David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 26 Economic growth
The zero-growth proposal
argues that, because higher
measured GNP imposes
environmental costs, it is best
to a im for zero growth of
measured GNP.
The full implementation of such a policy would (optimally) reduce the growth of
measured GNP below the rate where there is no restriction on activities such as
pollution and congestion. And this is the most sensible way in which to approach
the problem. It tackles the issue directly. In contrast, the zero-growth solution is
a blunt instrument.
The zero-growth approach fails to distinguish between measured outputs accompanied
by social costs and measured outputs without additional social costs. It does not
provide the correct incentives. The principle of targeting, a key insight of the welfare economics discussed
in Part Three, suggests that it is more efficient to tackle a problem directly than to adopt an indirect
approach that distorts other aspects of production or consumption. Thus, when there is too much pollution,
congestion, environmental damage or stress, the best solution is to provide incentives that directly reduce
these phenomena. Restricting growth in measured output is a crude alternative, distinctly second best.
Some problems might evaporate if economists and statisticians could measure true GNP more accurately,
including the 'quality of life' activities (clean air, environmental beauty, sustainable climate and so on) that
yield consumption benefits but at present are omitted from measured GNP. Voters and commentators
assess government performance against measurable statistics. A better measure of GNP might remove
perceived conflicts between measured output and the quality of life.
This is also a good way to address 'sustainable growth: At present, Mediterranean beauty spots become
concrete jungles of hotels and bars; once the environment is spoiled, upmarket tourists move on to
somewhere else. An economist's advice, however, is not to abandon being a tourist destination, but to keep
track of environmental depreciation and only engage in activities that show a clear return after proper
costing of environmental and other damage. Embodying these costings in actual charges also provides the
market incentive to look after the environment.
This also provides the answer to those who argue that tackling climate change will hamper economic
growth. Growth of what? The subset of outputs that are traded anyway, and hence easily measured? Just as
we want congestion charging to reduce some outputs (rush-hour traffic), we want environmental pricing
to reduce some activities (greenhouse gas emissions, lax building insulation). In both cases, the objective
is to get aggregate output, properly measured, to increase!
No matter how complete the framework, the assessment of the desirable growth rate will always be a
normative question hinging on the value judgements of the assessor. Switching resources from consumption,
however defined, to investment will nearly always reduce the welfare of people today but allow greater
welfare for people tomorrow. Nowhere is this clearer than in the speed with which we try to deal with
climate change. More sacrifice today will make life easier tomorrow; less sacrifice today will compound the
problems for our children's children. The priority attached to satisfying wants of people at different points
in time is always a value judgement.
Summary
• Economic growth is the percentage annual increase in real GNP or per capita real GNP in the long run.
It is an imperfect measure of the rate of increase of economic well-being.
• Measured GNP omits the value of leisure and of untraded goods and bads that have an impact on the
quality oflife. Differences in income distribution make per capita real GNP a shaky basis for comparisons
of the welfare of the typical individual in different countries.
• Significant rates of growth of per capita GNP occurred only in the last two centuries in the advanced
economies. In other countries persistent growth is even more recent.
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