Only growth and market economies can save the planet.

Spoiler: Global warming is a real problem that needs to be addressed. However, policies appeasing the cries of alarm demanding de-growth and socialism would be disastrous for our planet. Most of the growth today is intensive. That means that we consume more of less material-intensive products such as information- and telecommunication services. The production of such requires less inputs of material and energy than production of goods. Continued growth including digitalisation, more use of robots and artificial intelligence in the production processes will therefore mean even less use of resources than today while less growth or de-growth means the opposite. And the good news is that de-coupling is possible.

De-coupling can only take place in market economies. Socialism and planning economies would only make matter worse. The belief that concentration of power in the hands of a few people should solve the problem of global warming ignores the fact that there has never been any more environmental damaging system than the planning economies in Soviet Union, its satellite states, China and North Korea. Market economies are much more capable of fostering new ideas and transforming these into innovative products through technological progress than planning economies. But markets alone won’t do it. Policies that affect relative prices supporting green technology and provide incentives for innovation are necessary.

Less efficient and more wasteful production in communist countries led to ecological disasters

 

As I showed in this post, production in communist countries was much less efficient than in market economies. More resources were therefore used in order to increase production in communist countries than in market economies.

This is well documented by Kornai (1992).  Energy and steel intensities were twice as large and use of other intermediate inputs at least 25% higher in communist countries, c.f. Table 1.

 

Table 1. Energy, steel and material intensities in communist countries and market economies.

Source: Cited sources in Kornai (1992), tables 12.4 and 12.5. Note: a:1979 b: 1980 c: years around 1975. Industry encompasses mining, manufacturing and energy producing industries. Energy intensity was measured in kg/coal equivalent consumed per 1 000 1979 US dollars of output. Steel intensity was measured in kg of steel consumed per 1 000 1980 US dollars of output.

 

The wasteful production methods in Soviet and other communist countries led to more damages of the environment than production in market economies. Growth in socialist economies is and was extensive, i.e. output growth mainly caused by increasing inputs such as raw materials and energy. Growth in market economies is to a much higher extent characterised by intensive growth, using inputs more efficiently. Intensive growth is growth by technological progress.  As also pointed in this post, increasing factor intensity contributed much more to productivity than TFP in communist countries.

 

A planning economy, run by a political body, can never coordinate billions of decisions by firms and households

 

The socialist countries thought they could replace the markets with the Plan. The plan was a poor substitute for the market economies’ billions of decisions that are made by firms and households every day. Households divide their income between consumption and savings and firms decide what to produce and how to produce it, just to mention a few of all decisions that are made. Firms and households are guided by changes in relative prices. Increasing prices of raw materials give firms incentives to economise, find substitutes and innovate. Over time this leads to a less resource intensive production. The communist regimes’ plans created perverse incentives that inhibited innovations, made quality improvements costly, cost reductions meaningless but encouraged waste. In the communist economic system where factors of production were not allocated and rewarded according to their productivity, the result could only be inefficiency, waste, shortages and, in the worst cases, ecological disasters.

And this hard-earned lesson by millions of people who were forced to live in such countries seems to be ignored by environmental activists such as Extinction Rebellion. Their visions of “assemblies” and increased democracy are doomed to fail in the same way as the socialist plans.

 

Growth saves lives and reduces poverty

 

Let’s move on the why intensive growth is better than no growth. To begin with, growth saves lives. The richer we are, the more money we can spend on things that prevent and mitigate the effects of natural disasters. And spending money on research has made it possible to save lives easier, faster and cheaper.  Extinction Rebellion and other climate hysterics claim that there will be large fatalities in the near future due to climate-induced natural disasters. That is simply not credible. Even though the world’s population has increased from 1.7 in 1990 to 7.7 billion 2018, the deaths caused by natural disasters have decreased significantly both in absolute and relative terms. And reducing poverty also saves lives. Escaping poverty means that you can live healthier and safer. That includes using methods to warm your house ways that are not only hurtful to your health but also to the environment. With access to electricity, people don’t need to cook by using solid fuels indoors.  The share of people in the world living in extreme poverty has decreased from 40% in 1981 to 10% in 2015. This development would not have been possible without growth, c.f. Figure 1.

