Globalization has eradicated great power war, dedev reverses

No uniqueness—pollution and eco-footprint are lessening, ingenuity solves resources

But the report’s fundamental legacy remains: we have inherited a tendency to obsess over misguided remedies for largely trivial problems, while often ignoring big problems and sensible remedies.

In the early 1970’s, the flush of technological optimism was over, the Vietnam War was a disaster, societies were in turmoil, and economies were stagnating. Rachel Carson’s 1962 book Silent Spring had raised fears about pollution and launched the modern environmental movement; Paul Ehrlich’s 1968 title The Population Bomb said it all. The first Earth Day, in 1970, was deeply pessimistic.

The genius of The Limits to Growth was to fuse these worries with fears of running out of stuff. We were doomed, because too many people would consume too much. Even if our ingenuity bought us some time, we would end up killing the planet and ourselves with pollution. The only hope was to stop economic growth itself, cut consumption, recycle, and force people to have fewer children, stabilizing society at a significantly poorer level.

Instead, despite recent increases, commodity prices have generally fallen to about a third of their level 150 years ago. Technological innovations have replaced mercury in batteries, dental fillings, and thermometers: mercury consumption is down 98% and, by 2000, the price was down 90%. More broadly, since 1946, supplies of copper, aluminum, iron, and zinc have outstripped consumption, owing to the discovery of additional reserves and new technologies to extract them economically.

Similarly, oil and natural gas were to run out in 1990 and 1992, respectively; today, reserves of both are larger than they were in 1970, although we consume dramatically more. Within the past six years, shale gas alone has doubled potential gas resources in the United States and halved the price.

As for economic collapse, the Intergovernmental Panel on Climate Change estimates that global GDP per capita will increase 14-fold over this century and 24-fold in the developing world.

The Limits of Growth got it so wrong because its authors overlooked the greatest resource of all: our own resourcefulness. Population growth has been slowing since the late 1960’s. Food supply has not collapsed (1.5 billion hectares of arable land are being used, but another 2.7 billion hectares are in reserve). Malnourishment has dropped by more than half, from 35% of the world’s population to under 16%.

Nor are we choking on pollution. Whereas the Club of Rome imagined an idyllic past with no particulate air pollution and happy farmers, and a future strangled by belching smokestacks, reality is entirely the reverse.

In 1900, when the global human population was 1.5 billion, almost three million people – roughly one in 500 – died each year from air pollution, mostly from wretched indoor air. Today, the risk has receded to one death per 2,000 people. While pollution still kills more people than malaria does, the mortality rate is falling, not rising.

Nonetheless, the mindset nurtured by The Limits to Growth continues to shape popular and elite thinking.

Consider recycling, which is often just a feel-good gesture with little environmental benefit and significant cost. Paper, for example, typically comes from sustainable forests, not rainforests. The processing and government subsidies associated with recycling yield lower-quality paper to save a resource that is not threatened.

Likewise, fears of over-population framed self-destructive policies, such as China’s one-child policy and forced sterilization in India. And, while pesticides and other pollutants were seen to kill off perhaps half of humanity, well-regulated pesticides cause about 20 deaths each year in the US, whereas they have significant upsides in creating cheaper and more plentiful food.

Indeed, reliance solely on organic farming – a movement inspired by the pesticide fear – would cost more than $100 billion annually in the US. At 16% lower efficiency, current output would require another 65 million acres of farmland – an area more than half the size of California. Higher prices would reduce consumption of fruits and vegetables, causing myriad adverse health effects (including tens of thousands of additional cancer deaths per year).

Obsession with doom-and-gloom scenarios distracts us from the real global threats. Poverty is one of the greatest killers of all, while easily curable diseases still claim 15 million lives every year – 25% of all deaths.

The solution is economic growth. When lifted out of poverty, most people can afford to avoid infectious diseases. China has pulled more than 680 million people out of poverty in the last three decades, leading a worldwide poverty decline of almost a billion people. This has created massive improvements in health, longevity, and quality of life.

The four decades since The Limits of Growth have shown that we need more of it, not less. An expansion of trade, with estimated benefits exceeding $100 trillion annually toward the end of the century, would do thousands of times more good than timid feel-good policies that result from fear-mongering. But that requires abandoning an anti-growth mentality and using our enormous potential to create a brighter future.

