk, the Human Factor Was Left Out, published November 4th 2009 in the New York Times for an overview. Bibliography Al-Azmeh, A. 1982. Ibn Khaldun: An Essay in Reinterpretation. London: Frank Cass and co. Ltd. Beardshaw, J., Brewster, D. Cormack, P. & Ross, A. 1984. Economics: A Student’s Guide. Reprinted 2001 London: Pearson Education Ltd. De Slane, W. 1862. Les Prolegomenes d’Ibn Khaldoun. Paris: Impr. Imperiale. Friedman, M. & Schwartz, A. J. 1963. A Monetary History of the United States 1867-1960. Reprinted 1993 Princeton University Press. Gopal, M.H. 1935. Mauryan Public Finance. London: George Allen & Unwin Ltd. Ibn Khaldun translated by Rosenthal, F. 1958. The Muqaddimah: An Introduction to History. London: Routledge and Kegan Paul. Langholm, O. 1979. Price and Value in the Aristotelian Tradition. London: Global Book Resources Ltd. Lawson, T. 2010. Economics and Science. The Transatlantic, Issue 1. pp. 9 – 13 Lacoste, Y. 1984. Ibn Khaldun: The Birth of History and the Past of the Third World. London: Verso. Lumsden, K. Attiyeh, R. & Scott, A. 1980. Economics Education in the United Kingdom. London: Heinemann. Mackay, C. 1856. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. London: G. Routledge and co. Mahdi, M. 1957. Ibn Khaldun’s Philosophy of History. London: George Allen and Unwin Ltd. Oweiss, I.M. 2009. Ibn Khaldun: Father of Economics. http:// allafrica.com/stories/200905150190.html Skidelsky, R. 2010. What’s Wrong with Economics? The Transatlantic, Issue 1. pp. 31 – 33 Smith, A. 1776. The Wealth of Nations. Reprinted 1991 London: Prometheus Books. David Abramsky is reading Physics and Philosophy at King’s College London.

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beyond the growth dilemma — ecological enterprise and the cinderella economy by tim jackson

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Tim Jackson is Professor of Sustainable Development at the University of Surrey, Economics Commissioner on the UK Sustainable Development Commission and author of Prosperity without Growth – economics for a finite planet. Society is faced with a profound dilemma. To resist growth is to risk economic and social collapse. To pursue it relentlessly is to endanger the ecosystems on which we depend for long-term survival. For the most part, this dilemma goes unrecognised in mainstream policy. It’s only marginally more visible as a public debate. When reality begins to impinge on the collective consciousness, the best suggestion to hand is that we can somehow ‘decouple’ growth from its material impacts. And continue to do so while the economy expands exponentially. The sheer scale of action implied by this is daunting. In a world of 9 billion people all aspiring to western lifestyles, the carbon intensity of every dollar of output must be at least 130 times lower in 2050 than it is today (Figure 1). By the end of the century, economic activity will need to be taking carbon out of the atmosphere not adding to it.

The scale of improvement required in the future is daunting. In a world of nine billion people, all aspiring to a level of income commensurate with 2% growth on the average EU income today, carbon intensities (for example) would have to fall on average by over 11% per year to stabilise the climate, 16 times faster than it has done since 1990. By 2050, the global carbon intensity would need to be only 6 grams per dollar of output, almost 130 times lower than it is today (Figure 1). Never mind that no one knows what such an economy looks like. Never mind that decoupling isn’t happening at anything like that scale. Never mind that all our institutions and incentive structures continually point in the wrong direction. The dilemma, once recognised, looms so dangerously over our future that we are desperate to believe in miracles. Technology will save us. Capitalism is good at technology. So let’s just keep the show on the road and hope for the best.

Figure 1: Carbon Intensities Now and Required to Meet 450 ppm Target 800 –

Carbon intensity gCO2/$

700 – 600 – 500 – 400 –

768

300 – 200 –

347 244

100 –

36

30

14

0 2007 World 2007 UK 2007 Japan Now

2050 (Scen 1)

2050 (Scen 2)

2050 (Scen 3)

6 2050 (Scen 4)

Required to meet IPCC target

Scenario 1: 9 billion people; trend income growth Scenario 2: 11 billion people; trend income growth Scenario 3: 9 billion people; incomes at equitable 2007 EU level Scenario 4: 9 billion people; incomes at equitable 2007 EU plus 2% pa growth

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The reality is that there is as yet no credible, socially just, ecologically sustainable scenario of continually growing incomes for a world of nine billion people. And in these circumstances, simplistic assumptions that capitalism’s propensity for efficiency will allow us to stabilise the climate and protect against resource scarcity are nothing short of delusional.

