The Problems of Halting Economic Growth; D. Lee and R. McNown

This article is based on a chapter from a book by Professors Lee and McNown, to be published by Science Research Associates, In corporated in 1976. increasingly fashionable to criti cize continued growth as undesir able and unsustainable. The debate surrounding this issue has cen tered almost entirely on the ques tion of whether our resource base is adequate to support the de nlands of a growing economy. Without going into detail here, it is our judgment that historical evidence and economic analysis re1976 THE PROBLEMS OF HALTING ECONOMIC GROWTH 235 quire that this question be an swered with a resounding affirma tive. The purpose of this paper, how ever, is to address an important aspect of the growth versus no growth debate that has been largely neglected. There has been little discussion of the problems that would be encountered in ac tually formulating and implement ing a policy of zero economic growth. Despite the importance of these problems in assessing the de sirability of the no-growth posi tion, they have been brushed aside by those pushing for a halt to economic growth. According to E.

J. Mishan, one of the most articu late advocates of zero economic growth (in his words, a steady state economy) :1 The actual means whereby a steady-state economy is to be brought into being - the rationing of raw materials, the controls on technology, etc. - and the level of affluence to be sought are important subjects of discussion. But in the existing state of social awareness, they are per haps premature .... The aim of the ecologist and environmentalist is not a no-growth economy per se. It is to win acceptance by the public at large of a no-growth society. 1 E. J. Mishan, "Ills, Bads, and Disa menities: The Wages of Growth," in The No-Growth Society, eds. M. Olson and H. H. Landsberg, W. W. Norton and Com pany, 1973, pp. 81-82. Why Does Growth Occur? One may also say it is premature to feel an urgency to convince the public of the desirability of a pro posal until it has been fully thought through. Certainly a con sideration of the implementation and functioning of a zero-growth economy is crucial in assessing the overall desirability of such an economy.

In considering the question of how growth in the economy is to be halted, it is wise to ask why economic growth occurs in the first place. The motivating force behind our economic growth has always been the desjre of individ uals to improve the economic well being of themselves and their off spring. Government policy can help by creating a stable political environment, protecting property rights, and not destabilizing the economy with inappropriate mone tary and fiscal policy. But without individuals seeking to improve their lot by working, innovating, saving, and investing, economic growth would not take place. This means that achieving a no-growth society would require denying peo ple many of the opportunities and freedoms they now have to im prove their situation. The question of how this is to be accomplished poses problems that are crucial in assessing the merits and liabilities of a no-growth economy.

236 THE FREEMAN April Certain attributes are desirable in any economy, whether growing or not. One of the most important of these is that our resources be used as efficiently as possible to prod uce those goods and services most valued by consumers. Cer tainly this has to be considered an important attribute to those who feel that a dwindling resource base makes halting economic growth an imperative. Stopping economic growth clearly shouldn't mean hal ting technological improve ments that allow a given set of consumer desires to be satisfied with reduced demands on our re sources. If a no-growth policy re stricted this technological growth, it would frustrate the mechanism that has provided us with a grow ing usable resource base in the past and can continue to do so in the future. And as we are about to see, the implementation of a no growth policy is very likely to hamper technological advances. In so doing, such a policy would prob ably hasten the very problems its advocates claim it will postpone.

Market Allocation In a market economy the effi cient use of resources is accom plished primarily by private pro ducers responding to prices of productive inputs and outputs. Output prices provide information on consumer preferences, with the rela tive price of a good increasing in response to an increase in con sumer demand, which in turn moti vates producers to increase their production of the good. Prices of productive inputs reflect their value in their most produc tive employments in the economy. Therefore, with producers re sponding to these input prices in their attempt to produce as cheaply as possible, the cost of producing commodities is kept to a minimum, with substantial re wards going to those who can in novate more efficient ways of pro ducing. While the market mechan ism doesn't always work perfectly, it works better than any other mechanism yet .conceived. But without a large amount of freedom afforded to the individual to spend his money as he desires, and to allocate his productive re sources and talents as he sees fit, much of the advantage of the mar ket mechanism is negated. This brings us face to face with the problem of how zero economic growth can be achieved without obstructing the desirable alloca tion of our resources among com peting uses.

How Assure Constant Output? It 'may seem quite simple to de sign an effective policy imposing zero economic growth. The gov ernment could pass and enforce a 1976 THE PROBLEMS OF HALTING ECONOMIC GROWTH 237 law requiring the value of produc tion to remain constant from year to year . However, some problems come immediately to mind. First of all, what mechanism can the government use to insure that out put doesn't increase? One possi bility would be to place quotas on the quantity of each good to be produced. If this is done a major problem is that of determining which goods should be produced and in what combination. As previously discussed, a cru cial goal of any economy is that these decisions be made to con form to consumer preferences. These preferences vary widely from individual to individual and change unpredictably through time. It takes an extraordinary amount of information to keep the productive process responsive to these consumer preferences. It is optimistic indeed to hope that any government agency would be able to keep abreast of this information and maintain the desirable pro duction quota system. Optimism would require not only tremendous confidence in the governmen t' s ability to keep current on chang ing preferences, but also great faith in its ability to make deci sions independent of political pres sures.

