Introduction to economic myths : The GDP indicator

 

The diversity of myths in human history is impressive. Myths have touched all civilization some of which, such as the ancient Greeks, have been critical in an attempt to rationalize their origin. Today there are many stories. In the West, the hope for resurrection and eternal life has given way to transhumanism, intergalactic exploration or eternal economic growth.

 

But why should we strive for growth?

Mainly because the functioning of a market economy requires that investors and banks invest or lend money in the present, expecting a profit in the future (either in the form of dividends or interest rates). Therefore, interest rate relies on the creation of economic value. As you will have understood, without banks or private lenders, investment capacities are strongly limited.

 

So what happens if the production of economic wealth decreases?

Simply put, there is at first recession (a temporary slowdown in economic growth), and then, if it lasts, an economic crisis (lower production, falling wages, rising unemployment, inability to repay debts and bankruptcy of lenders).

 

To take the example of oil companies, stocks depletion in different areas leads mechanically to a lower EROI (as mentioned in the previous article) and the companies go bankrupt as a result. The Haynes and Boones report notably points out that 45% of oil industry bankruptcies were concentrated in Texas, the world’s leading extraction site, over the last 5 years.

 

Recession, which is here physical (availability of resources or sufficiency of flows), is not appreciated by banks or investors. The current economic system is not prepared for these phenomena and its rescue parachute remains indebtedness or speculative bubbles that lead to crises.

 

Back to the myths

Let’s start with the economic concept of productivity. In human history, productivity first consisted in reducing working time while maintaining material well-being and freeing up time for quality of life. Today, it boils down to work as much or even more, to produce more and more for the same pay. It is quite a different approach.

 

Besides, who has never heard that growth provides financial capacities for social spending? Yet if we look more closely, social security correlated to GDP growth does not explain anything. It is population growth and household income that play a role in the financing of social spending.

 

Speaking of households, what about their purchasing power?

In France in 2019, even if growth was weak, we experienced the biggest increase in purchasing power of the 12 past years. This can be explained because it is not production, but distribution or redistribution that solves the problem of household purchasing power. Many indicators exist to quantify income differences, such as the Gini or Atkinson index. GDP therefore leaves income inequalities aside, since it is an average, it does not measure inequalities.

 

As we saw previously, GDP is linked to energy consumption growth, which has exploded since the industrial revolution and has not decreased since. The energy mix being dominated by fossil fuels, the more consumption increases, the more GDP grows and the more we release CO2 in the atmosphere.

 

Reducing our greenhouse gas emissions, which cause global warming, and curbing the 6th mass extinction by stopping the destruction of natural habitats (artificialization, land fragmentation, and overexploitation) remain the greatest challenges in the history of humanity. However, GDP measures nothing of biodiversity destruction, nothing of ecosystems degradation, nothing of climate change and nothing of the effects on human societies.

 

The Holocene, the interglacial period that allowed Homo Sapiens to develop and gradually conquer the planet, is being disrupted by our activities. Climate change is 100 times faster than the transition over the last million years from ice ages to interglacial eras approximately every 100,000 years. These passages resulted in an increase of about 0.05°C per century, allowing nature to adapt. Today, the temperature has risen by 1°C in about 170 years. The current trajectory of the Paris Agreement and the lack of international commitment promises us an increase of at least 3.2°C by 2100 according to international organizations.

 

In the words of Éloi Laurent, an economist and researcher at l’Observatoire Français des Conjonctures Économiques (OFCE), GDP “makes us one-eyed to economic well-being, blind to human well-being, deaf to social suffering, and mute on the state of our planet.”

 

The advantage for the proponents of economic growth at all costs, is that it has become embedded in budgetary procedures. At a time when governments around the world are voting budgets based on economic growth prospects and at a time when the investments needed for the ecological transition represent huge sums of money, proposals to bring ecological expenditure out of the 3% deficit rule required by the European treaties are finding some resonance.

 

This echo is all the more important since the famous 3% deficit limit is an economic rule without theoretical basis, devised by Guy Abeille in 1981 in response to the short-term objectives of French President François Mitterrand’s term of office (oil shocks) before being generalized in Europe at the beginning of the 1990s.

 

This 3% deficit, together with the objective of public debt below 60% of GDP, does not correspond to any rule that could determine the sustainable level of deficit or debt. These rules are completely arbitrary and while the 3% deficit is the basis for austerity policies, the 60% rule is respected by very few countries in the world. In Japan the debt reaches 240% of the GDP, while in the United States it reaches105%, or 150% for France.

 

But could we avoid generating debt?

No. For the only reason that money is debt. Money is either outstanding government debt or value created by Banks to make loans. It is through this very system that money is created. And for this reason, both banks and investors have a vested interest in keeping the debt outstanding.

 

Criticism of the overriding objective of growth does not, however, lead to an absolutist and unqualified position. It must be understood that the issue at stake is not so much economic decline, because “speaking of decline in order to fight against growth is to fight against an indicator for its simplicity, the injustice that it masks and the lack of relevance that it carries within it, by using this same indicator in an inverted manner”[1].

 

It is certainly necessary to carry out an overall energy and material decrease, but there are still large fields of ecological transition will induce growth of certain activities (agricultural workforce, deployment of railway lines, electrification, renewal of heating systems and buildings, renewable energy, etc.). Finally, if we want to criticize the growth imperative, it is equally essential to criticize alternative indicators.

 

Thus, while 1.2 million Chinese die from air pollution every year due to hyper-growth (economic and CO2 emissions), the need to take into account a panel of indicators that are more representative of socio-economic and environmental realities is urgent if we want to achieve the United Nations SDOs (sustainable development goals).

———

 

[1] Éloi Laurent words, excerpts from Le grand face à face, “La croissance est une mythologie économique”, October 26, 2019, available online: https://www.franceinter.fr/emissions/le-grand-face-a-face/le-grand-face-a-face-26-octobre-2019

 

Sources :

https://www.theceomagazine.com/business/start-ups-entrepreneurs/worlds-top-10-startups/ 

https://www.usinenouvelle.com/blogs/julien-fosse/le-climat-va-plomber-le-pib-mondial.N922059

https://www.mercialfred.com/topos/croissance-dahus-licornes?fbclid=IwAR3ffySNNn18OgDfBwb7LJX65hBh8v3l_Vta4ii3O66pTUE_cV2VeuJHiao

https://www.leftvoice.org/climate-catastrophe-may-be-imminent-but-a-better-world-is-still-possible

 

A propos de Albéric BARRET

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