Smart growth can help achieve a good life for all without killing the planet

This piece is part of the series “Reimagining economics for a carbon-constrained world”. It argues that, with the right policies in place, economic growth as it relates to continued improvements in human well-being is possible without overstepping natural limits.

The views expressed in the blog are the author’s own and do not necessarily reflect the views of Economist Impact or the sponsor.

Explore another side of the debate with Susan Paulson, who argues that economic growth measured in terms of GDP already contributes to environmental degradation and societal harm, and makes a case for the degrowth movement. Read her take here.

Is a global economic system based on GDP an outdated measure of progress? Read the explainer article here.

Is infinite economic growth possible in a world of finite natural resources? For many environmentalists the answer to this question is a clear no. But economists often disagree, emphasising that economic growth can occur as productivity increases, even as consumption of natural resources and greenhouse-gas (GHG) emissions decrease. As gross domestic product (GDP), the most commonly used measure of economic activity, denotes the monetary value of all goods and services produced and consumed, growth in quality instead of quantity is feasible as long as people come up with novel ideas for better products.

There is a widely held belief that economists regard economic growth as the most important goal for policymakers to pursue. However, most economists are well aware that economic growth should not be a policy goal per se, because a good life cannot be reduced to mere material consumption. But they contend that a higher GDP helps to get those things that are desirable from a social perspective, such as decent education and health care. As economic growth is related to rising productivity, it can also spur innovations that reduce environmental impacts. Such “green growth” could be based on, for instance, more energy-efficient production, including from renewable sources.

It is well understood that GDP fails to fully capture the extent to which an economy achieves societal goals. GDP does not account for things that society values but does not trade on markets, such as child care or taking care of elderly people. It also fails to account for inequality and poverty. All consumption is counted equally, regardless of whether it is of necessities or luxury goods. GDP also does not appropriately capture environmental damage and the use of natural resources. That is, an economy can boost output in the shortterm by depleting its natural capital stock, without providing for economic activity in the long run. Such unsustainable economic growth would make an economy poorer, not richer, despite a growing GDP.

Several indicators have been proposed to deal with these shortcomings. The World Bank’s estimates of “adjusted net savings” subtract resource consumption and GHG emissions from investments in physical capital stocks to assess whether economic activity is sustainable in the long run. The Human Development Index compiled by the United Nations Development Programme includes education and life expectancy.

Nevertheless, it is difficult to capture all aspects of economic performance in a single indicator, as this would require a common denominator for very disparate issues, such as lifeexpectancy, education, inequality and intergenerational equity.

Dashboards that provide a comprehensive overview of the issues at stake and the compromises between them can help inform this debate.

To assess the extent to which the economy provides things that matter for society, we need to have a conversation about societal values. To arrive at a green economy, it will not be sufficient to develop cleaner technologies. Rather, we will need to do things in different, smarter, ways. This does not need to entail sacrifice. Moving away from lifestyles that many regard as overly materialistic could yield important additional benefits. Dietary shifts to reduce the consumption of animal products and increased uptake of biking and cycling could be parts of healthier lifestyles. Video conferences allow people to keep in touch with peers while avoiding the hassle and environmental costs of taking a plane.

Nevertheless, as climate measures may raise the price of using fossil fuels, some people who spend relatively large shares of their incomes on energy could suffer from the costs of a transition to a carbon-neutral economy. Transforming the economy in a way that yields better social outcomes requires a debate on how to assist the most vulnerable parts of the population to adapt to change.

In the past, resource use and GHG emissions only declined during brief spells of global economic contraction, such as financial crises. But this does not mean that measures to protect the environment will necessarily result in declining GDP, or that one should deliberately curtail economic output to achieve environmental goals.

For example, a price on GHG emissions that accounts for the harmful effects of fossil fuels would reduce their use and at the same time boost demand for clean alternatives. With higher monetary values attributed to “goods”, such as renewable energy sources, and lower monetary values for “bads”, such as GHG emissions, efforts to decarbonise the economy would in turn result in a higher GDP. Getting market prices right would thus also help close at least part of the gap between GDP and human well-being.

For this reason, the question of whether infinite economic growth is possible in a world of finite natural resources might be restated as whether continued improvements in human well-being are possible without overstepping natural limits. The answer is likely yes, but only with the right policies in place. Designing these policies will require deep deliberation about what constitutes a good life for all.