GDP growth: an inevitable lock-in?

Simone D’Alessandro, Tommaso Luzzati, Mario Morroni

Dipartimento di Scienze Economiche – Università di Pisa

tluzzati@ec.unipi.it

First International Degrowth ConferenceParis 18-19 April 2008

Dou we need GDP growth? Alleged reasons

1) An increase of income per capita is regarded as a widening of the set of choices available to individuals. Therefore it is seen as an increase in individual freedom of choice.

2) Equity: a) intragenerational: increasing GDP reduces conflicts in income distribution, facilitates redistribution policies and the provision of public goods. b) intergenerational: how to cope with population ageing and the provision of pensions and social services fo the elderly.

3) Unemployment:

a) to contrast a labour saving technical change and avoid decreasing employment levels. If GDP increases less than productivity, the number of employees decreases possibly increasing unemployment.  

b) the main Keynesian recipe for decreasing unemployment has been the increase in the equilibrium level of income. In fact demand for labour derives from the demand for goods and services. An increase in the demand for goods and services determines a rise in employment and a consequent decrease in unemployment (if the elasticity of employment in relation to output is positive).

4) Dynamic efficiency : firms tend to invest in technical change, which enhances competitiveness, if they forecast an increase in demand of the goods and service they supply.GDP growth provides resources for basic research and R&D.

Growth as a Nercessary Condition for Social/Political Consensus

No need for telling here reasons against GDP growth

(after a given threshold?) !

Social costs of GDPand the breaking up of the relation

between GDP & welfare

Against GDP? Against growth? Against growthmania?

"We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods. We cannot measure national spirit by the Dow Jones Average, nor national achievement by the gross national

product. For the gross national product includes air pollution and advertising for cigarettes, and ambulances to clear our

highway carnage. It counts special locks for our doors, and jails for the people who break them. The gross national product

includes the destruction of the redwoods, and the death of Lake Superior. It grows with the production of napalm and

missiles and nuclear warheads . . . It includes Whitman's rifle and Speck's knife, and the broadcasting of television

programs which glorify violence to sell goods to our country."

"And if the gross national product includes all this, there is much that it does not comprehend. It does not allow for the health of our families, the quality of their education or the joy of

their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of public officials . . . the gross

national product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our

devotion to our country. It measures everything, in short, except that which makes life worthwhile; and it can tell us everything

about America -- except whether we are proud to be Americans.

Speech by Robert Kennedy, March 18, 1968, University of Kansas

Main arguments

We model an economy that produces with funds and flows which are complementary.

(1) Y(t) = min ( AK(t) , e(t)E(t) ) K capital stock A>0E energy flow, e energy efficiency e >0, e [e0, eM ) , e'>0

Main arguments

Our exercise starts (t=0) when the issue of exhaustion of fossil fuels enter the agenda.

Before t=0 non-renewables energy sources were largely abundant ; renewables were biomasses harvested at a rate higher than the regeneration rate since the stock was large. The economy, GDP, consumption and investment, grew at positive rates, i.e. exponentially.

At t=0 our society would like to invest in renewable energy sources, both in terms of research and development and of installation of renewable energy capacityR.

The reason is to start replacing fossil fuels so to avoid, if possible, energy shortages when, at time t, the production of non-renewable energy will stop to have positive net energetic yield («accessible » in Georgescu terms).

How should our society invest in R?

Two polar cases, either the society takes the resources from the investment in capital (included human capital, knowledge,…) or from consumption.

FIRST: part of the investments in capital are diverted towards renewables.

IR(t) = (1- (t)) (Y(t)-C(t)) (t) quota of investments diverted to

renewables.How much has to be diverted? What will be the

consequences?

Since the investment in capital affects the economy growth rate, the quota destined to investments in capital should be rather high: a relatively high growth rate, will make the absolute amount of investment in R high even if this is small in relative terms, i.e., as compared to total investments.

