Economists need some reality checks

How is it that with all the evidence about our climate and energy future, including diminishing oil reserves, economists still count on endless growth? [28 April 2009 | Peter Boyer]

Some things are becoming clearer as we venture deeper into the gloom of the 21st century. These insights won’t provide us with much comfort, but they will be much more valuable than conventional wisdom – if wisdom is the right word – in guiding us along uncertain paths.

We’ve been had. There we were, thinking that modern economic theory, after the odd minor glitch like the Great Depression, had it all worked out. We cling to certainty, a point well understood by our political masters, who often talk as if they’re ladling it into our bowls from on high.

We should have known all along that the economists, like our politicians and the rest of us, don’t have much of a clue about how to get out of the present quagmire. We may as well go off and consult an oracle.

What’s even more disconcerting is that the economists have been unable to articulate how we got into this economic mess. They even talk of “animal spirits”, as if this explains everything. It’s probably closer to the mark than most of what we’ve been fed by these latter-day gurus.

Having determined over a century ago that their profession was a science, economists have used jargon to shield them from scrutiny and create an illusion of special knowledge – a tactic employed by the politicians and business people who profit from the self-containment of modern economics.

In the latest Scientific American, the science historian Robert Nadeau has highlighted the danger of relying on economic theories based on long-discredited 19th century scientific ideas.

Nadeau’s position is that modern economic theory is hindering us in finding solutions for the many menacing environmental problems we face today. In failing to acknowledge costs of environmental problems and limits to growth, “it constitutes one of the greatest barriers to combating climate change and other threats to the planet”.

The theme has been taken up by a scientist from the University of Adelaide, Michael Lardelli, in an essay published in “Energy is everything,” writes Lardelli, enabling things to grow and prosper: “So the most fundamental definition of money is that it is a mechanism to allow the exchange and allocation of different forms of energy.”

Lardelli argues that if we see the economy as energy – a thermodynamic system – we must reject the conventional wisdom that declining energy availability and rising costs will continue indefinitely to stimulate investment in new energy sources.

As it gets increasingly hard to extract mined energy, we’ll need to invest progressively more energy in the resource, until eventually the effort will be too much and we’ll have to stop. We are approaching a “net energy cliff”, says Lardelli.

This unfolding scenario of energy decline, with cries for help from unemployed people and struggling companies diverting resources, weakening currencies and hindering major energy infrastructure reform, would see the world economy contracting for at least half a century.

A likely effect of declining energy will be increasingly impotent governments. In such a scenario, individuals and local communities will need to cope as best they can. Their most important task will be to capture solar energy by growing food.

The economic gurus have taught us that predicting the future is a risky pastime, but it seems to me that Lardelli’s scenario is better-founded than their discredited ones. In any event, preparing for radically different, tougher times calling for different mindsets – where skills will need to be more tangible and where flexibility, not ideology, is the rule – would seem like a good idea.

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1 Response to Economists need some reality checks

  1. Nick Towle says:

    I believe an urgent rethink of our current economic objectives are required. The following piece from The Australia Institute also reinforces the fact that GDP (Gross Domestic Product) as a measure in assessing economic progress may bear little relation to our actual quality of life. Yet quality of life is so commonly quoted as a key reason for individuals moving to or choosing to stay in Tasmania. Let’s not be fooled into thinking that activities to expand economic activity in Tasmania will translate into improved quality of life.

    In rethinking our approach to economic growth we will need to rewrite the Tasmanian Framework for Action on Climate Change, which assumes that the model of economic growth is a given and is incorporated as a guiding priority in the choices we make for tackling climate change.

    It’s about time we take a position on our future direction.

    Increasing GDP or true progress: Take a position!

    For many years, nations have equated economic growth with progress. Economic growth is an increase in the production and consumption of goods and services and is indicated by an increase in Gross Domestic Product (GDP). GDP, therefore, has become the standard measure of economic progress even though it was only intended as a macroeconomic accounting tool. Prompted by the banking and finance industries and the media, citizens generally applau d increases in GDP.

    The problem with GDP is that it doesn’t separate costs from benefits; it simply adds them together under the heading of economic activity. The answer to the question, ‘Is increasing GDP indicative of increasing wellbeing?’ depends on whether the social costs of such an increase outweigh the benefits. GDP is a good measure of size, but at some point bigger can be detrimental not beneficial.

    At the individual level, economic activity is required for wellbeing but the relationship becomes very weak after a surprisingly low per capita GDP is achieved. Beyond that, the ‘disutility’ of production and consumption causes a net drain on health and happiness. GDP also has nothing to say about how income and wealth are distributed among the people. Does increasing GDP indicate progress if the additional income accrues to a very small number of people? Of course not!

    It is time for governments, businesses and citizens to stop confusin g economic growth with economic development. Economic growth is not an end but rather a means to an end. We are not interested in growth for growth’s sake but presumably to achieve development—a higher level of individual and societal wellbeing.

    Several alternative measures to GDP have been developed, including The Australia Institute’s Genuine Progress Indicator. A discussion paper on this subject is available at In the US, the Center for the Advancement of the Steady State Economy (CASSE) highlights the conflict between economic growth and environmental protection and calls for an economy that fits within physical limits.

    If you would like to find out more about CASSE’s position, go to

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