Assume, for example, that con sumers began to sour on the auto mobile as the almost exclusive form of personal transportation and that millions of individuals decided that bicycles offered a more desirable alternative. With production decisions being made in response to market forces, we would find a reduction in auto pro duction as 'auto manufacturers found fewer people willing to buy their product at prices that cov ered their cost. On the other hand, with increasing numbers of peo ple willing to spend money on bicy cles, producers of bicycles would expand output in response to higher profits. Problems of Control It's hard to imagine this adjust ment occurring so smoothly if the decision of auto versus bicycle production was under the control of a government agency. Under these circumstances automobile manufacturers would find it to their advantage to invest heavily in lobbying against any reduction in their production quotas. They could come up with any number of "justifications" for maintaining high production levels for autos.

Of course, bicycle manufacturers could, and probably would, lobby for an increase in their production quotas; but being much smaller and less influential politically, they would have an uphill task getting their quota enlarged at the ex pense of the automobile quota. The 238 THE FREEMAN April bicycle man ufacturers certainly wouldn't get any help from the oil industry or the highway lobby, both of which would take an ac tive interest in the issue. Mean while, the consumer, who should be the important decision-maker, will hardly be heard from in the decision-making process. Extend our example of autos and bicycles to include razor blades, running shorts, motor boats, tennis balls, insect repellent, shoe repair services, dental repair, textbooks, soy beans, and the like, and it is clear that vesting gov ernment with the authority to de termine the allowable production of each concei vahle good and ser vice would be a frightfully clumsy and wasteful way to halt economic growth.

But there are further difficul ties involved in direct government control. Once the quota for a good has been established, decisions as to which producing units are to fill that quota would have to be made. Suppose, for example, that an individual developed a new technique for making sleeping bags, and as a result thought he could give consumers a better bag than was currently available and at a lower price. Operating under the market mechanism, this indi vidual could invest his money in manufacturing and promoting his sleeping bag. If his assessment of his bag wasn't consistent with that of the consumer, he would soon find it advantageous to direct his talents and money elsewhere. On the other hand, if consumers did find his sleeping bag preferable to existing bags, his production and revenue would expand while the production and revenue of his com petitors would fall. Eventually our innovator's techniques would be imitated and all producers would be producing better bags for less, much to the consumer's benefit.

The Consumer's Interest If a government agency rather than the market was responsible for deciding for each produc~ which firms could expand output and correspondingly which firms had to reduce output, it's doubtful if the interests of the consumer would be promoted. For practical purposes it would be impossible for a government agency to have the information on changing pro ductive techniques necessary to know, for each product, which firms should be expanding and which should be contracting. Not having this information, the agency would soon find itself rely ing' on the expertise of the exist ing firms in each industry in order to make its decision. Each firm in an industry would soon learn that in order to protect or enlarge its market share, it has to appeal to 1976 THE PROBLEMS OF HALTING ECONOMIC GROWTH 239 the judgment of the regulatory agency rather than that of the consumer. Technological improve ments and product innovations would be found less useful to the aggressive firm than its lobbying activities and influence with the right regulators. Unfortunately, this wouldn't create the type of environment that a new firm with an improved product or lower price will find very hospitable. Well established firms in the industry could be expected to use their in fluence to prevent such intruders from ever getting their product to market.

This is more than idle conj ec ture. We unfortunately have had plenty of experience with govern ment agencies regulating such things as market share and entry in many of our industries. For ex ample, since the Civil Aeronautics Board was established in 1938 to regulate our airline industry, not one new airline has been permitted to enter into long haul competition with the existing airlines. Another example comes from the Interstate Commerce Com mission (ICC), an agency of the federal government charged with regulating interstate ground transportation. In 1961, Southern Railroad had developed a grain carrying car that allowed them to cut their freight rates on grain by 60 percent and requested the ICC to permit this reduction. It was estimated that this innovation would save consumers millions of dollars annually. Yet the ICC, in sympathy with barge lines, truck ing firms, and other railroads, all of which competed with Southern Railroad, refused to allow the rate reduction Southern requested. It wasn't until 1965, after the case was nine times before lower fed eral courts and twice before the U.S. Supreme Court, that the ICC quit fighting the rate reduction and allowed it to go into effect. 2 Many other examples could be given indicating the tendency of agencies charged with regulating industries to completely lose sight of the consumer interest. But by now our point should be clear. At tempting to halt economic growth by controlling the permitted out put for each good and service would be inconsistent with the goal of using our resources as efficiently as possible to produce a combination of goods and services compatible with the preferences of consumers. The cost of halting economic growth in this way would be so high that only the most en thusiastic no-growth advocate would find it acceptable.