IR(t) = (1- (t)) (Y(t)-C(t)) (t) = quota of investments diverted to renewables.

At the same time higher rates of growth will make more rapid the fossil fuel extraction, so that our society will have less time to accumulate R.

In synthesis higher (t) higher growth in R however and t

closelower (t) lower growth in R however t far away

This suggests that the range of available choices of f(t) is tiny, or even void. As a consequence it might be difficult to induce investments to make the accumulated R at t to

be enough to avoid energy shortage. If this condition is not met, capital would become unemployed and income drop.The amount of the energy shortage affects the long run outcome.if the gap is small enough to make the economy to be able to replace most/all of the

depreciated investments, without squeezing too much consumption, then the economy could enter a path that goes to a relatively high level of income in the long run or even enter a path of constant growth;

otherwise the economy will start to decumulate and enter a path leading to a low level income in the long run.

Long-Run Income

1,100

825

550

275

0

0 150 300 450 600 750 900 1050 1200 1350 1500 1650 1800 1950 2100 2250 2400 2550 2700 2850 3000Time (Year)

8.5% GDP in Renewables8.44% GDP in Renewables7,6% GDP in Renewables

6% GDP in Renewables2% GDP in Renewables

This suggests that the range of available choices of f(t) is tiny, or even void. As a consequence it might be difficult to induce investments to make the accumulated R at t to

be enough to avoid energy shortage. If this condition is not met, capital would become unemployed and income drop.The amount of the energy shortage affects the long run outcome.if the gap is small enough to make the economy to be able to replace most/all of the

depreciated investments, without squeezing too much consumption, then the economy could enter a path that goes to a relatively high level of income in the long run or even enter a path of constant growth;

otherwise the economy will start to decumulate and enter a path leading to a low level income in the long run.

Short-Run Income

1,100

825

550

275

0

0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400Time (Year)

8.5% GDP in Renewables8.44% GDP in Renewables7,6% GDP in Renewables

6% GDP in Renewables2% GDP in Renewables

“Installed” Capacity of Renewable ResourcesRenewables (Installed Capacity)

550

412.5

275

137.5

0

0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 380 400Time (Year)

8.5% GDP in Renewables8.44% GDP in Renewables7.6% GDP in Renewables

6% GDP in Renewables2% GDP in Renewables

• Why the path to sustainability is so narrow, or even non-existent ?

Just because our economy choose to let the macroeconomic aggregates to grow at a constant rate in the period from 0 to t. Consumption has grown exponentially until non-renewables “end”.

• Therefore, let us consider an alternative strategy, a strategy that considers consumption at t=0 as satisficing  so that income growth goes entirely to finance investment in capital and in renewables. Obvioulsy the path towards sustainability is much more wider so that it is easier to enter the path towards steady states with relatively high consumptions.

Fixed Consumption

500

375

250

125

0

0 150 300 450 600 750 900 1050 1200 1350 1500 1650 1800 1950 2100 2250 2400 2550 2700 2850 3000Time (Year)

Initial ConsumptionMinimum Level of Consumption

Optimal Level of ConsumptionToo High Consumption

Three Different Strategies

600

450

300

150

0

0 150 300 450 600 750 900 1050 1200 1350 1500 1650 1800 1950 2100 2250 2400 2550 2700 2850 3000Time (Year)

7,44% of GDPFrom 2% to 10% in Few Years

Stop Growth

Further specifications of our modelWe assume that :a) a logistic learning curve exists for accumulating in R. In other

words, for low levels of accumulated investments investment in R causes low increases of R ; for R sufficiently high, the return of investment increases quickly with R leading to a mature stage in which the return tends to an upper bound.

b) the accumulated investments in R depreciate at a lower rate than ordinary capital.

c) that energy efficiency improves with time according to an exogenous logistic process.

Under these assumptions, which are made merely because the seem plausible, the « end » of non-renewables should not be too early in order to exploit progress in energy efficiency. At the same time it is important to invest quickly enough in R in order to enter the take off stage in R technology before the « end «  of non renewables. For this purpose growth is important since it makes resources available for investment in R technology.

