The last couple of hundred years have seen an incredible rise in the world’s average standard of living. This increase in living standards is a result of an unprecedented level of economic growth. But a negative effect has accompanied that growth—environmental degradation. Phrases such as “peak oil” and “climate change” have led many to conclude that we have reached the limits of economic growth and that if the growth is not curbed, it will ultimately destroy the Earth and all species that inhabit it.
Yet, there is a conceptual error being made when economic growth is equated with environmental degradation, or at the very least, with the increasing consumption of the Earth’s resources. Despite their close connection in the past, it is theoretically possible to have limitless economic growth on a finite planet. What is needed, however, is to turn theory into actuality by decoupling, or separating, economic growth from unsustainable resource consumption and harmful pollution.
Planet Earth—the Source and Limit of Growth
All of life needs the Earth’s resources to survive. It is impossible to conceive of a world in which there is absolutely no consumption of these resources. People need to drink water and eat food. Beyond that, humans have found that using other resources such as wood have enabled them to build fires to stay warm and structures to shelter them from wind, rain and snow. The use of such resources has enabled humans to not just live, but also to improve the quality of their lives. (To read more, see: Water: The Ultimate Commodity).
The improvement in the quality of life is what motivates the desire for continued economic growth. But for most of human history, economic growth and improvements in people’s standards of living have increased relatively slowly. The situation changed dramatically around 200 years ago. J. Bradford DeLong, an economics professor at the University of California, Berkeley, estimates that from year 1 to 1800, average world gross domestic product per capita remained under $200 (in 1990 international dollars), and after 1800, began to rise rapidly, reaching $6,539 by the year 2000.
While much of this economic growth and improvements in living standards has been concentrated in certain nations, developing countries have also seen increases in per-capita economic growth, higher life expectancy and decreases in mortality rates from disease and malnutrition. Yet that economic growth has also been accompanied by massive consumption of the Earth’s natural resources and environmental degradation.
“The extraction of construction materials grew by a factor of 34, ores and minerals by a factor of 27, fossil fuels by a factor of 12, and biomass by a factor of 3.6,” according to a report from the United Nations Environment Programme. Further, while climate change is not something new, research indicates that the increases in global temperatures since the last half of the 20th century are most likely the result of human activity. The massive increases in the consumption of the Earth’s resources and the environmental impact of industrial activity have led many to conclude that economic growth is unsustainable.
Yet, these critics tend to have a narrow, although understandable, interpretation of economic growth. For such critics, growth tends to be equated with physical/material growth—that is, larger buildings and more infrastructure expanding over an ever greater geographical area, as well as more material goods production. Although much of economic growth in the past has coincided with physical growth, the concept of economic growth doesn't depend upon it.
So What Is Economic Growth?
Economic growth is the increase in real (after inflation) GDP, where GDP is the total value of the domestic production of all goods and services. The key word here is value. Economic growth occurs when the value of real GDP increases. There are two ways in which value can be affected. One is what critics of economic growth tend to focus on: an increase in the quantity of production. The other way, however, is to increase the quality of what is produced. (To read more, see: What is GDP and why is it so important to economists and investors?)
This leads to another distinction between “extensive” economic growth and “intensive” economic growth. Extensive economic growth describes increases in physical growth that uses more inputs. Intensive economic growth, on the other hand, describes growth increases resulting from more efficient or smarter ways of using inputs to produce higher quality goods.
Remember, too, that GDP doesn’t just measure the production of goods, but also services. With increases in education, health care and other services, economic growth expands without large quantities of the Earth’s resources being consumed or the environment being harmed.
In fact, some economic growth can be good for the environment and reduce our dependence on natural resources. That includes expanding public transportation and making it more efficient, improving the energy efficiency of homes and businesses, producing more fuel-efficient vehicles, investing in non-polluting industrial processes and cleaning up industrial waste sites.
Because economic growth doesn't mean infinite increases in our consumption of natural resources or environmental degradation, it is possible to separate economic growth from physical growth and its harmful effects. It is this possibility of decoupling that has motivated the sustainable development movement.
There is some evidence suggesting when countries pass a particular wealth threshold, they become cleaner, less wasteful and more efficient, all of which provides hope that sustainable development is possible. Rich countries, however, tend to export much of their resource-intensive and environmentally damaging economic activity to poorer nations.
Even with greater resource efficiency, the finite limits of the Earth’s natural resources require a greater separation of economic growth and physical growth.
The Bottom Line
Economic growth has been defended for its contributions to human well-being and increasing standards of living. Yet, it is becoming more evident that the degree to which economic growth has depended upon increasing use of the Earth’s natural resources is unsustainable. It is clear that we cannot continue to consume more water, burn more fuel and spew out more and more carbon dioxide at ever increasing rates. While theoretically possible, we are at a point in history where separating economic growth from physical growth has to become a reality or economic growth will begin to reduce human well-being.