For our modern economy to function, constant growth is required. But this does not make people happier. There is no easy way out of this dilemma, says economist Mathias Binswanger.
The economy is growing steadily, our prosperity is increasing. And yet, this doesn’t seem to do our world any good. What is going wrong?
We live in an economic system that we call capitalist without meaning that in a judgmental way. It was created in the 19th century, is fundamentally geared towards growth and only functions satisfactorily if this growth takes place. It has taken many people out of poverty and into material prosperity. But in recent decades, especially in highly developed countries, we have seen that this development results in collateral damage and on average, does not make people happier. The environment in particular suffers as a result. We must therefore also ask ourselves why we are pursuing this approach from an economic standpoint.
In your latest book, you explain that our economic system is forced to grow. Why is that?
We live in a money economy. This means that companies have to make a profit in order to survive in the long term. If, on the other hand, a company is loss-making for several years in a row, it has to close its doors and is eliminated from the economy. Such bankruptcies can also lead to difficulties for other companies, because they lose clients as a result – either directly or because the employees who lost their jobs have to limit their consumption. This principle also applies at the macroeconomic level. If growth is lacking, the entire economic system is disrupted. Without at least a little bit of steady growth there is no stability. Greece is an example of what an enormous burden a recession of several years can place on a country and its people.
What exactly are the main drivers of growth?
Capitalism is an interplay of very different factors. Overall, companies have to earn more money than they spend. This works because the economy receives money year after year through bank loans to finance further investments. At the same time, however, companies have to hold their own against the competition. This forces them to constantly improve and create new products. On the other side of this equation are the consumers, who constantly want to satisfy new desires. Today, however, their needs are largely saturated. Nevertheless, new products and markets must be developed, and new desires must be awakened. For example, some companies are attempting to shorten the time it takes for products to become obsolete, as is the case with smartphones. Every year, a new model is launched that has as many new functions as possible. As a result, the previous model is out of date after only one year, meaning that in the “ideal case”, consumers buy a new model every year.
Is it even possible to continue to grow forever? Will we not at some point lack the raw materials or even the ideas to do so?
This question has been asked again and again throughout history. We can certainly decouple GDP growth from resource consumption and C02 emissions to a certain extent. This is easier to do in countries like Switzerland, because we import many products that are energy-intensive to manufacture from abroad. At some point, however, we will hit a wall, because commodities and other factors will become limiting factors. But we have not yet reached that point.
There are always some economists who predict that growth will soon come to an end. Are they all wrong?
Our capitalist system has an uncanny ability to push the limits into the future. That is why all doomsday prophets have always been wrong. The British economist Tomas Robert Malthus, for example, claimed at the beginning of the 19th century that food production would soon be unable to keep pace with population growth. This proved to be just as mistaken as Karl Marx’s assertions a few decades later. In his books, the latter put forward the theory that workers would be exploited by capital and would therefore inevitably revolt against it. He did not foresee that workers would benefit from this development and support it.
Wages, and therefore also prosperity, have risen sharply over the past few decades. Does this make society happier?
In highly developed countries, there has no longer been a correlation between people’s average happiness and average income for some time now. But thanks to economic growth, unemployment remains low. There is therefore an indirect connection between growth and happiness, because unemployment is the statistically most significant factor when it comes to unhappiness in people’s lives.
But for the individual, a higher wage is positive, no?
More income does not automatically make you happier. People have a tendency to compare themselves with their environment. They want to be richer, more successful and more powerful than their neighbors, relatives and former classmates. That’s why they buy status symbols like expensive cars, yachts or luxury watches. But because they are all striving for the same thing, it becomes a zero-sum game in the end and leads to a “status hamster wheel”. No matter how hard people try: everyone cannot always have more than everyone else.
Are there ways to make growth better, that is, greener and more sustainable?
They exist and they are happening. Through interventions in the price system, environmentally harmful consumption can be reduced. This is relatively easy to implement and the economy can therefore be made more environmentally friendly and sustainable. One example is the CO2 tax on airplane tickets, which contributes to a greener economy. However, a dilemma arises here too, because an entire sector suffers as a result. Due to the higher prices, the demand for air travel is declining. In the worst case scenario, the state will have to step in to support the industry.
You write that there is no harmony between growth and sustainability. But new companies that are bringing greener and more sustainable products to the market are emerging all the time.
I warn people against being too euphoric about this kind of harmony. Often, there is nothing more behind it than a good marketing strategy. After all, green products such as electric cars ultimately lead to increased consumption, more driving and thus to the greater use of resources. This so-called rebound effect is caused by the fact that efficiency gains make certain services linked to energy consumption, such as driving or heating, cheaper, which then leads to an increase in demand. At the end of the day, these new technologies also come down to achieving growth and generating profits for the companies that produce them.
If more growth is too much and less growth is too little, what is the solution?
A first sensible step is to strive for more moderate growth. You don’t always have to generate the maximum profit. This takes pressure off the system and minimizes the risks faced by the individual market players. To achieve this, we would have to move away from the prevailing, unrealistic expectations in terms of returns, especially in the financial markets. Companies that are listed on the stock exchange are under enormous pressure in this respect. CEOs who fail to achieve their growth targets are immediately replaced. Companies with a low share price become takeover candidates. It would therefore be worthwhile to consider reforms for public companies. Another option would be to focus more on cooperatives. This business model has a long tradition in Switzerland and Germany and has proven to be very stable despite some isolated undesired outcomes.