The limits to Limits

Earthrise, December 24, 1968Earthrise December 24, 1968 (pictured to the left) is reported to have changed human perception of our home planet. The image of the blue Earth isolated in space with the barren moon in the foreground reverses the perspective that people had been used to seeing until the crew of Apollo 8 orbited the moon. This reversal of viewpoints is said to have brought home to us our planet’s finite and isolated position.  It is frequently claimed that Earthrise galvanized the environmental movement and brought into focus the idea that there truly are physical limits to human development.

I was barely a month past my third birthday when the picture was taken and so, like many people alive today, my entire life has been spent in the context provided by images such as Earthrise; I don’t have an internal reference for how much of a shift in perception humanity really experienced back in1968. Looking for clues from external evidence, I’m forced to conclude that there really wasn’t much of a lasting practical impact at all. A recent article in the UK Guardian newspaper illustrates why.

The Guardian article summarizes research carried out at The University of Melbourne’s Sustainable Society Institute (the full Working Paper from MSSI can be found here).  The Guardian article, and the original research it summarizes, focus on comparisons between observed global trends in population size, food per capita, energy availability/use, and several other variables, with the values predicted by the World3 model, which was developed in the early 1970’s and published in the (in)famous Limits to Growth (LTG).

The work that led to LTG was commissioned by the Club of Rome to examine the potential sustainability of the world’s trajectory of economic development.  LTG was widely and comprehensively criticized immediately after its publication for being overly pessimistic in predicting that uncontrolled growth would lead to economic collapse and a rapid and substantial loss of human welfare sometime in the mid 21st century. It was also attacked on technical grounds for possible weaknesses in the way that its different biological,  physical and economic sub-components were linked together. Economists, particularly,  were critical of the work’s apparent disregard for the potential of substitution of goods and resources to overcome physical limits. LTG had limited relevance to the real world, they argued, and there was no need to change  the course of economic development; a point which brings us to the title of this blog – the limits to Limits.  LTG had a huge impact on the way that growth and sustainable development are discussed in academia and it provided a formal analysis of the concept of limits which had been starkly portrayed in Earthrise just four years earlier, but it had almost no measurable impact on global economic policy whatsoever.

Responding to both negative and positive criticism the LTG team revised World3, gathered fresh data and in 1992 published a 20 year update. In it the team came to

essentially the same conclusions that they had in the original 1972 study; except to note that 20 more years of business-as-usual (BUA) had done nothing to help the pressure on Earth’s natural resource base or the health of its key biophysical cycles. The LTG team noted that the model continued to give a reasonable fit to the available data.  A further update after 30 years (in 2002) repeated the story: another decade of BUA, more depletion of resources, less healthy biophysical cycles, and even less time to change course or prepare for the hard landing which was predicted to be due within a few decades; the model still gave a reasonable fit to the slightly larger set available data.  Another decade has passed, bringing us to the Australian study in 2014 which the Guardian article recently summarized.  No prizes for guessing the main findings…

The LTG story makes for depressing reading about the limitations which sound, but unwelcome, analyses can have on economic policy.  It tells us something useful about the management of expectations for those who hope for a greater involvement of science in the process of policy formulation.  The message is not completely one of gloom, however. After 40 years, the continuing match between the model’s predictions and observations of key global variables finally appears to be swinging the pendulum of opinion in LTG‘s favour. If the early balance of opinion was that: (1) the LTG team were playing Chicken Little in predicting a mid 21st century global collapse in development and; (2) in contrast to the views of the LTG team the basic concept of global development, based on unlimited economic growth, is sound, then these claims are, at last, starting to look like the hollow reassurances of Prof Pangloss that “all is for the best“.

I suspect LTG‘s impact on policy was limited because its main point was so unwelcome to the mainstream view that unconstrained economic growth was the best way to drive the process of global development. Development (which meant development along the trajectory taken by northern/western economies) is seen by mainstream economics as the answer to humanity’s major problems.  Within this free-market Weltanschauung, market signals are supposed to take care of issues of resource depletion in one of two ways. First, by increasing prices as supply declines and/or forcing substitution when use of a resource is no longer economically justified, markets might provide a feedback mechanism to prevent over-exploitation. Secondly, the possibility of substitution may obviate the need to worry about depletion of resources; if something runs out, you simply develop the technology to use a substitute.  The problem with both these arguments is that we depend on a range of common goods which have physical limits and for which there are no substitutes. Successful operation of the market feedback mechanism, furthermore, presupposes that the price threshold for halting exploitation of a resource will halt exploitation before a non-recoverable damage threshold is reached.  I don’t know of any a priori reason, based on fact (as opposed to magical thinking) to justify that sort of assumption. In fact,  human history is littered (pun intended) with examples of the failure of market signals to safeguard natural resources, or manage them within sustainable limits. In line with that empirical evidence, World3 suggested that economic feedback mechanisms would not act quickly or efficiently enough to prevent dangerous over-exploitation.