The dilemma, once recognised, looms so dangerously over our future that we are desperate to believe in miracles. Technology will save us. Capitalism is good at technology. No surprise then, that the response to the recession was a ubiquitous call to re-invigorate consumer spending and kick start growth. Those inclined to question the consensus were swiftly denounced as cynical revolutionaries or modern day luddites. “We do not agree with the anti-capitalists who see the economic crisis as a chance to impose their utopia, whether of a socialist or eco-fundamentalist kind” (The Independent 2008), roared the Independent on Sunday late in 2008. “Most of us in this country enjoy long and fulfilling lives thanks to liberal capitalism: we have no desire to live in a yurt under a workers’ soviet.” (Ibid.) With that confusingly-attired bogey-man looming over us, kick-starting growth looked like a nobrainer. And the closest we got to doing anything other than business as usual was the possibility that somehow out of the crisis we might create a different “sustainable engine for growth” as Achim Steiner from the UN Environment Programme called it (Steiner 2010). Green growth became the holy grail of economic recovery. Similar proposals had been voiced for some years by ecological economists. Pointing out that “ever greater consumption of resources is [in itself] a driver of growth” (Jackson 2009B, p. 53) in the current paradigm, Robert Ayres argues that “in effect, a new growth engine is needed, based on non-polluting energy sources and selling non-material services, not polluting products.” (Ayres 2009, p. 292) This idea is still essentially an appeal to decoupling. Growth continues, while resource intensity (and hopefully throughput) declines. But here at least is something in the way of a blueprint for what 48

such an economy might look like. It gives us more of a sense of what people are buying and what businesses are selling in this new economy. Its founding concept is the production and sale of de-materialised ‘services’, rather than material ‘products’. Clearly this can’t just be the ‘service-based economies’ that have characterised certain Western development over the last few decades. For the most part those have been achieved by reducing heavy manufacturing, continuing to import consumption goods from abroad and expanding financial services to pay for them. So what exactly constitutes productive economic activity in this new economy? Selling ‘energy services’, certainly, rather than energy supplies. Selling mobility rather than cars. Recycling, re-using, leasing, maybe. Yoga lessons, perhaps, hairdressing, gardening: so long as these aren’t carried out using buildings, don’t involve the latest fashion and you don’t need a car to get to them. The humble broom would need to be preferred to the diabolical ‘leafblower’, for instance. The fundamental question is this: can you really make enough money from these activities to keep an economy growing? And the truth is we just don’t know. We have never at any point in history lived in such an economy. It sounds at the moment suspiciously like something the Independent on Sunday would instantly dismiss as a yurt-based economy – with increasingly expensive yurts. But this doesn’t mean we should throw away the underlying vision completely. Whatever the new economy looks like, low-carbon economic activities that employ people in ways that contribute meaningfully to human flourishing have to be the basis for it. That much is clear. So rather than starting from the assumption of growth, perhaps we should start by identifying what we want a sustainable economy to look and behave like. Clearly, some form of stability – or resilience – matters. Economies which collapse threaten human flourishing immediately. We know that equality matters. Unequal societies drive unproductive status competition and undermine wellbeing not only directly but also by eroding our sense of shared citizenship. Work – and not just paid employment – still matters in this new economy. It’s vital for all sorts of reasons. Apart from the obvious contribution of paid


employment to people’s livelihoods, work is a part of our participation in the life of society. Through work we create and recreate the social world and find a credible place in it. Perhaps most vital of all, economic activity must remain ecologically-bounded. The limits of a finite planet need to be coded directly into its working principles. The valuation of ecosystem services, the greening of the national accounts, the identification of an ecologically-bounded production function: all of these are likely to be essential to the development of a sustainable economic framework. And at the local level, it’s possible to identify some simple operational principles that these new economic activities need to fulfil. Let’s call these activities ecological enterprises if they satisfy three simple criteria: • they contribute positively to human flourishing • they support community and provide decent livelihoods • they use as little as possible in the way of materials and energy Notice that it isn’t just the outputs from economic activity that must make a positive contribution to flourishing. It’s the form and organisation of our systems of provision as well. Ecological enterprise needs to work with the grain of community and the long-term social good, rather than against it. Interestingly, ecological enterprise has a kind of forerunner. The seeds for the new economy already exist in local, community-based social enterprise: community energy projects, local farmer’s markets, slow food cooperatives, sports clubs, libraries, community health and fitness centres, local repair and maintenance services, craft workshops, writing centres, watersports, community music and drama, local training and skills. And yes, maybe even yoga (or martial arts or meditation), hairdressing, and gardening. People often achieve a greater sense of wellbeing and fulfillment, both as producers and as consumers of these activities, than they ever do from the timepoor, materialistic, supermarket economy in which most of our lives are spent. So it’s ironic that these community based social enterprises barely count in today’s economy. They represent a kind of Cinderella economy that sits neglected at the margins of consumer society.

