concept of economic growth is used to advance various agendas,
sometimes as an excuse for conservative economic policies, sometimes
as an argument to consume less. The term "economic growth" can be
useful, but only if one properly defines what it is that is growing.
When people become richer because they steal from a bank, one
shouldn’t add the thieves' riches to the gross domestic product.
When resources like soil, forests or oil are used up , the
GDP allegedly goes up. On the other hand, when a
computer the size of a room can fit into a small briefcase, this
shrinkage can also be called growth. How can we construct a more
useful concept of economic growth?
The Grand Illusion
As usual, mainstream economics only muddies the picture. Despite what most people are
led to believe, for all intents and purposes, neoclassical economics
has no theory of economic growth Robert Solow received a Nobel
Prize in Economics for explaining economic growth, but his theory
actually explains why technological change is responsible for most
economic growth, and since neoclassical
economics cannot explain technological change, well, how
The main problem for neoclassical economists in attempting to
explain growth is that the basic theory used for explaining changes
in production is an explanation of the decline of
production, called the theory of diminishing returns. It is
impossible to explain how something grows if all you have is a
theory explaining how something decreases. The reason economists
stick with the principle of diminishing returns is that this
principle allows them to tell a story about how prices
are determined, not how economic growth happens; and it allows
economists to advance the fairy tale that people receive the wages
and salaries commensurate with what they contribute to national
Back in 1899, the eminent economist John Bates Clark, along with
his colleagues, was facing the problem of beating back the claim by
Karl Marx and others that in a good society, each person should
receive income according to their needs, or at the very least,
according to their contribution to society. Clark solved this
problem by asserting that every person already receives
that which they contribute. Today, when CEO's make
hundreds of times the annual salary of most of their workers, the
heirs to John Bates Clark's theory use this line of defense. But
Clark’s idea, called marginal productivity, which undergirds the
theory of economic growth as well, is the result of carrying what
initially seems a reasonable mental exercise to absurd lengths.
The theory of diminishing returns (and marginal productivity) is
an example of arguing by using only a part of an analogy. , the
inventor of the principle of diminishing returns, used the cutting
edge of ecological theory of the time and noted that when one
"factor of production" -- in his case, land -- is held constant, and
another "factor of production" – labor -- is expanded, the addition
of more labor leads to smaller and smaller additions to total
output. Similarly, in an ecosystem, if one has, say, a prairie, and
one adds, for instance, more and more deer, eventually the deer will
have less and less grass for each deer. Ricardo's rival in economic
thought at the time, Thomas Malthus, was making a name for himself
by emphasizing the possibility that humans were like deer and
feeding the poor would soon lead to a massive die-off of the
Ricardo, instead of using the analogy of the ecosystem in order
to understand more about production in an economy, simply stopped at this one
mechanism of diminishing returns. The reason his principle works
well for determining price is exactly because each additional
person's contribution is diminishing , so that at some point,
the cost to the entrepreneur/capitalist of hiring an additional
person just equals the contribution that the additional person makes
to the enterprise. The entrepreneur stops hiring, everybody receives
a salary or wage that is pretty close to this final
“contribution”, the CEO can claim that he/she receives
compensation in the same way, and economists can maintain that we
live in the best of all possible worlds.
No there there
But that leaves the sticky problem of economic growth.
Historically, labor has received about two-thirds to three-quarters
of the national revenue, and capital the rest. So according to the
theory, labor must be contributing two-thirds to three-quarters of
the wealth. When growth occurs, then, it must be the case that labor
accounts for this same fraction, that the amount of time that people
work has increased by enough to account for growth. But over the
past century, even though the GDP has increased about 13 times from
1929-2005, the total number of hours
worked in the U.S. has remained fairly constant. On the other hand,
the amount of capital fixed assets has gone up almost nine times. In fact, total capital
assets have pretty much tracked total GDP; in econo-speak, the
capital-output ratio has remained pretty constant. But since labor's
"contribution" is much larger than capital's, capital should not be
the determining factor in growth, even though it certainly looks
U.S. capital to output ratio, 1929-2005
As the dean of American economists, Paul Samuelson, notes about
this paradox, "A steady profit rate [that is, share of capital in
national income] and a steady capital-output ratio are incompatible
with the more basic law of diminishing returns under deepening of
capital. We are forced, therefore, to introduce technical
innovations into our statical neoclassical analysis to
explain these dynamic facts".
Notice that since the law of diminishing returns is "more basic"
than reality, reality is jettisoned, the use of the law of
diminishing returns in calculating economic growth is retained, and
a deus ex machina, called technological innovation, is "introduced".
Thus was neoclassical economics a part of a faith-based ideology
long before George W. Bush had even stopped drinking.
