Can Growth Save Us?
September 24, 2013
Is it sensible to bet on a return to growth to solve our problems? Of course, 1 percent growth in production and national income is always preferable to 0 percent. But it’s time to realize that that won’t resolve most of the challenges that wealthy countries will have to deal with in the early twenty‑first century.
Production can grow for two reasons: because of population growth and because of growth in per capita production, or productivity. Over the past three centuries, world production grew by 1.6 percent per year on average, of which 0.8 percent was through population growth and 0.8 percent through per capita production. That might seem tiny, but in reality it’s a very rapid pace if continued over a long period. In fact, it corresponded to a tenfold growth of world popula‑ tion in three centuries, from roughly six hundred million people around 1700 to seven billion today. It seems unlikely that that pace of demographic growth will continue in the future. Population has already started declining in several European and Asian countries. According to United Nations forecasts, world population as a whole is expected to stabilize over the course of the century.
As for per capita production, it’s entirely possible to imagine those past growth rates – 0.8 percent per year for the last three centuries – continuing into the future. I am not an adherent of the ‘de‑growth’ perspective.* Technological innovation permitting nonmaterial, nonpolluting growth could very well continue indefinitely. But only if we come up with clean energy sources, which can’t be taken for granted. In any case, the important point is that even if growth continues, it probably won’t exceed 1 to 1.5 percent per year. The 4 or 5 percent growth rates seen in Europe during the postwar decades, the even higher rates in China today, represent purely transitory situations of countries catching up relative to others. No country, upon reaching the world technological frontier, has ever experienced sustained growth rates above 1 to 1.5 percent per year.
In these conditions, it’s almost inevitable that growth in the twenty‑first century will settle at a rate far lower than the rate of return to capital – that is, what wealth earns on aver‑ age over the course of a year (in the form of rents, dividends, interest, profits, capital gains, etc.) as a percentage of its initial value. This rate of return is generally on the order of 4 to 5 percent per year (for example, if an apartment worth €100,000 has a rental value of €4,000 euros a year, the return is 4 percent), and can reach 7 to 8 percent per year for stocks and the biggest and most diversified wealth holdings. But this inequality between the return to capital (r ) and the growth of production (g ), which can be noted r > g, automatically gives disproportionate weight to wealth that was constituted in the past, and leads mechanically to an extreme concentration of wealth. We’ve started to see signs of it in the last few decades, in the United States, of course, but also in Europe and Japan, where reduced growth (especially demographic growth) is causing an unprecedented increase in the mass of wealth relative to income.
It’s important to understand that there’s no natural reason why the rate of return to capital should fall to the level of the growth rate. The simplest way to see this is to note that growth was practically zero for most of human history, while the return to capital was always clearly positive (typically 4–5 percent for landed wealth in traditional agricultural societies). From a strictly economic point of view, this poses no logical problem. Quite the contrary: the purer and more perfect the capital market (in the economist’s sense), the greater the r > g gap will be. And yet that leads to extreme inequality, incompatible with the meritocratic values on which our democratic societies are based.
A number of remedies are possible, ranging from the greatest international cooperation (automatic exchange of bank information, a progressive tax on capital) to the greatest national isolation. Inflation would help liquidate
public debt, but would mainly hit modest wealth holdings, and is therefore not a sustainable response. Chinese‑style capital controls, Russian‑style authoritarian oligarchy
, perpetual demographic growth as in America: each regional bloc has its solution. Europe’s good fortune is its social model and its great wealth, which far exceeds all its debts. Provided that it radically revises its political institutions, which are now seriously dys‑functional
, it has the means to go beyond growth and help democracy retake control of capitalism.