Satyajit Das: High economic growth could be over – and it may have benefits

Midweek View: Growth was based on policies that led to the unsustainable degradation of the environment

Growth is not a given. In a deliberately provocative 2012 National Bureau of Economic Research paper entitled Is US Economic Growth Over? Faltering Innovation Confronts The Six Headwinds, the economist Robert Gordon found that prior to 1750 there was little or no economic growth (as measured by increases in gross domestic product per capita).

It took some five centuries (from 1300 to 1800) for the standard of living to double in terms of income per capita. Between 1800 and 1900, it doubled again. The 20th century saw rapid improvements in living standards, which increased by between five or six times. Living standards doubled between 1929 and 1957 (28 years) and again between 1957 and 1988 (31 years).

Other measures show similar trends. Between 1500 and 1820, economic production increased by less than 2 per cent per century. Between 1820 and 1900, economic production roughly doubled. Between 1901 and 2000, economic production increased by a factor of something like four times.

Professor Gordon argues that growth and improvements in living standards will slow, possibly to 0.2 per cent, well below even the modest 1.8 per cent between 1987 and 2007.

Over the last 30 years, a significant proportion of economic growth and the wealth created relied on borrowed money and speculation. But this process requires ever-increasing levels of debt. By 2008, $4 to $5 of debt was required to create $1 of growth. China now needs $6 to $8 of credit to generate $1 of growth, an increase from around $1 to $2 of credit for every $1 of growth a decade ago.

The ability to maintain high rates of economic growth through additional debt is now questionable.

Growth was also based on policies that led to the unsustainable degradation of the environment. It was based upon the uneconomic, profligate use of mispriced non-renewable natural resources, such as oil and water.

There are striking similarities between the problems of the financial system, irreversible environmental damage and shortages of vital resources like oil, food and water. In each area, society borrowed from and pushed problems into the future. Short-term profits were pursued at the expense of risks which were not evident immediately and that would emerge later.

Another common theme in the parallel crises in finance, environment and management of scarce resources is mis-pricing. In the period leading up to the global financial crisis, risk, especially the ability of individuals and firms to repay borrowings, was under-priced. The true cost of polluting the environment or consuming certain resources has also been under-priced.

In the early 20th century, the German economist EF Schumacher observed that human beings had begun living off capital: "Mankind has existed for many thousands of years and has always lived off income. Only in the last hundred years has man forcibly broken into nature's larder and is now emptying it out at breathtaking speed which increase from year to year."

That observation is now just as true about the economic and financial system as it is about the environment.

Government intervention can cushion some of the costs of the crisis but cannot solve the fundamental problems. It is not self-evident that growth can be conjured up policy diktat. If government deficit spending, low interest rates and policies to supply unlimited amounts of cash to the financial system were universal economic cures, then Japan's economic problems would have been solved many years ago. The lack of easy policy options means that the world faces an unknown period of low, below trend growth.

The simultaneous end of financially engineered growth, environmental issues and the scarcity of essential resources threatens the end of an unprecedented period of growth and expansion. But it was an unsustainable world of Ponzi Prosperity where the wealth was based on either borrowing from or pushing problems further into the future.

Arthur Miller wrote that "an era can be said to end when its basic illusions are exhausted". The central illusion of the age of capital – unbounded economic growth– may be ending.

Satyajit Das is a former banker and the author of 'Traders, Guns & Money' and 'Extreme Money'

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