One of the fundamental assumptions of mainstream economic theory is that long-term growth is the key to raising everyone’s standard of living. Obviously economists are having to grapple with the fact that unlimited growth is not possible with limited natural resources, but their approach to the problems of pollution and climate change are often hampered by the framework within which they are thinking.

Growth is an increase in the total output of a nation over time, and is usually measured as the annual rate of increase in its real Gross Domestic Product. [see GDP] Textbooks cite four factors affecting growth:  

Human resources (labor supply, education, skills, discipline, motivation)

Natural resources (land, minerals, fuels, environmental quality)

Capital (factories, machinery, roads, intellectual property)

Technological change and innovation (science, engineering, management, entrepreneurship)

Most of the factors are obvious, but two that bear examination are capital [see Capital] and entrepreneurship.

Entrepreneurship is defined as the activity of setting up a business or businesses, taking on financial risks in the hope of profit. [see Profit] This is an expression of the myth of autonomous individuals seeking to better their own lives which lies at the root of mainstream economic theory. It is a very powerful myth, and obviously the current system is set up to encourage individuals to set up businesses to increase their own wealth. How critical this is to improving the overall standard of living is complicated. Plenty of companies make large amounts of money marketing products of questionable value or little worth in terms of any sane definition of “standard of living.” The benefit of these companies to overall prosperity is the economic activity resulting from employees spending their wages. Satisfying the desires of a sufficient number of consumers is not the same as improving the overall or average standard of living, but economic theory does not seem to have any other way to gauge the standard of living. Bhutan may have tried to measure Gross Domestic Happiness, but few Americans want to live like the citizens of Bhutan.

Relying on the desires of individuals to increase their own wealth is not the best way to increase the overall standard of living. This is not to say that people who have good ideas and work hard to implement them should not be rewarded. There just needs to be some other method besides the market for guiding the growth of economic activity. [see Markets] When an individual “creates wealth” by accumulating profits from his business, he is probably siphoning off more money from the economy than the spent wages of his employees adds.[see Wealth Creation] The net effects of his profits is a redistribution of wealth. The accumulation of wealth in this manner is theoretically justified by the idea that the wealth will then be invested in other ventures so that there will be a snowballing effect on economic growth, but it also constitutes a concentration of power, and in the current system the individual’s investments are more likely to be in the financial markets rather than the “real” economy. [see Financialization]

The other key feature of our fetish with entrepreneurship is the idea that individuals must take financial risks in order to have economic growth and that profits are the reward for their risk taking. Certainly individuals who put money into a new venture are risking the loss of that money, but accumulated “savings” are not the only way new ventures may be financed. [see Finance]

Given the current system an individual cannot “invest” without foregoing “consumption,” and the textbook explanation of growth uses the same frame of reference:

“Increasing capital requires the sacrifice of current consumption to increase future consumption. Instead of eating more pizza now, people build new pizza ovens to make it possible to produce more pizza for future consumption.” [see Samuelson 2010 p.417] 

This may be true if you are the owner of a pizza parlor wanting to expand and unable to secure a line of credit to do so, but it need not apply to the economy as a whole. It only applies to a system where economic prosperity or growth depends on the efforts of individuals to better their own lives and where money is a commodity with a price set by a market.

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