Some of them scarcely even register as economic activities in a formal sense at all. They sometimes employ people on a part-time or even voluntary basis. Their activities are often labour intensive. So if they contribute anything at all to GDP, their labour productivity growth is of course ‘dismal’ – in the language of the dismal science. If we start shifting wholesale to patterns of de-materialised services, we wouldn’t immediately bring the economy to a standstill, but we’d certainly slow down growth considerably. We’re getting perilously close here to the lunacy at the heart of the growth-obsessed, resource-intensive, consumer economy. Here is a sector which could provide meaningful work, offer people capabilities for flourishing, contribute positively to community and have a decent chance of being materially light. And yet it’s denigrated as worthless because it’s actually employing people. This response shows up the fetish with labour productivity for what it is: a recipe for undermining work, community and environment. Of course, labour productivity improvements aren’t always bad. There are clearly places where it makes sense to substitute away from human labour, especially where the working experience itself is poor. But the idea that labor input is always and necessarily something to be minimised goes against common sense.

The reality is that there is as yet no credible, socially just, ecologically sustainable scenario of continually growing incomes for a world of nine billion people. In fact, there’s a very good reason why de-materialised services don’t lead to productivity growth. It’s because for many of them it’s the human input to them that constitutes the value in them. The pursuit of labour productivity in activities whose integrity depends on human interaction systematically undermines the quality of the output. Besides all that, work itself is one of the ways in which humans participate meaningfully in society. Reducing our ability to do that – or reducing the quality of our experience in doing so – is a direct hit on flourishing. Relentless pursuit of labour productivity in these circumstances makes absolutely no sense. 49


So in summary, it seems that those calling for a new engine of growth based around dematerialised services are really onto something. But they may perhaps have missed a vital point. The idea that an increasingly serviced based economy can (or should) provide for ever-increasing economic output doesn’t quite stack up. On the other hand, we’ve made some clear progress here. The Cinderella economy really does offer a kind of blueprint for a different kind of society. New, ecological enterprises provide capabilities for flourishing. They offer the means to a livelihood and to participation in the life of society. They provide security, a sense of belonging, the ability to share in a common endeavour and yet to pursue our potential as individual human beings. And at the same time they offer a decent chance of remaining within ecological scale. The next economy really does mean inviting Cinderella to the ball.

Bibligraphy Ayres, Robert. 2008. Sustainability Economics: where do we stand? Ecological Economics 67. 281-310 Jackson, T. 2009A. Prosperity without Growth – economics for a finite planet. Earthscan 2009. www.earthscan.co.uk/pwg Jackson, T. 2009B. Prosperity without Growth – economics for a finite planet. Sustainable Development Commission. http:// www.sd-commission.org.uk/publications/downloads/prosperity_without_growth_report.pdf (accessed on 18/10/2010) Steiner, A. April 2010. The Role of Impact Assessment in Transitioning to the Green Economy. 30th Annual Conference of the International Association for Impact Assessment (IAIA10). http://www. unep.org/Documents.Multilingual/Default.Print.asp?Document ID=621&ArticleID=6524&l=en (accessed on 18/10/2010) The Independent. 12/10/2008. Leading article: The green lining to this chaos. http://www.independent.co.uk/opinion/leading-articles/ leading-article-the-green-lining-to-this-chaos-958581.html (accessed on 18/10/2010)

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The next economy really does mean inviting Cinderella to the ball.


call for

articles

The Transatlantic—Journal of Economics and Philosophy—is calling for the submission of articles for the spring issue 2011, which will be on the topic

Education A Innovation If you wish to write for the forthcoming issue, send an abstract no later than January 20th, 2011 to submit@thetransatlantic.org. We will then ask you for the full version of your proposed article. The article should be about 2,000 words long. Undergraduate and graduate students from all universities and fields of studies are encouraged to submit. You may write on any of the following issues – or on a topic of your choice that relates to Education and Innovation. — Economics Education — Provision and financing of education — Grade Inflation

Next theme: RIGHTS & DUTIES Interested in writing? Contact us: vox@clubofpep.org

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Human Capital theory Innovation, Competition and Incentives Research & Development Inequality in education Education and Development Innovation and Growth Intellectual Property Elitism and Economics Educational Devaluation Science and technology Competence and Capital Brain Drain Specialization Regulation & Innovation Returns to education

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The Transatlantic - Growth  

We dedicate this new issue of The Transatlantic to GROWTH – a topic ubiquitous and controversial on almost all dimensions. Although most eco...

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