Growth is sustainable and prevents pollution

Richard Hartman, O-Sung Kwon

a Department of Economics, University of Washington

b Korea Institute of Public Finance

Sustainable growth and the environmental Kuznets curve

Journal of Economic Dynamics and Control, Volume 29, Issue 10, October 2005, Pages 1701–1736

http://dx.doi.org/10.1016/j.jedc.2004.10.001, jj
6. Conclusion

We have analyzed an extension of the Uzawa–Lucas endogenous growth model that includes pollution and the possibility of pollution control. We found that economic growth is sustainable in the long run and that the model is consistent with an environmental Kuznets curve for realistic parameter values. In the long run it is optimal for human capital to grow more rapidly than physical capital, output, and consumption while pollution declines for realistic values of the elasticity of the marginal utility of consumption. For this model a competitive equilibrium is not Pareto efficient, but the optimum can be implemented with a pollution tax or with a voucher system. These results hold whether or not pollution accumulates, provided that the natural dissipation rate of pollution is not too small if pollution does accumulate.

With the major scientific issues in the debate over global warming having been resolved, attention has turned to the economics of climate change, and of stabilising the global climate. The release, in the UK, of Nicholas Stern's 2006 review of climate change had a powerful effect on public debate in Australia, an effect that was amplified by the recent interim report of economist Ross Garnaut's climate change review.

Coming from mainstream economists with a longstanding reputation for cautious policy judgements, these dire assessments of the impact of uncontrolled growth in emissions had a greater impact on many people than similar assessments offered by environmentalists or climate scientists.

Stern's pessimism on the consequences of doing nothing was matched by striking optimism regarding the cost and feasibility of stabilising the global climate. Stern concluded this could be achieved with carbon dioxide (CO2) equivalent concentrations of 550 parts per million (ppm)

Garnaut drew on more recent evidence to suggest that the safe level of emissions was actually 450 ppm and that rapid growth in China and India had already made the achievement of such a target difficult, if not impossible, in the absence of immediate action. Still Garnaut endorsed Stern's main point - the cost of stabilisation is far less than the cost of doing nothing.

The Stern review was controversial. Naturally, plenty was heard from the noisy, but rapidly shrinking, cohort who still deny the reality of the problem. But the main dissent from economists focused on Stern's estimates of the cost of doing nothing, and particularly his treatment of the way in which benefits and costs should be discounted.

The debate is complex and unlikely to be resolved soon. Fortunately, at least for anyone willing to accept the view that massive changes in the climate are a bad idea regardless of the economic number attached to them, the problems of discounting can safely be left to the professionals.

There was much less criticism of Stern's estimates of the cost of stabilising climate. Even the sharpest critics among economists only suggested that Stern's estimates were at the optimistic end of a plausible range, the upper limit of which might be 5 per cent of national income, or around two years worth of economic growth. That is, by 2050, a low-carbon economy might have the material living standards that would otherwise have been reached by 2048.

On the face of it this is a striking conclusion. We use energy in nearly everything we do, and it's widely assumed that a modern economy is dependent on cheap energy. Yet mainstream economists, even those most critical of the Kyoto Protocol on climate change, are unanimous in the view that we could greatly reduce emissions of CO2 while continuing to improve living standards at much the same rate as in the past.

Stern's optimistic view that CO2 emissions could be significantly reduced without a corresponding reduction in living standards is rejected by critics from two diametrically opposed positions. Although deeply hostile to each other, the two groups find surprising common ground.

The first are what might be called the Deep Green pessimists who see the end of consumer capitalism as both inevitable and desirable. At least since the reports of the Club of Rome in the 1970s, members of this group have argued that continued economic growth is inherently unsustainable.

The Club of Rome - a global thinktank - initially focused on claims that stocks of various mineral and energy resources would be exhausted within a few decades. But claims of this kind have been refuted by experience. Most mineral resources have actually become cheaper. Even in cases where prices have risen, the economic impact has been marginal, relative to the long-run trend of increasing income.

As a result, most Deep Greens now focus on limits to the capacity of the natural environment to support continued growth and assimilate waste products like CO2. Their central claim is that economic growth depends critically on the use of the natural environment as a dump for our waste products.

The mirror image of Deep Green pessimism is that of the Dark Brown pessimists who say we should do nothing to stabilise the climate because to do so will wreck our standards of living. Dark Brown commentators from thinktanks like the Washington based Competitive Enterprise Institute warn of ruinous economic consequences from even modest first steps such as the implementation of the Kyoto Protocol.

