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Tim O’Reilly has just written a piece on his blog discussing the current state of the world economy, calling it “the biggest Ponzi Scheme of them all”. He argues that much of world growth has been pure inflated paper wealth, and that economic growth, much like the earth’s resources, is limited. He quotes from Former World Bank economist Herman Daly as follows:

“Growth in US real wealth is restrained by increasing scarcity of natural resources, both at the source end (oil depletion), and the sink end (absorptive capacity of the atmosphere for CO2). Further, spatial displacement of old stuff to make room for new stuff is increasingly costly as the world becomes more full, and increasing inequality of distribution of income prevents most people from buying much of the new stuff—except on credit (more debt). Marginal costs of growth now likely exceed marginal benefits, so that real physical growth makes us poorer, not richer (the cost of feeding and caring for the extra pigs is greater than the extra benefit). To keep up the illusion that growth is making us richer we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so‐called assets are, for society as a whole, debts to be paid back out of future real growth. That future real growth is very doubtful and consequently claims on it are devalued, regardless of liquidity.”

I can not disagree with the view that much of the growth over the past 10 years has been inflated by a paper wealth bubble, however, I do not think I could cope with accepting that there are few productivity gains to be had. If “the world was full” what would be the point in trying to improve the way we do things?

UPDATE – Tim O’Reilly replied to my comment on his blog:

Tim O’Reilly [01.06.09 09:30 AM]

Henry Yates: I think you misread “the world is full” argument. Daly explicitly calls out the kind of growth that consists of “qualitative improvement.” And I do agree that he perhaps misses the point that certain types of qualitative improvement can be quantitative improvement as well.

Take agriculture for instance. There’s no question that domesticated grains are both a qualitative and a quantitative improvement over the food carrying capacity of the natural environment. Sustainable agriculture of all kinds is an improvement over hunter-gathering. But at some point, you start borrowing from the future. As Wendell Berry pointed out in the article that Chris Ryland links to in his comment above, current farming practices destroy topsoil, while other practices preserve it. At what point do we realize that the version that borrows from the future by stripping the soil and adding petrochemical fertilizer is NOT actually more productive than sustainable agriculture?

Or, more importantly for the argument I hinted at in my conclusion, I believe that there’s a wonderful economy of innovation to be found in qualitative improvement. Is the web not a wonderful demonstration of that fact? We’ve all got the same personal computers we had 20 years ago but we’re getting more out of them not because they are faster but because they are connected (and in fact the rise of netbooks shows that the idea held by the computer industry for so long that faster chips was the only way to grow the industry is wrong.) We hit the wall on certain aspects of quantitative improvement, and qualitative improvement took over.

Or take my own industry: publishing. It’s not been growing much for years. But Amazon has certainly made a great business by creating a qualitative improvement in the way people can find and buy books. So I think you miss the point when you say that there’s no room for entrepreneurship in a steady state economy. If anything, there’s more room, because you really have to innovate if you can’t rely on the free ride given by unconstrained growth.

As I said above, I do think that it’s not a binary choice of qualitative vs. quantitative. But it’s a useful tool for thinking about how “growth” and innovation can continue even in a steady state economy.

I would agree that growth or productivity gain is usually overstated. Qualitative vs. quantitative is an interesting way of looking at things. You could argue that GDP growth is a crude way of measuring progress anyway and that more of a “balanced score card” quality of life metric would be more useful.

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