Neoclassical economics cannot handle the concept of capital, and
thus it cannot explain economic growth. However, conservative
politicians still use the term "economic growth" in order to justify
"free market" policies, not because they are relying on a
neoclassical theory of growth, but because they are retreating to
the even “more basic” principle of short-term economic models, that
everybody’s welfare is maximized if the market is perfectly “free”.
Within the international economy, Bill Clinton and other
conservatives use the concept of free trade as a proxy for economic
growth; the theory of free trade is basically an extension of the
short-term model of a competitive market. Every time you hear a
policy justified by the term “economic growth”, remember that there
is no there there.
The only substantive use of the term “economic growth” is as a
measure of the flow of goods and services in an economy, compared
from year to year. Thus economists are relieved of the
responsibility of accounting for the capital that creates
those goods and services. In other words, even if flows have
increased because people have been robbing banks, ecological or
industrial, it looks like the economy is expanding.
In order to begin to construct a useful concept of economic
growth, we need to first establish a better way to measure it. We
should be measuring the capital, or assets, that is, the
wealth-generating components of the economy, not the flow of goods
and services, as an indicator of economy-wide wealth. The emphasis on flows was
developed during the Great Depression, because Keynes pointed out
that sometimes an economy gets stuck at a low level because the
flows tail off, even if the capital/wealth-producing base is doing
just fine. But now we have a different problem.
present era is characterized by the effects of creating flows of
goods and services by using up the human and natural
capital that is needed to create those goods and services. In the
case of United States manufacturing, the process has been the
equivalent of milking a factory by producing goods while spending no
money keeping the factory in operating condition, a process that the
steel companies perfected in the 1970s and 1980s. In
accounting-speak, there was depreciation with no depreciation
account that could be used to replace the worn-out machinery.
Multinational corporations milked their factories, made huge
profits, used the profits to build factories abroad, and have
allowed the manufacturing sector of the U.S. to decline and approach
a collapse. The military-industrial complex siphoned off the best
and brightest from the manufacturing sector, as well as trillions of
dollars worth of resources, while giving nothing back in return.
The central exhibit in this orgy of capital consumption has been
fossil fuels, which accumulated over millions of years and will have
been used up at the end of a couple of centuries. The only way to
use fossil fuels sustainably would be to use them to create a
renewable energy infrastructure of wind, solar, geothermal, and
hydro power, a pile of capital that would replace the pools of oil,
mountains of coal, and caverns of natural gas as the components of
the energy infrastructure.
We should be measuring growth by measuring the increase in
wealth-generating capital from year to year, perhaps replacing GDP
with Gross Domestic Capital. If a factory is constructed, growth
increases; if oil is used, wealth has declined. If soil is added to
an area, wealth grows; if soil blows away, we are poorer. We could
even extend this concept to people, perhaps in a separate gross
domestic human capital index: when people become healthier, wealth
goes up, when they become sick or injured or die, wealth goes down.
When people get an education, or spend more time in a skilled job,
wealth goes up; when they are fired and can't find work or find
lower skilled work, wealth goes down.
However, the problem of growth is not simply the problem of
counting the wrong phenomena. We should set up democratic social
structures that will help natural, human, and machinery capital to
bloom. We need a way to change power and ownership in the society.
Two ways of doing so are to encourage employee ownership and
control, and public ownership and control.
Employee ownership and control would give power to people who
live in the vicinity of the firm. Because they live in a particular
place, the people so empowered would seek to create economic wealth
in a way that was compatible with the long-term sustainability of
the resources and capital of their area. In addition, the goal of
the firm would broaden from a single-minded devotion to maximum
profit to the expansion of the decision-making power of the top
executives of the firm. Thus, such firms might be able to ignore
Marx's famous dictum that capitalists must accumulate or die, and
they might avoid the worst of what Murray Bookchin called
“uncontrollable growth”. In a firm in which the
employees are in control, the greatest imperative is the long-term
health and well-being of the company.
Public ownership and control, preferably at the local level,
would also push the economic system toward a sustainable course, as
long as government officials could not profit in any way from public
control. After all, the land, soil, forests, rivers and flora and
fauna on the soil, and the resources below it, are the common
resources of humanity that are needed for survival. New Orleans and
Louisiana are examples of areas that have not reaped the rewards of
the oil and gas in their territories. When ownership of land leads
to power, as it usually does, it also leads to concentration of
power in a positive-feedback loop that often ends in tyranny.