2 For a more complete discussion of this (;ase, see Louis M. Kohlmeier, Jr., The Regulators: Watchdog Agencies & The Public Interest, Harper & Row, 1969, pp. 121-128.

240 THE FREEMAN April Let Consumers Choose, But Limit Total Income Having a government agency decide on the combination of goods and services to be produced, isn't the only way zero economic growth could be imposed. Another possi bility is to let consumers spend their incomes as they see fit, but limi t the total income that can be earned in the economy. This would seem to have the advantage of al lowing consumers to decide what should be produced and encour aging producers to be innovative and efficient with their use of re sources. But, of course, we now have the problem of controlling in comes. And, unfortunately, for this approach, there is a strong relationship between how consum ers exercise their preferences for goods and services and how indi viduals earn their incomes. People earn their incomes by responding to the desires of con sumers, producing and perfecting those things on which consumers are most anxious to spend their money. As we have already pointed out, this provides the incentive for producers to use resources effi ciently and 'creatively in order to provide consumers with better products at lower prices. But peo ple get rich doing this, and in so doing they invariably enrich countless others by creating highly productive jobs and permitting consumers to obtain more with less effort.

So any attempt at controlling the incomes consumers have to spend will require strict controls or strong disincentives against creative responses to the wishes of consumers. This doesn't nec essarily mean that the government would have to apply direct restric tions on innovative behavior. A high enough tax on profits or in vestment returns could sufficiently discourage investment in capital and technological improvements to be consistent with a no-growth economy. But whatever the means, only by discouraging producers from responding to the consumers' desire for better products at less cost will it be possible to prevent incomes from increasing. It's hard to see, therefore, where this approach to controlling eco nomic growth has eliminated the disadvantage of direct controls on output. Both approaches will have the effect of insulating the actions of producers from the desires of consumers.

Reducing Income Mobility Attempting to control incomes and dampen investment presents another, but related, problem. The necessity of controlling innova tive responses to consumer prefer ences means controlling one of the most important sources of income 1976 THE PROBLEMS OF HALTING ECONOMIC GROWTH 241 mobility in the economy. Despite much ridicule of the Horatio Alger "myth" the evidence indicates a substantial amount of income mo bility in the U.S. from one genera tion to the next. 3 There are plenty of opportunities for the ambitious and capable individual to become wealthy even though born into poverty. Likewise, being born into wealth is no guarantee that an in dividual can remain both indolent and affluent for long. The primary source of this mobility is that those who are productive are re wa-rded while those who are un productive aren't. Attempts to con trol income would surely reduce income mobility in our society by hampering the mechanism that produces it. Restricting people's ability to develop more productive techniques or train for more pro ductive employment would restrict the means by which individuals have been able to improve their economic situation. It also re stricts the competition that forces those who have achieved economic success to either remain respon sive to consumer desires or move down the economic ladder. With perhaps a little cynicism, we note that no-growth advocates are sel3 See Peter M. Blau and O. D. Duncan, The American Occupational Structure, New York, Wiley, 1967.

dom positioned in the bottom half of the income distribution. Designing and enforcing a policy to halt economic growth would be a difficult task. If such a policy were actually imposed, many of the consequences would be un fortunate. It would reduce the in fluence that consumers have on the choice of what is to be produced. Coupled with that is the stifling influence the implementation of such a policy would have on moti vations to produce efficiently and creatively. We would also find a more regimented society, with far less chance for the relatively dis advantaged in society to improve their situation through ingenuity and hard work. The likely conse quence of this calcification of so ciety would be disruptive social unrest or the emergence of a caste system in 'which people knew their place and accepted it. If the advocates of eliminating economic growth feel we are faced with an imperative, they had bet ter come to grips with the serious problem of implementing their proposals. It is our judgment, how ever, that they have first failed to establish the imperative for a no growth policy, and secondly, have no positive proposals on how such an economy could be implemented without unfortunate consequences.

~ How much Competition BRIAN SUMMERS ONE OF THE ARGUMENTS used against free enterprise is that there is too much, competition, that the business world is "dog eat dog" and "cutthroat." An other argument used against free enterprise is that there is too little competition, that the busi ness world is dominated by mo nopolies and oligopolies. Oppo nents of liberty, it seems, believe in touching all bases. Is there too much competition? Is there too little? How much should there be? Let us answer these questions by examining the more basic question: What is the meaning of business competition? Unfortunately, many peop'le try to answer· this question by count ing noses. If a given industry has many firms, they call it "competi tive." If an industry has few Mr. Summers is a member of the staff of the Foundation for Economic Education. 242 firms, they call it "noncompeti tive." A Iittle reflection reveals the shortcomings of this criterion. It tells us the number of firms in an industry, but it doesn't tell us what they are doing. And if a nose count doesn't tell us what the firms are doing, it certainly doesn't tell us if they are com peting because competition, if it is to have any meaning, must refer to actions, not just the number of contestants.