As with the Deep Greens, the Dark Brown school must be distinguished from participants in the climate change debate, such as US economist William Nordhaus, who recognise the necessity for large scale mitigation, but argue for a slower pace of initial action than is implied by the Kyoto process. Whatever the merits of this argument, it is driven by beliefs about relative costs and benefits, rather than an assumed fundamental conflict between the environment and the economy.

The track record of Dark Brown pessimists is no better than that of the Deep Greens. Time after time, Dark Browns have opposed environmental improvements as too costly, repeatedly overestimating the costs and underestimating the benefits.

The debate over chlorofluorocarbons (CFCs) and damage to the ozone layer provides a good example, since it was one of the first issues to be addressed on a global scale. The doomsayers repeatedly attacked both the science behind a proposed ban on CFCs and the economics of such a policy, claiming it would cause massive economic damage. In reality the 1989 Montreal Protocol phasing out CFCs had no discernable negative impact on global growth, and may even have benefitted some countries.

Although many Dark Browns got their start in the CFC debate, there have been some new entrants to the camp. For example, Denmark's Bj rn Lomborg has taken up the mantle of the late economist Julian Simon, repackaging Simon's arguments with some success. In political terms, in the US, the Dark Browns have become aligned with the Republican Party establishment in a way that wasn't true when president Richard Nixon signed the Clean Air Act in 1970. But the central arguments haven't changed.

Both the Deep Greens and the Dark Browns engage in a fair bit of wishful thinking about their positions. But their opposing claims are secondary to the shared presumption that economic growth depends on increasing exploitation of the natural environment and, in particular, on the burning of fossil fuels.

Underlying both positions is a fundamental misunderstanding of the nature of economic progress and of economic activity in a modern society. The concept of economic growth is so firmly embedded in our thinking that we forget it is just a metaphor. The idea of growth implies physical expansion, and any process of physical expansion has limits.

Economists have contributed to these misunderstandings. The traditional model of economic growth is based on the accumulation of capital equipment, capable of converting an ever-larger volume of natural resources into physical products for human consumption.

Such a model leads naturally to the conclusion that economic growth cannot continue indefinitely. The classical economists of the 19th century, beginning with Thomas Malthus, were the first to reach this conclusion, which they phrased in terms of the idea of diminishing returns.

The central Malthusian theme is most easily seen in terms of agriculture. The output of a given piece of land can be improved by the application of fertiliser, the use of more agricultural machinery and more labour. Initially the returns to such increases in intensity may be high. But the total amount that can be grown on a given plot of land is bounded, and eventually the benefit of additional inputs must decline or become negative.

The same logic applies in industrial capitalism. Productivity can be increased by investing in more capital equipment, but if the labour force is held fixed, the marginal return to additional investment must eventually decline. It was this that led the classical economists (including Karl Marx) to talk about the inevitability of a declining rate of profit.

Long experience of sustained growth suggested that the classical economists were missing something. For a long time, growth models were made to fit the economist's ideas by adding an unexplained and exogenous source of growth called technological change, but this was always unsatisfactory. Technological change is itself the product of economic activity, and therefore subject to the same logic of diminishing returns. Something was missing.

It has gradually been recognised that the missing ingredient was information, embodied in technological improvements and in the minds of skilled and educated workers. Unlike physical inputs to production, information is not subject to diminishing returns. In economic terms it has the fundamental characteristic of a public good referred to by economists as non-rivalry. That is use by one person does not diminish its availability to other. Once some piece of information, such as an improved way of producing a good or service is discovered, it can be used and reused indefinitely. This insight led to the development of an "endogenous growth theory" as opposed to older theories of growth based on exogenous technological change.

The public-good nature of information explains how economic progress can continue without additional resources. Most obviously, improvements in information technology allow more and faster communication which in turn allows for yet more technological improvements. There is no apparent indication of diminishing marginal returns in this field; if anything the opposite.

What is true of health care is even more true of education, the information service par excellence. The only limit to the capacity for education is the capacity of the human mind. And while once it was argued that this was limited enough to mean that more extensive education should be confined to an elite few, these supposedly tight limits have regularly been broken. High school completion, once a rarity except for the upper-middle class is now the norm, and the numbers of students going on to universities have increased massively. And even so, the demand for educated workers, and for more skilled workers of all kinds, continues to outpace the supply.

