20 July 2015

The challenges of economic growth


Economic growth: it’s touted as the most important aspect of economic performance – the one that can help to resolve so many other economic problems, such as unemployment, escalating welfare bills and high levels of government debt – but it is also proving to be the most illusive. Across large parts of the world, from China to Europe, growth rates are either being revised downwards or look so limp that economists have for the last two years been talking about a future of slow growth, one of “secular stagnation”. Even when it comes to Britain, now a supposedly shining economic example of post-recession recovery, the headline growth figures leave much to be desired. In the years after the Great Depression, Britain was growing at 4% p.a. – that’s a long way from where we are today. Perhaps the only reason that the situation looks so good over here is that things are so much worse elsewhere in Europe.

As any economist knows, that that is most desired is also most prized. Scarcity adds value. At a time when economic growth seems so out of reach, it is therefore easy to see growth as the “be all and end all”. It is easy to put all of our efforts into emphasising the positive side of growth. However, only by appreciating the dark side of economic growth can we understand how successful economies can tumble – how we got to where we are today and what we need to do to ensure growth is sustained in the future.

Let’s begin with the plus side. Of course, no one is going to deny that economic growth leaves us with a lot to be thankful for. For most of history, life has consisted of a constant struggle simply to meet the needs of subsistence. Hunger, thirst, cold and physical pain were all too common – as was the emotional pain involved in witnessing the death of ones infant children, an unfortunately widespread occurrence. The last two centuries of positive economic growth have transformed the lives of those of us lucky enough to live in the West and certain parts of the world beyond. Until recently, it had been natural to think that our own children and grandchildren would live a significantly better life than our own. It is therefore of no surprise that economic textbooks paint economic growth in a positive light.

However, as so often in life, the bad can come with the good. Economic growth inevitably involves a process of creative disruption – a process of continual change, change that can disrupt working life and communities. Of course, we do not want to stand in the way of such change – to do so would be to throw the baby out with the bathwater, leaving our economy stagnant. Indeed, one of the supposed advantages of a “laissez faire” policy approach is that it limits the ability of vested interests to lobby for regulations and other policies that would benefit the few at the cost of the many – at the cost of the wider economy. However, that does not mean that we should completely overlook the negatives that can come with growth, ignoring any associated pain and suffering. If the negatives go unaddressed, they have the power to undermine the very foundations of growth, creating a process of negative feedback that can suck energy from the economy.

Nothing shows this more than the event commonly seen to mark the start of modern economic growth: the Industrial Revolution of the late eighteenth and early nineteenth centuries. Living in the modern day, it is easy to celebrate the achievements of this great age – those of the scientists, technologists and engineers cut into bronze sculptures that bask in the sunshine in the centre of many of Britain’s great cities. The National Portrait Gallery has a whole room dedicated to the great men of both the industrial and the agricultural revolution. However, the reality on the ground – the reality experienced by the average man, woman and child of the time – was one of dirt, squalor and hard labour. Engels is famous for his emotive words relating to “The Condition of the Working Class in England” – a book published in Germany and the USA as a warning of what would be to come. However, you did not have to be a Marxist to acknowledge that there were problems, as Lord Shaftesbury, the Conservative politician, demonstrates. More recently, economic historians have turned to data in an attempt to test the claims of Engels, Shaftesbury, Dickens and others. Here, there is nothing more real than the evidence relating to the toll on the human body.

During the second half of the Industrial Revolution, the occupants of industrial cities were getting smaller and smaller generation on generation, indicating a combination of poorer nutrition, arduous working conditions and increased exposure to disease environment. The rapid expansion of the cities created an environment that was squalid, overcrowded and rich in disease, much like the slums that surround the growing Indian cities today. Infant mortality was on the rise and life expectancy at birth in Manchester was a mere 25 years (compared with 45 in rural Surrey). These adverse effects of economic growth on the nation’s health acted to undermine the roots of prosperity. Creativity and productivity were harmed, and it is easy to see why: try getting a good long day of work done if you are feeling ill and lacking nourishment. Only once the state began to take appropriate action, providing clean water supplies, sanitation systems and public health programmes (such as mass vaccinations), were the negative effects of economic growth on health successfully counteracted. Once it did so, the nation’s health began to improve and so did economic growth. The two were able to positively – rather than negatively – feedback on each other, creating growth levels never before seen and a dramatic change in the human body.

More recently, deindustrialisation – as opposed to industrialisation – has brought trauma at the same time as opportunity. Growing up in Manchester in the 1980s, I saw at first hand the unemployment and social deprivation that came as the factory doors slammed shut one after another. Today, the effects have lingered on. Too many former industrial communities have been cursed to living a life dependent on state handouts (handouts that have been increasingly seen as a drag on the economy’s finances) whilst The Economist has recently drawn attention to what it has called “the plight of the rich world’s blue-collar men”. Whether it is concerns about inequality, worries about an inadequately skilled workforce, or escalating welfare bills, we are to some extent paying the price today for not having done enough in the past. We are paying the price for accepting the positives that came with economic change but at the same time having ignored the negatives – for having turned a blind eye.

Economic growth brings immense power to transform our lives for the better. However, where we do not admit that the associated economic change means that there will be losers – as well as winners – we fail to nip-in-the-bud problems which can initially be solved relatively easily but which, if left unresolved, fester to become much bigger problems at a later date. That includes a potential challenge to capitalism itself. By undermining the growth capitalism has promised and by creating a group of outsiders who feel left behind (and to which extremist parties can appeal), our neglect of the negative effects of economic growth can prove very damaging in the longer term, eroding the very foundations on which prosperity and freedom depend. In other words, if we do not keep the bathwater clean, we risk throwing the baby out with it.

Once we succeed in achieving renewed growth let us not forget how easily it can be undermined – unless we keep our eyes open to the reality on the ground.

Dr Victoria Bateman is Economic Historian and Fellow in Economics, Gonville & Caius College, Cambridge, and Fellow of the Legatum Institute, London.