The Cult of GDP: Can Economies Function without Growth?

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Given the Earth's limited system, the economy clearly cannot grow indefinitely. From an ecological perspective, this is the fundamental contradiction within the logic of growth. But there is also another problem, a mathematical problem, as it were.

As economies mature, it automatically becomes more difficult for them to sustain their rates of growth. Essentially this is merely a question of mathematics, as a simple calculation serves to show.

The young Chinese market economy is expected to grow by about 8 percent this year. Because the standard of living in China is so low, however, this translates into $260 in per capita growth. On the other hand Germany, an established industrialized nation, would be more than pleased with 1 percent growth in crisis-ridden 2009.

To achieve this much growth in Germany, however, each and every citizen -- in a population only one-16th the size of China's -- would have to produce an additional $447 worth of goods and services. In other words, the Germans need to make a tremendous effort to keep their economy growing. Does this mean that the growth rate is destined to decline to zero in the future, or perhaps even descend into negative figures?

New Innovations

Paul Welfens, an economist in the western German city of Wuppertal, considers this idea erroneous. He is convinced that "economic growth in Europe and worldwide can continue for centuries," that is, for as long as the world continues to move, change and develop. And as long as competition continues to produce surprising innovations, like the shipping container, the computer, the satellite and the Internet.

Whenever people believed that humanity's creativity had been exhausted once and for all, some groundbreaking new innovation emerged. These goods and services generate needs and desires, so that a saturation limit is never reached. This is the reason why companies, in order to survive, are constantly investing in new ideas. Progress is what allows the economy to grow to a practically unlimited extent.

And because the new and improved displaces the old and outdated in this productive process, manufacturers can usually charge higher prices for their innovations, thereby increasing GDP. The car manufacturer Daimler, for example, has charged more for each new model in its E Class series, because the new model always includes a qualitative improvement over the old model -- features like airbags, ABS or, more recently, a warning system to combat driver fatigue.

Thus, growth does not stem solely from the fact that workers are producing more products, thereby increasing the volume of goods produced. Instead, the critical factor is the value of goods. This leads to an important realization: A growing economy does not necessarily need to consume more resources. In other words, our goal should not be to achieve less growth but better growth, and not to forego consumption but to improve the quality of that consumption.

Shifting Focus

A company like IBM is an example of how this can work. IBM has radically changed its business, moving away from material products and the production of more and more powerful computers. Today, the company focuses on a non-material resource: knowledge. IBM has shifted its emphasis to consulting and IT services and, as a result, has seen its profits grow despite the economic crisis.

A less-is-more strategy also works on the national scale. German GDP has grown by close to a third since 1990. At the same time, however, the country's energy consumption has declined by 7 percent. Cars are now more fuel-efficient, ships consume less heavy fuel oil and businesses use less electricity. However, one of the reasons Germany is in a relatively good position is that it has outsourced much of the dirtier aspects of its production to Eastern Europe or South-East Asia.

Of course, businesses and consumers have not changed their production and consumption behavior entirely on their own -- government has given them a helping hand. To a certain degree, lawmakers can promote the desired kind of growth through the use of well-designed incentives.

For instance, they can require vehicle manufacturers to reduce average emissions to less than 120 grams of CO2 per kilometer driven, thereby stimulating the development of low-emission vehicles. Or they can attach suitable prices to a valuable resource like clean air which was previously available free of charge, by way of emissions trading -- thereby forcing companies to invest in climate protection.

Better Recipes

The principle is clear: Resource consumption must be decoupled from growth. The respected US economist Paul Romer employs a kitchen metaphor to illustrate the concept. "Economic growth springs from better recipes," he says, "not just from more cooking."

This is effectively what representatives of the world's governments will be discussing when they meet in Copenhagen for the United Nations Climate Change Conference in December. But the world is still a long way from this goal.

Emissions trading is still limited to Europe, and the system can only become fully effective once every country on Earth is included. The entire global economy still depends almost entirely on fossil fuels, as evidenced by the fact that seven of the world's 10 biggest corporations are involved in the oil business. More importantly, most people probably couldn't care less how their economies achieve growth, as long as the growth figures they see are in positive territory.

Wiesbaden economist Norbert Räth, at any rate, is amazed at the seemingly miraculous powers of the number he calculates each quarter. When he announced the most recent figure of 0.3 percent growth in GDP, which took many by surprise, politicians, business executives and academics promptly interpreted the number as clear evidence that Germany is now squarely on the road to recovery.

"We weren't at all happy about that," he says, sighing. He would feel more comfortable if his calculations were not used to support all kinds of different interpretations. "Growth is undoubtedly a central variable," says Räth. "But it doesn't explain everything."

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• Part 1: Can Economies Function without Growth?
• Part 2: Symbol of a Better Life
• Part 3: The Contradictions of Growth