Saturday, March 18, 2006

Yes, Economic Growth Could Stop, but What a Price

In answer to the question: does economic growth ever stop?, the answer is, unambiguously, yes. It has, does, could and, perhaps, will again.

Anthony Black, an actor, asks these and other questions in his one-man show, now running at Neptune’s Studio Theatre, Halifax, Nova Scotia, Canada, as reported in The Chronicle by Stephen Pedersen, its Arts Reporter, 18 March:

‘Confronting ambiguity, uncertainty’ with the strap line: ‘Atom needs to get a life in Black’s remarkable, entertaining, one-man show’. Here is a paragraph from Pedersen’s report:

The ideas begin simply. They come from Adam Smith’s Wealth of Nations (does economic growth ever stop?), Isaac Newton’s discovery of the Law of Gravity (is it ever suspended?), and a thesis on sub-atomic particles, about to be presented by Atom’s wife for an advanced academic degree (is the atom, once thought inviolable, infinitely divisible?).”

I have no comment on Isaac Newton’s Law of Gravity or on the science of sub-atomic particles, but I can comment on Adam Smith’s answer. He was well aware of the possibility of an end to growth, as were most of his generation who were schooled in British universities, where the long shadow of the former Roman Empire hung over their studies of its histories and language. Lectures, until the mid-18th century, were given in Latin, not English, literature was mostly read in Latin and ancient Greek, and as many allusions were made in both learned and literary works to events, plays, poetry and philosophy from ancient Greece and Rome as there were authors. Even the Founders cast their new republic’s institutions in the forms of the Roman Senate.

The Fall of Rome marked the fall of the first Age of Commerce, and with it, also ended its concomitant economic growth. These centuries became known as the Dark Ages; the economies of Europe reverted to barbarism and remnants of the economy retreated into local agriculture. For a thousand years there was no economic growth, with everything that went with[out] it.

Such an event – the sole cause of which was human destruction on a continent-wide scale – could happen again. There is no ‘law’ preventing what I call ‘Man’s Avoidable Disasters’ (MAD).

There is another end to growth scenario, which Smith includes in ‘Wealth of Nations’:

In a country which has acquired that full compliment of riches which the nature of its soil and climate, and its situation with respect to other countries allowed it to acquire, which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low. In a country fully peopled in proportion to what either its territory could maintain or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it could transact, as great a quantity of stock could be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would everywhere be as great, and consequently the ordinary profit as low as possible.

But perhaps no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had probably long ago acquired the full compliment of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects, or despises foreign commerce, and which admits the vessels of foreign nations into one or two ports only, cannot transact the same quantity of business which it might do with different laws and institutions
. (WN I.ix.14-15: pp 111-12)

I discuss this passage in ‘Adam Smith’s Lost Legacy’, pp 205-9 (Palgrave Macmillan, 2005). The end of growth problem Smith discussed was inhibited by a major missing ingredient in his analysis. He did not (and could not), and nor did anybody else, anticipate the massive serial changes and inventions in technology just ahead of his horizons that came in the 19th and 20th centuries, and, by all current judgements, look set to continue throughout the 21st century. These unforeseen events postponed, perhaps indefinitely, a country reaching its ‘full compliment of riches which the nature of its soil and climate, and its situation’ allow it to acquire.

But, in the case of 18th century China, Smith spotted something that may have relevance to future answers to the question. He asserted that China had: ‘long ago acquired the full compliment of riches which is consistent with the nature of its laws and institutions’. Fortunately for the poor people of China, and despite their compulsive residence in a theme park for the Communist Experiment, the ‘nature of their laws and institutions’ are changing; the road block is removed and, after six hundred years since the 15th century, they resume their economy’s growth, with a vengeance.

In addition to the negative reactions of some influential voices in the West from among rabid hyper-suspicious xenophobes through to Marxist environmentalists, and usually decent people and a few economists, the muffled drums of protectionism are shifting up a beat, albeit in the distance for now. So called ‘fair trade’, ‘what about the US deficit’ near- panicky voices, and the shriller of the doomsday ‘global-warming’ chorus, are on a converging course with the xenophobes towards changing the ‘nature of [Western] laws and institutions’ that, if carried politically, would so inhibit both technological change and the existence of market solutions as the main drivers of economic growth as to risk a re-run of the Fall of the Roman Empire and an end to economic growth.

I remain optimistic enough to consider markets will overcome such a ‘Man-made Avoidable Disaster’.


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