Figure 1.  Annual death rates from natural disasters per 100, 000 of population 1990-2015 (left) and share of world population living in extreme poverty (right).

Source: Natural disasters. EM-DAT: The Emergency Events Database – Universite catholique de Louvain (UCL) – CRED, D. Guha-Sapir – http://www.emdat.be, Brussels, Belgium. Poverty. World bank. Note: Poverty headcount ratio at $1.90 a day is the percentage of the population living on less than $1.90 a day at 2011 international prices.

 

Growth has opened up farmland and made the earth greener by increasing forests

 

And technological advances have made it possible to use natural resources more effectively over time which means that we can produce more with less. As shown by for instance Jesse Ausubel , advances in agricultural production has de-coupled corn yields from farm land; since 1940 have American farmers have quintupled corn production while using the same or even fewer acres of land. And the increasing yields have been accomplished by fewer inputs such as fertilizers and other chemicals. The same goes for wood production. Forest areas are increasing. More efficient methods of harvesting and re-planting forests, substitution of other materials for wood in energy, construction, housing and more have contributed to this development. And the forces of demand and supply have led to similar developments for many types of inputs and materials, c.f. Figure 2.

Figure 2. Consumption of nine basic commodities in USA 1900-2010.

Source: Ausubel (2015) citing USGS National Mineral Information Center. https://www.usgs.gov/centers/nmic. Note: 1970=1.

 

Technological progress has also made it possible to economise on energy and resources by making goods smaller. An obvious example is smart phone, but also computers, satellites and medical equipment, just to mention a few categories of goods are smaller today. And who needs a stereo or DVD-player today, not to mention the VHS. That means that we need less resources to produce them, less material to pack them and less energy to transport them.

Adding to that, methods of transportation has also improved. Transportation has become more energy efficient and more goods can be transported than before. Containerization allows container ships to carry around 20 000 containers. Loading that on a train would be impossible since length of the train carriages would be some 120 km.  

 

And growth has made us more affluent today than ever before

 

Contrary to what dooms-day preachers have been telling us for decades, growth has not caused to run out of natural resources or energy. On the contrary, we are more affluent today than ever before even though the world’s population has increased. This can be illustrated by the Simon Abundancy Index which measures the change in abundancy of resources over time. The index takes into account both global population and the prices of 50 commodities important for human welfare. The price a commodity is expressed in terms of how long an average person in the world must work to afford one unit of the commodity in question. All 50 commodities have become more affordable since it was first calculated, in 1980. And at the same time has the World’s population increased by 71% from 4.4 billion. The aggregate Simon Abundance Index, which was set to 100 in 1980 and had increased to 620 in 2018, shows that abundance is around 5.2 times larger than in 1980, c.f. Figure 3.

Figure 3. The Simon Abundance Index 1980-2018.

Source: https://humanprogress.org/simonproject

 

Growth and higher incomes in a country also leads to a shift in demand towards more services. Why is that relevant? If you calculate each sector’s share of total carbon dioxide emissions you find that the share of sectors where services are included declines, c.f. Figure 4. 

Figure 4.  CO2 emissions by sector or source for the World.

Source: https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions#co2-emissions-by-sector Note:Descriptions of the data are found under the tab “Sources” beneath the chart on the website.

 

Another reason for a positive relationship between income and the share of services in the economy, is the higher productivity in the production of goods leads. This leads to lower relative prices for goods and thus a higher share of services in the economies. The important thing is that it is higher growth that accomplishes this.  