That is, there is nothing in the nature of economic progress in a modern society that inherently requires increased volumes of physical output. Most growth will occur in activities where information is the crucial factor. It might be argued, that since energy is essential to all of these activities, so a reduction in energy use must bring growth to a halt. The first part of this claim is true, but the second is false.

The most common problem with so called energy fundamentalism is the failure to understand prices. As the economist Friedrich Hayek observed long ago prices are the critical information generated by a market economy. Even where explicit prices are not present, for example within firms and government agencies, increasing scarcity of any resource is reflected in higher implicit prices.

Before considering the future, we can use prices to assess the importance of energy in existing activity and the extent to which our current prosperity depends on readily available supplies of cheap energy.

At current prices, primary energy accounts for less than 5 per cent of total expenditure in the economy. An immediate implication is that a doubling of the cost of primary energy, arising from a switch to more expensive sources (like solar-thermal) could cost no more than an additional 5 per cent of national income.

But even this is a substantial overestimate. An increase in the cost of carbon emissions would provide signals to users, from energy suppliers to industry to final consumers, of the need to become more efficient in using energy. Decades of cheap energy have produced a system characterised by inefficiencies at every stage of the process from production to final consumption.

Where the scope for efficiency improvement is limited, prices will signal the fact that some kinds of consumption are more costly than others. Consumers will respond, as they always have done, by changing consumption patterns to favour items that are relatively cheaper. Of course, this will entail social change, but relative prices change all the time, in many cases by much more than the likely change in energy prices. The plummeting cost of computers and the rapidly rising cost of healthcare are two examples.

Taking account of efficiency improvements and substitution effects, it seems reasonable to suppose that a doubling of energy prices over a long period would reduce average income by no more than 2 to 3 per cent.

Optimists like Stern can easily justify a lower number on the basis of plausible estimates of potential efficiency improvements and the like. Pessimists can argue for higher numbers. But even the most pessimistic cost estimates of economists are an order of magnitude away from those offered or implied by the Deep Green and Dark Brown doomsayers.

Would a doubling of energy prices be sufficient to permit a switch to a low-emission or zero-emission technology over several decades? As far as electrical energy is concerned, almost certainly it would be. Some renewable sources of electricity, such as wind, are already competitive in many locations at existing prices or with a modest subsidy. With a substantial further increase in prices, output from these sources would rise. Other energy sources including geothermal energy and, assuming safety concerns can be resolved, nuclear energy would become competitive, as would long-distance transmission lines which would permit more effective use of existing sources of renewable energy.

A doubling of prices would also provide incentives for innovation in a range of technologies including solar photovoltaics, solar thermal and carbon capture and sequestration. It's unlikely that all of these technologies will turn out to be economically feasible, but it's equally unlikely that none of them will.

As far as transport is concerned, the rise in oil prices over the past five years has already converted the purchase of fuel-efficient hybrid cars from a piece of conspicuous environmentalism to an economically sensible choice. It will take a long time for carmakers to retool their systems, and some laggards will surely fail along the way, but a shift towards hybrids is inevitable in the long run. A further substantial increase in the cost of carbon emissions will encourage a move towards plug-in hybrids and then to electric or fuel-cell vehicles powered by renewable sources.

Of course, it would be mistake to leave prices to do all the work. The case of lighting provides an obvious example. Lighting accounts for around 17.5 per cent of global electricity use. According to the International Energy Agency, using compact-fluorescent and other low energy lamps in place of their incandescent predecessors would reduce global lighting demand by up to 40 per cent. More gains could be made by improving installations and using automatic controls.

All these steps make economic sense even at current prices, but for a variety of reasons the switch has been slow to take place. In such circumstances, it makes sense for governments to give the market a push, by developing standards and, if necessary, announcing a phase-out date for incandescent light globes, as has been done in Australia. What is needed is a clear commitment reflected both in the price we pay for energy and in a broad range of public policy settings.

In the long run only an international agreement embracing all major countries will suffice. And the search for such an agreement is stalled until the world's heaviest energy consumer, the US, joins other nations already well down that path. The successor to US President George Bush will face the task of turning US policy around and then achieving an international compact that includes developing countries like China and India.