For the sake of simplicity, we assumed that exponential growth is

impossible and that in the long run income converges to a STEADY STATE values.

Parameters used to simulate our model are set accordingly, that is, by imposing that

a) the energy(material) efficiency is limited from above, in other words, a unit of energy cannot « produce » more than a maximum amount of GDP.

b) the investment in renewable energy has decreasing returns in its accumulation process ( f( )<1 in eq. 6).

Both conditions seems to us plausible.

This paper does not tackle the welfare effects of GDP growth.

Of course we are conscious that sever limits to the working of our society come from the waste-side of the story.

We are at risk of poisoning ourselves in a process where consumption is not anymore welfare enhancing.

This can be used as a sound reason for policies favouring substitution of growth in consumptions with growing investments in renewables as suggested above. This would widen the narrow path towards sustainability.

THE MODEL

Goods production

(1) Y(t) = min ( AK(t) , (t)E(t) )

K capital stock A>0

E energy flow, energy efficiency >0, [) , '>0

Capital accumulation

(2) K = IK(t) – KK(t) IKinvestment in CapitalKcapital depreciation rate

Energy

(3) E(t)=Q(t)+H(t)

Q use/production of non renewable energy sources

H use/production of renewable energy sources

Non renewable extraction

(4) Q(t) = –X(1/X(t))

where >0 and /Xunitary physical extraction cost XNonRenewable stock

Q(t)> 0 iff /X(t)<1 i.e. energy cost<energy production

from (4)

(4bis) X = – Q(t) [1+/(X(t)]

Use of renewables

(5) H(t) = hR(t) h>0 R stock of installed capacity

(6) R = IR(t) f(R(t)) – R [R(t)-R(0)] IRinvestment in renewables Rrenewables depreciation

rate

(7) f (R(t))= +/ [1e R(t)]

f (R(t)) is a logistic function : the productivity of the investment in renewables increases logistically with the accumulated stock. The inital level of stock R(0) does not deteriorate due to the natural reproduction processes (R(0)biomass)

Behaviour

Consumption and investment:

Decision variables :

C(t) consumption , (t) proportion of savings invested in capital

(8) C(t) Y(t)

(9) IK(t) = (t)(Y(t)-C(t))

(10) IR(t) = (1(t)) (Y(t)-C(t))

(Y=C+ IK +IR)

Production:

Technical efficiency : (t)E(t) = AK(t)

Efficiency attained

A) through the control of non-renewable energy FLOWS (Short-term/myopic efficiency), i.e.

the economy extracts exactly the needed amount of non renewable energy, provided the stock of NRs is enough.

(11) Q(t) = AK(t)/(t) H(t) if AK(t)/(t)H(t), else Q(t)=0 (no NRs needed)

and if X X, that is if Q<(X) (from eq. 4),

otherwise efficiency cannot be attained since accessible NRs are exhausted

Q(t): X(t+1)=i.e. Q=(X-)2/X<Qdesired AK>E

B) (long-term efficiency) through the control of the accumulation process of both Capital and Renewable capacity (i.e. the choice of Investments and their ripartition ) so that

(t)E(t) = AK(t) t (even if X=0)

Some related references• MAYUMI, K., GOWDY, J.M. (eds) (1999), Bioeconomics and Sustainability., Edward Elgar, Cheltenham.