The nature of public control of the economy has been debated for
centuries, with neoclassical economics forming the basis of the
conservative assault on government. But governments have always
controlled much of the physical infrastructure, and have also
generally planned the changes in urban structure – thus the term,
“urban planning”. When a local government creates a viable downtown,
it encourages sustainable economic growth; when, in
concert with the Federal government and oil and car companies and
real estate interests they create suburban sprawl, they set up the
conditions for parasitic growth.
New and Improved
The concept of economic growth can rest on a measure of
wealth-generating capital, and can be encouraged by democratizing
control of the economy. We also need to differentiate between
parasitic growth, based on quantity, and sustainable growth, based
When growth is the result of improvements in machinery, or the
organization of work, or the improvement in public spaces or
infrastructure, such growth is the result of an increase in quality.
Certain categories of machinery, which I have called reproduction
machinery, are capable of collectively creating more of themselves,
and are also responsible for creating the various kinds of machinery
that, in turn, create the goods and services that constitute the
flows of the economy.
For example, machine tools create the metal parts that make more
machine tools, steel-making machinery creates the steel to make
machine tools and more steel-making machinery, and machine tools are
used to help make the steel mills. When technological improvements
are made in these types of machinery, whole new eras may result.
The constant improvements in semiconductor-making machinery, for
instance, have led to the computer and internet revolutions, as well
as to better designed machinery of all sorts.
In the natural world, as Malthus, then Darwin, and many others
have remarked, the explosive nature of reproduction leads to growth.
Humans have devised reproduction machinery to accomplish economic
These machines can be turned to the task of making more quantity,
or they can be used to create better quality. As the fossil fuel era
comes to a close, the blind pursuit of quantity will have to be
replaced with a greater emphasis on quality as the road to growth.
It might seem that a focus on machinery would dehumanize society,
but exactly the opposite is true. Machinery cannot design itself,
maintain itself, or fix itself; machinery needs help building
itself, managerial pipe dreams notwithstanding. In order to shift to
a quality-centered economy, the national work force will have to be
given the mental, physical, and financial tools needed to turn
themselves into a highly skilled workforce. Ironically, by
emphasizing labor instead of capital, neoclassical economists treat
labor as a commodity, made up of unskilled, substitutable
components. By taking capital seriously, we see that labor is not an
undifferentiated mass, but the basis of sustainable economic
The rise of industry has been propelled by the coevolution of
both quantity and quality-led economic growth. Even the loss of
fossil fuels would not necessarily bring us back to a preindustrial
society. We have the accumulated wisdom of centuries of experience
with machine tools, semiconductor making machinery,
electricity-generating turbines, metal-making machinery, and much
more; using these tools, we can radically reduce the human footprint
on the Earth while allowing for life, liberty, and maybe even the
pursuit of happiness.
You can contact Jon Rynn directly on his jonrynn.blogspot.com .
You can also find old blog entries and longer articles at
economicreconstruction.com. Please feel free to reach him at
This email address is being protected from spam bots, you need
This email address is being protected
 For an example of the
latter, see Bill McKibben’s most recent book, Deep Economy
 For a more in-depth analysis,
see my critique of neoclassical growth theory, a chapter from my
political science dissertation, at the following link
 For instance, see
Robert Solow, 1994. “Perspectives on Growth Theory,” Journal of
Economic Perspectives 8 (Winter): 45-54, which
acknowledges “a criticism of the neoclassical model: it is a theory
of growth that leaves the main factor in economic growth
 Clark, John Bates.
1927. The Distribution of Wealth: A Theory of Wages, Interest and
Profits. New York: MacMillan Company.
 For an attempt to use
ecosystems as an analogy for an economy, see my article “The
Economicy is an Ecosystem”, at the following link
 From Statistical
Abstract of the United States, table 648, “Gross Domestic Product in
Current and Real (2000) Dollars”, Constant 2000 dollars.
 See “Table 1.2.
Chain-Type Quantity Indexes for Net Stock of Fixed Assets and
Consumer Durable Goods” at the Bureau of Economic Analysis website,
at the following link
 Capital data taken from
the Bureau of Economic Analysis website, “Table 1.1. Current-Cost
Net Stock of Fixed Assets and Consumer Durable Goods”, at the
. GDP data taken from Statistical Abstract of the United States,
table 648, “Gross Domestic Product in Current and Real (2000)
Dollars”, excel format, Historical Data worksheet, at the following
 Samuelson, Paul. 1975.
Economics . New York:McGraw-Hill, p. 747.
 The seminal work in
calculating a sustainable measure of GDP is by the organization
Redefining Progress, at http://www.rprogress.org/ ,
although they mix both flows and assets in their accounting.
 Murray Bookchin. 1989.
Death of a Small Planet. The Progressive (August): 19-23, available
at the following link.
I would like to thank Colin Wright for point out this article to