The financial druids are all a flutter. Their worst fears have come true. It’s not only that we can now see the other side of the reckless credit boom: a long legacy of high unemployment, bankruptcy and wrecked public finances. The darkest fear of the priests of high finance is that we will never again trust and follow their sermons. Any faith faces disaster when people stop believing.
The “call to prayer” of conventional economics has been the incantation of economic growth figures: the accumulated monetary value of all the exchanges that take place in the economy. When it heads south, the system knows it has a problem.
Now, it has a real problem. Global economic growth is at its lowest level since shortly after the second world war, and the UK economy is shrinking fastest.
But here’s the problem. The fact that so much went so wrong, so quickly says that the long period of preceding growth hid a deep malaise. Growth conceals more than it reveals. It is about as informative as saying that when it rains things get wet. Yet the indicator retains an unbreakable grip on the imaginations of politicians and policymakers. Over 30 years of critique from the few dissident economists and environmentalists have not shifted its privileged position.
Growth tells us if things are happening, but not whether they are good or bad. Growth can be boosted by war, pollution and all kinds of social breakdown, from divorce to ill health and vandalism. That’s because they all require money to be spent, which shows up in the growth figures. This matters right now because the government is spending money simply to reboot growth, rather than to achieve particular, desirable outcomes, like creating green jobs to rebuild energy security, and tackle fuel poverty and climate change. It needs to get smart.
The irony is that when growth-based national accounting became popular and the subject of political posturing, it came with a very big health warning attached. One of the indicator’s key architects, the economist Simon Kuznets, was explicit about its limitations. Growth did not measure quality of life, he made clear, and it excluded vast and important parts of the economy where exchanges were not monetary. By this he meant, family, care and community work – the so-called core economy which actually makes society and civilisation possible. It also couldn’t tell you anything about the nature of the economy.
Kuznets’ work was commissioned by the US Congress in response to the depression of the 1930s. It was to be used to quantify the value of government interventions to rescue the economy. It was a humble tool, not a temple to worship at. Kuznets’ warnings were forgotten, and growth became the eclipsing indicator of an economy’s virility and success. There was a brief cooling in 1968 when Robert Kennedy pointed out that growth measured everything apart from “that which makes life worthwhile.” But is the worship beginning to weaken?
Last week, a ripple of uncertainty crossed the pages of the Financial Times. Acknowledging the paucity of the growth indicator, the paper said it survived due to the lack of an alternative. Of course, the alternatives were only missing if you didn’t want to see them.
There is, in fact, an alphabet soup of acronyms for a range of more informative alternatives than growth. To mention just a few: the measure of domestic progress (MDP), the index of sustainable economic welfare (ISEW), the genuine progress indicator (GPI), the ecological footprint, and even the happy planet index. The government has even had its own satellite accounting system, which used “headline indicators of sustainability”. We don’t lack better ways of measuring the economy. The problem is that growth always comes first.
Other things now matter more than maximising all economic activity for its own sake, such as preserving a habitable planet. Its time to push other, better ways of measuring to centre stage. Even the current head of the Financial Services Authority, Baron (Adair) Turner, wrote last year that it was time to “dethrone growth”.
The environmental economist Herman Daly said that if growth was good for anything, it made for a very accurate measure of the rate at which we liquidate irreplaceable natural assets. The faster growth rises when it is powered by carbon-based fuels, the quicker we head toward irreversible global warming.
The obsession with growth can lead to very bad decisions being taken, such as that to go ahead with a third runway at Heathrow. Almost anything can be justified if all you have to do is demonstrate that it contributes to economic growth, regardless of whether it might be the nudge that pushes us over an ecological precipice.
We’re left with confusing, mixed messages from Gordon Brown. On one hand he’s avowedly committed to tackling climate change and calls on the public to wrap up warm in winter to save energy. On the other, he builds infrastructure that will pollute the skies. What are we supposed to conclude?
We’ve already seen what lies the other side of the credit crisis. But we must never see the other side of the climate crisis. If we do, it will be too late. We need different economic indicators to steer us away from the edge.
Ninety-four months and counting…
This article was first published at Comment is Free.