• BONAIUTI, M. (2004), Obiettivo decrescita, EMI, .• DALY, H.E. (1979), "Entropy, growth, and the political economy of scarcity", in Smith V.K. (ed.), Scarcity and Growth

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Roegen, Nagard, Roma, second ed. 1991.• DYKE, C. (1994), "From entropy to economy: a theory path", in P. Burley and J. Foster (eds), Economics and

Thermodynamics, Kluwer Academic Publishers, Dordrecht.• FABER, M., NIEMES, H., STEPHAN, G. (1987), Entropy, Environment and Resources: An Essay in Physico-Economics,

Springer-Verlag, Heidelberg, trans. from German by I. Pellenghar.• FARRELL, K.N., MAYUMI, K. (2007), "Electricity Futures: an application of Nicholas Georgescu-Roegen's general theory of

economic production", , .• FUNTOWICZ, S., O'CONNOR, M. (1999), "The passage from entropy to thermodynamic indeterminacy: a social and

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• GEORGESCU-ROEGEN, . (1998), Energia e miti economici, Bollati Boringhieri, Torino.• GEORGESCU-ROEGEN, N. (1979), "Comments on the papers by Daly and Stiglitz", in Smith V.K. (ed.), Scarcity and

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Cecioni con Introduzione di S. Zamagni, Energia e miti economici, Boringhieri, Torino, 1982.• GIAMPIETRO, M., PASTORE, G. (1999), "Biophisical roots of 'enjoiment of life' according to Georgescu-Roegen's

bioeconomic paradigm", in Mayumi K. Gowdy J.M., Bioeconomics and Sustainability, Edward Elgar, Cheltenham, pp. 287-325.

• KHALIL, E.L. (1990), "Entropy law and exhaustion of natural resources: is Nicholas Georgescu-Roegen's paradigm defensible?", Ecological Economics, n. 2.

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solar technology", in Mayumi K. Gowdy J.M., Bioeconomics and Sustainability, Edward Elgar, Cheltenham, pp. 173-193.• MIERNYK, W.H. (1999), "Economic grought theory and dthe Georgescu-Roegen paradigm", in Mayumi K. Gowdy J.M.,

Bioeconomics and Sustainability, Edward Elgar, Cheltenham, pp. 69-81.• MIROWSKI, P. (1992), "Nicholas Georgescu-Roegen", in W.J. Samuels (ed.), New Horizons ..., Elgar, Aldershot.• MOLESTI, R. (1993), "The scientific fundamentals of environmental economy: the work of Nicholas Georgescu-Roegen", in

J.C. Dragan et al. (eds), , 38-47, .• MUSU, I. (1995), "Il problema dell'ambiente nella teoria economica contemporanea", in R. Molesti (ed), , , Pisa.• STIGLITZ, J.E. (1997), "Reply. Georgescu-Roegen versus Solow/Stiglitz", Ecological Economics, 22, pp. 269-270.• WADE, H. (1975), "Nicholas Georgescu-Roegen: entropy the measure of economic man", Science, October.• ZAMBERLAN, S. (2006), "L'entropia come fondamento dell'economia nel pensiero di Nicolas Georgescu-Roegen", Il

Pensiero Economico Moderno, XXVI, n. 1, gennaio-marzo, pp. 37-62.

Some related references• GDP Growth

MISHAN, E.J. (1967), The Costs of Economic Growth, Staple Press, London.

AUDRETSCH, D.B. (2007), "Entrepreneurship capital and economic growth", Oxford Review of Economic Policy, 23, n. 1, Spring.

BONAIUTI, M. (2004), Obiettivo decrescita, EMI, .LATOUCHE, A. (2006), Le pari del la decroissance, Librairie Arthme

Fayard, trad. it. di m. Schianchi, La scommessa della decrescita, Feltrinelli, Milano 2007.

MIERNYK, W.H. (1999), "Economic grought theory and the Georgescu-Roegen paradigm", in Mayumi K. Gowdy J.M., Bioeconomics and Sustainability, Edward Elgar, Cheltenham, pp. 69-81.

SOLOW, R.M. (2007), "The last 50 years in growth theory and the next 10", Oxford Review of Economic Policy, 23, n. 1, Spring.

WIESER, R. (2005), "Research and development productivity and spillovers: Empirical evidence at the firm level", Journal of Economic Surveys.

THANKS FOR YOUR PATIENCE !