EUROPEAN PAPERS ON THE NEW WELFARE

From Limits to Growth to Limitless Growth

3. Breaking the Limits
Giarini’s four reports to the Club of Rome pinpoint limitations in prevailing theory when confronted with a rapidly evolving social reality. Saved from cynicism by a keen sense of history and a deep faith in human values, his books present an analysis of these limited conceptions and a plethora of fresh perspectives struggling desperately to be grasped, formulated and communicated.
In Dialogue on Wealth and Welfare (1980) he examined underlying premises regarding contemporary economic theory and its relationship with human welfare. Drawing on insights from Smith’s Wealth of Nations, he traced back the roots of modern economic theory to the crucial point where theory became divorced from social reality. Smith had always regarded himself foremost as a moral philosopher and his interest in economics arose directly from his interest in promoting the welfare of humankind, both in his own country and in the world-at-large. For him, economic theory was a means to an end and never an end in itself. The task of the economist was not to discover the inalienable laws governing economic systems but to discover the means by which economic systems could be made to best promote the welfare of human beings. For him, economy was an inextricable part of a greater social whole. It is true that Smith advocated removal of barriers to free international trade, which under mercantilist regimes had become so burdensome that they stifled enterprise, supported monopolies and discouraged efficiency. But at the same time he regaled the blind pursuit of self-interest by business at the expense of public welfare and was deeply concerned by the concentration of wealth and power among a small group of influential producers.

3.1 What Type of Growth?
In his first report to the Club, Giarini argues that the central question regarding growth is not ‘How much?’ but ‘What kind?’ The simple, self-evident conclusion he arrived at was that the value of economic growth depended solely on its contribution to human welfare. Growth for growth’s sake is not only meaningless, but potentially disastrous. The problems highlighted in the Club of Rome report arose directly as the result of fundamental defects in the prevailing concept of economic growth.
That concept of growth is based in turn on a distorted view of economic value. Economics was founded at a time when scarcity appeared to be the inevitable human condition. Industrialisation was viewed as a means to mitigate shortages by raising human productivity and lowering production costs. It was natural enough under these circumstances for the early economists to consider any increase in production as a net addition to national wealth, but that ceased to be a valid assumption long ago.
Before the end of the 19th century, the problem of limited supply was supplanted by the problem of limited demand. Industrial economies could produce an endless supply of goods, but unless purchasing power were widely distributed and continuously rising, there would soon be too few people with the capacity to procure them. The principal economic crises of the 19th century were crises of demand. In recognition of this fact, Marshall first and then Keynes and later on more and more economists shifted their focus from the supply side to the demand side of the equation, which gave rise to a new set of economic principles that guided public policy in market economies throughout most of the 20th century. In the process of trying to keep growing, economists lost sight of a larger issue: namely, that unlimited capacity for production would inevitably tax the carrying capacity of the earth’s resources. While most economists worried about how to stimulate demand to keep pace with growth of production, the changed circumstances compel us to ask a more fundamental question: “What type of growth do we really want?”

3.2 The Problem of Value
This led Giarini to one of the most vexing problems of modern economics, the fundamental notion of value. You get what you measure, according to the management dictum; and the type of economic growth prevalent in the past two centuries is a direct reflection and result of the way we define and measure economic value. A truly constructive science of economics that eliminates the wasteful excesses and destructive aspects of unregulated activity can only be founded on a wholly positive conception of economic value. In Dialogue on Wealth and Welfare, he analysed the fundamental flaws in the prevailing notion of value and how it is measured. Although many of his insights have now been widely recognised, his arguments still carry the force of his original perception and theoretical clarity. Value is a purely human conception and the only sound basis for assessing the value of any economic activity is accord­ing to its contribution to human welfare.
This led him inevitably to the concept of negative value. It could well be, he argued, that many transactions recorded as productive may be destroying more than they produce. Prevail­ing measures of economic growth and national wealth are based on the implicit assumption that all monetarised activity adds to the total stock of wealth and that this is the sole or major determinant of the wealth of nations. This premise ignores the now obvious fact that current wealth creation is largely based on the consumption of non-renewable natural resources, whose true replacement value is not being measured. Long before the conse­quences of climate change threatened to undermine all conventional notions of economic value, he argued that the real future cleanup costs of pollution from industrialisation and fossil fuel consumption were not reflected in measures of GDP and when later they came to be included, the expenditure to address pollution would be recorded as a further positive contribution to growth. Is expenditure on treatment and management of refuse really a net addition to wealth and welfare? Obviously, not all economic activity reflect a real enhancement in human welfare. Indeed, much of what we measure and record as growth represents activity which may actually reflect a deterioration in human welfare. Rising costs of medical care resulting from pollution and lifestyle stress, expenditure on bottled water to replace contaminated natural sources, rising costs of the criminal justice system due to higher rates of crime and drug abuse, increased military expenditure in response to high levels of youth unemployment, social unrest and terrorism abroad, all contribute to growth of GDP, yet result from a deterioration rather than an enhancement in human welfare. So too, the divergence of capital from the real economy to speculative financial markets has generated higher rates of growth for the financial service sector over the past two decades, but far fewer jobs and widening levels of income inequality.
A central theme of the report is the vital distinction between wealth and income. The right goal of economic activity is to enhance the wealth of the population, which means to enhance its accumulated capacity for consumption (stock), rather than striving to perpetually stimulate greater production (flow) for its own sake. The report challenged the very notion of trying to measure human welfare in terms of the flow of economic activity, as GDP measures it. Is the wealth of nations really enhanced, if rapid mechanisation leads to a drastic increase in production at the cost of large scale unemployment, rising crime rates and mounting industrial pollution? Theoretically, it might be possible to generate an endless array and volume of goods, but of what significance would that be unless the entire population benefits from them?
The simple analogy of a bathtub full of water is illustrative. The water in the tub represents the cumulative stock of wealth in society. The tub is equipped with cold and hot water taps, representing the inflow of natural and human contributions to the creation of wealth. One tap represents the contribution of monetarised activities to wealth creation, the other represents non-monetarised activities such as air and water quality and depletion of re­­sources. Sensors on both taps record only total inflow, regardless of whether the flow involves production of useful products and services or remediation for deterioration of health, social stability and the environment. Elizabeth Mann Borgese, daughter of the great German writer Thomas Mann, embraced this model and applied it to assess the economic value of ocean wealth in a report to the Club of Rome entitled The Future of the Oceans (1986).
Traditional growth measures also failed to reflect positive off-balance sheet trans­actions. When economic or technological development delivers useful goods and services at little or no cost, such as free email, internet chat, voice conferencing or global positioning, GDP remains untouched, while the real wealth and welfare of people increase substantially. Without more reliable measures, how can we ensure economic policy encourages the right type of activities? The obvious answer is that we cannot. An economics of human welfare necessitates a reconceptualisation of value and development of new ways to measure it.


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