It may seem that I’m denying that growth leads to more CO2-emissions. That is not the case. CO2-emissions are higher in high-income countries. But with intensive growth, production becomes both less energy intensive (the amount of energy per dollar of GDP) and carbon intensive (the amount of CO2 per dollar of GDP). While energy intensity decreases with income, carbon intensity development is more complex, c.f. Figure 5.

Figure 5.  Energy and carbon intensities for the world, and countries with high, middle and low incomes.

Source: https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions#co2-intensity-of-economies, https://ourworldindata.org/energy-production-and-changing-energy-sources#energy-intensity-of-economies  Note:Descriptions of the data are found under the tab “Sources” beneath the chart on the website.

 

Carbon intensity across countries shows an inverted U-shape. It tends to first increase with income and then decrease as middle-income countries grew richer and become high income countries although there are large variations in carbon intensities across countries at similar income levels.

 

And de-coupling is possible

 

As already noted, increasing incomes raises consumption. But increased consumption per capita do not necessary lead to increased CO2 emissions. CO2 emissions per capita due to consumption or consumption-based emissions are calculated by tracking trade across the world.  Since much of the consumption is imported, this measure takes into account all CO2 emissions caused by the production of imports in other countries. Even though CO2 emissions are higher in richer countries, de-coupling is possible. Looking at some middle-income and high-income countries confirm that. The high-income countries Sweden and USA show declining CO2 emissions per capita. In the middle-income countries China and India, CO2 emissions are levelling in China while still increasing in India although not at the the same pace as GDP per capita, c.f. Figure 6.

Figur 6. GDP and consumption-based CO2 emissions in four countries 1990-2016

Source: GDP per capita is available for download at www.ggdc.net/pwt.  “The Next Generation of the Penn World Table” American Economic Review, 105(10), 3150-3182. Consumption based CO2 emissions per capita is available at https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions#per-capita-co2-emissions. Note: All series are shown as logs of an index, which equals 1.0 at 2000 so the series start at zero. Since the vertical axis is in log units, the slopes of the series are the rates of growth. An increase of 0.1 is a growth of 100*(exp(0.1)-1). 

 

Which is good news for people in Low- and Middle-Income countries where most of the poor people on the planet live.

 

The Chinese development shows that de-coupling is possible in countries which haven’t reached the High-Income status. This is very good news for other Middle-Income and Low-Income countries where most of the World’s poor people live. It means that by growth it is possible to both reduce poverty and the impact of growth on CO2-emissions if the right policies are implemented and state interventions provide the markets, i.e. firms and households with the right incentives. And that is possible according to many, including this, analyses.

 

Read more:

Ausubel, J., H., (2015). Nature rebounds. https://phe.rockefeller.edu/docs/Nature_Rebounds.pdf

Deep Decarbonization Pathways Project (2015). Pathways to deep decarbonization 2015 report,

SDSN – IDDRI. http://deepdecarbonization.org/wp-content/uploads/2016/03/DDPP_2015_REPORT.pdf

Hassler, J. et. al. (2018),  “The Consequences of Uncertainty: Climate Sensitivity and Economic Sensitivity to the Climate”, Annual Review of Economics, 2018

Hassler, J., & Krusell, P.  “The Climate and the Economy”, Mistra-SWECIA Report No 5.

Human progress. https://humanprogress.org/simonproject

McAfee, A., (2019). “Technology will keep us from running out of stuff”. Wired. https://www.wired.com/story/technology-will-keep-us-from-running-out-of-stuff/

Niemitz, K. (2019). Why ”overthrowing capitalism” would not avert climate change. Institute of Economic Affairs, https://iea.org.uk/why-overthrowing-capitalism-would-not-avert-climate-change/

Norberg, J., (2016). Progress. Ten reasons to look forward to the future. Oneworld Publications. London.

Pinker, S., (2018). Enlightenment Now. The case for reason, science, humanism and progress. Penguin Books. London.

https://ourworldindata.org/

 

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