If  the central idea from LTG – that sustainable development requires deliberate planning to set constraints on growth – is unwelcome to free market economics, the central idea of Hirsch’s “Social Limits to Growth” (SLTG, published in 1976) is positively heretical.  It’s perhaps no surprise, then, that Hirsch’s work is relatively unknown, although it was referenced in Season 3 of the T.V. comedy show “The Big Bang Theory“. In the episode “The Large Hadron CollisionDr Sheldon Cooper compares Hirsch’s theory of positional goods (see below) to the  taunt of “neener neener“.  To preempt what follows, in terms of neener neener, Hisrch’s argument is that there is a common misconception that growth gives us a chance to be among those who are in a position to call “neener neener“, while in reality it makes no actual difference the chances of us joining that club at all (and may in fact reduce them).  If your happiness depends on getting to say an economic “neener neener” to those around you, growth’s not your friend.

The core idea in SLTG is built on the concept of positional goods.  These are goods which are subject to some form of social scarcity, either as a result of absolute physical scarcity, or because consumption is subject to crowding (congestion) effects.  A positional good is one which derives all, or a substantial part, of its value from its social scarcity. For example, the value, to the owner, in owning a rare painting might derive not from the painting’s price, but from the owner being in the unique position of ownership and from the status derived from being wealthy enough to be the owner. The value obtained from enjoying an exclusive holiday destination may similarly derive partly from the exclusivity itself, and also from the lack of physical crowding that might reduce the satisfaction obtained from consumption; enjoyment of ski resorts seems to be particularly susceptible of this type of positional valuation.

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In its simplest form (see Figure , left), Hirsch’s idea divides the distribution of absolute wealth into three sections.  Below some lower threshold of poverty, people’s basic needs for food, shelter and health are not met and their primary focus will be in raising their quality of life above the threshold.  If we are fortunate enough already to  have our basic needs met we are able to consume goods of the type that increase in availability as the economy grows (sometimes referred to as “free” or “unbound” goods).  If satisfaction depended only on consumption of this type of goods, growth would generate increasing happiness for all (until the limits suggested by LTG were reached).  However, not all goods fall into this category; economic growth does not produce more Rembrandt masterpieces, nor change the dependence of full satisfaction of a ski slope on its being uncrowded. The ability to consume goods of this type depends on one’s position in the distribution of wealth, not on the absolute level of wealth. We could say very  simplistically that there is an upper threshold of wealth (as seen from today’s perspective) above which one has access to positional goods (and gets to call “neener neener“).

As economic growth raises the absolute level of wealth, shifting the wealth distribution to the right, it gives the (false) impression that it will carry people toward and over the upper threshold. However, even as this process increases the potential competition for positional goods, the people who are already in the upper tail of the wealth distribution (those who are already above the threshold) simply pay more, increasing the absolute value of the threshold, maintaining their relative advantage, and thwarting the aspirations of the majority, who see the threshold stay ahead of them even as they grow materially richer in absolute terms. This reduces competition for the positional good, but leaves those who thought they would gain access to it frustrated with the failure of growth to deliver on its promise.  A more subtle version occurs when increased competition occurs for a previously uncongested good.  In these cases, the part of the value of the good which derives from exclusivity of consumption is lost as congestion increases.  In response, the wealthy often find a substitute good and the element of positional wealth which derives from exclusivity switches away from its previous locus to the new one; e.g. some new resort emerges as the place to take one’s winter vacation as the “plebs” over-run the last fashionable place.  Again, the aspirations of the majority are thwarted by the inability of the growth in absolute wealth to solve the “problem” of distribution.

If the prevailing vision of the connection between wealth and consumption fails to recognize (or admit to) the existence of positional goods it gives people false hopes of the satisfaction to be gained from economic growth.  It fails to recognize that the threshold for admission to the kingdom of positional wealth is constantly moving upward as growth increases absolute wealth in general, and (crucially) that the upper threshold is pulled upward by the people who are already on the other side of it.  If you get richer, so do they, and your relative positions do not change.  In order to gain access to the kingdom it is not enough to do well as the economy grows, you must do substantially better than everyone else so that your relative wealth increases and your position in the distribution moves to the right faster that the distribution moves en masse.

LTG deals with the ideas that  there are biophysical limits on growth, and that there are safe limits to consumption which growth should not be allowed to exceed. STLG deals with the idea that there are limits to what economic growth can do to increase our sense of well-being. Worse yet (for free marketeers), SLTG suggests that economic growth, and the associated belief that growth will allow everyone tomorrow to have what only the few have today, may actually be a cause of increasing dissatisfaction.  Bad enough, then, for the project of free market capitalism that LTG suggested the need for deliberate, self-imposed constraint, how much worse that SLTG suggested that the free-market project itself breeds unhappiness for the very people it’s supposed to help?

Hirsch’s typology of goods obviously has some overlap with the more widely known typology based on rivalry and excludability.  Given the importance of these concepts in our current theories of the management of public goods, some effort in understanding the links with Hirsch’s ideas seems warranted. The central idea of SLTG may also have implications for the critique of growth generated by LTG.  In a counterfactual world in which the implications of the existence of positional goods were fully acknowledged, single-minded pursuit of growth as an economic policy would likely be seen as undesirable.  Without such growth-focused policies, the danger of collapse predicted by LTG would certainly be reduced. This suggests at least the theoretical possibility of a new version of Adam Smith’s unseen hand: the emergence of more sustainable environmental management as an unintentional consequence of the pursuit of policies aimed at increasing satisfaction instead of absolute wealth.