Monday, August 8, 2011

The End of Growth?

A friend of mine sent me this video produced by the Post Carbon Institute which is dedicated to "leading the transition to a more resilient, equitable, and sustainable world." The video is written and narrated by Richard Heinberg, author of The End of Growth. He attempts to explain the onset of the Great Recession and why economic growth has not yet returned. You can watch the video below:

I must say I was disappointed with what I saw and heard. Much of what Heinberg says about the proximate causes of the credit bubble and the fictitious prosperity made apparent by debt, is correct as far as it goes. However, he way overemphasizes the importance of our living on a finite planet and energy depletion. For example, Heinberg claims that it was really cheap energy that made the industrial revolution and unprecedented economic growth possible. Given that premise and his belief that we are on the steep downhill slide energy supply wise, it is natural  to see the current economic stagnation as the finite earth chickens coming home to roost.

It seems to me, however, that Heinberg just does not give sound economic analysis its due. Certainly the industrial revolution was made possible in part by affordable energy that powered machines. However, that energy had been dormant there since the creation of the world. Why didn't we have an industrial revolution that started the first year after Adam and Eve were created? Perhaps because people had not discovered such sources were useful, because they had no need of them yet?

The causes of the industrial revolution he cites from economists, such as the division of labor, innovation, and increased trade (I would include capital accumulation and entrepreneurial activity), are indeed the causes of economic prosperity. Also, as he argues that economic growth is over, it would be helpful for him to define what he means by economic growth. It seems as if he makes a common error by equating increases in GDP with economic growth. They are not the same thing.

In a free society, people will experience the level of economic expansion they desire in the sense that, given their stock of scarce factors of production, they will act to achieve what they most prefer. Their time preference will dictate how willing they are to save and invest, and, consequently, the magnitude of capital at the disposal of entrepreneurs..

In such an economy, no one will have to arbitrarily tell anyone when is the right time to shift from fossil fuels and no one will be forced to do so against their will. Economic calculation using relative prices will guide people away from more costly energy to energy that is most efficient. Perhaps the true primary underlying cause of our current prolonged economic stagnation is the lack of a free economy. Who knows how prosperous we could actually be with real private property?

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