Social limits of growth – III

In Social Limits to Growth, Fred Hirsch illustrates the psychological problem created by growth using the example of Education. Education has usually been associated with external benefits, based on the assumptions that educated people make better citizens, they are more productive, and all the resulting benefits are not captured in their own higher earnings. For example, they pay more taxes and enhance the productivity of those with whom they work. But education also has a role as a signaling device in the modern economy which may negate these external benefits. 

Education's function as a screening device helps the employer sort out those who can best survive and master an educational obstacle course.  The “quality” of schooling has a relative dimension in which quality consists of the differential over the educational level attained by others. Adding layers to the level to which the competition for credentials is pushed merely absorbs educational resources without adding to the productivity of the winners in the competition.  

When education expands faster than the number of jobs requiring those educational credentials, employers  intensify the screening process. Jobs for which a high school diploma was previously sufficient will then require some college education. Individuals who decline to join the educational upgrading will suffer a devaluation of their credentials in the job market. This means, as the average level of educational qualifications in the labor force rises, a kind of penalty is imposed on those lacking such qualifications

Additional education becomes a good investment, not because it would generate additional income but because you will not be able to maintain the current level of income if others receive more education and you do not. Thus, the utility of expenditure on a given level of education as a means of access to the most sought after jobs will decline as more people attain that level of education. ‘The race gets longer for the same prize.‘

Because ever more people reach higher levels of education (due to well meant “inclusionary” state policies), but at the same time the amount of high-level jobs remains more or less stable, both sides – the employers and the potential employees – face increasing costs of screening. The former are forced to introduce additional barriers, tests and other screening efforts to find the people who fit their needs. Meanwhile, the latter are faced with an ever longer “obstacle course” (i.e., longer education + more intense screening by employers) to get the desired high-level jobs. This clearly makes both sides worse off.

The increase in capacity of the educational sector also has probably increased the attention paid to the quality of education provided. Existing institutions that have many years track record are valued more by employers than new colleges. Not only do they convey information the employers can trust but, in addition, it enables them to buy the elite contacts of the employee. Thus, establishing new colleges end up increasing the demand for an education at existing colleges.  

Even if the absolute quality of education in a particular institution is fully preserved, the previous incumbents of the superior schools would still lose their edge. This loss will force them to demonstrate their proficiency in a tougher or longer course of study. Education enjoyed in its own right is capable of indefinite extension; as an instrument for entree into top jobs, it is not. When you consider education as a screening device, the possibility of general advance is an illusion.

An “inflation” of educational credentials of this kind involves social waste in two dimensions. First, it absorbs excess real resources into the screening process by increasing the length of the obstacle course that employees require for testing for the qualities desired . Second, social waste will result from disappointed expectations of individuals and from the frustration they experience in having to settle for employment in jobs in which they cannot make full use of their acquired skills. 

Considered in isolation, the individual’s demand for education as a job entree can be taken as genuinely individual wants. But satisfaction of these individual preferences itself alters the situation that faces others seeking to satisfy similar wants. Competition among isolated individuals in the free market entails hidden costs for others and ultimately for themselves. What is possible for the single individual is not possible for all individuals. This is true for all higher levels of selection: What is possible for an individual state or an individual country is not possible for all units. Hirsch writes:

‘Once again, it is a case of everyone in the crowd standing on tiptoe and no one getting a better view. Yet at the start of the process some individuals gain a better view by standing on tiptoe, and others are forced to follow if they are to keep their position. If all do follow, whether in the sightseeing crowd or among the job-seeking students, everyone expends more resources and ends up with the same position.

Hirsh is not saying that more educational resources should not be provided. The way the system is structured at present, politicians are forced to make such promises and are under pressure to keep them. As he writes, ‘If theorists of human capital fell into this trap, why expect acquirers of human capital to avoid it?’ But the investments will be a social waste that will just force you to run faster to stay in the same place. Although individuals benefit from isolated action, the sum of benefits of all the actions taken together is zero. 

Social limits of growth – II

For his analysis in Social Limits to Growth, Fred Hirsch divided goods into two primary types. The first type was material goods: These are, in a sense, goods as commonly defined in economics. Their consumption generates utility because of the intrinsic characteristics of the good in question. These will generally be called FMCG (Fast Moving Consumer Goods like soaps, shoes, refrigerators etc.). The supply of material goods could be, and was, increased in response to the public’s rising demand for them. 

The second category was called positional goods. There were certain amenities whose supply cannot be increased. Economic growth increases their utilization which increases their relative scarcity. The ozone layer, clean air, drinkable water, natural beauty, land for infrastructure (e.g. roads, sewers) and growing food, antiques etc. are examples. (‘Buy land. They are not making it anymore.’ – Mark Twain). Positional goods have no equivalent in standard economic theory. The focus of Hirch’s analysis was on the interplay between these two divisions of the economy. 

Within the realm of material  goods, all the   accomplishments economists attribute to the invisible hand of the competitive market economy holds true. Economic growth understood as a continuous increase in affluence means that ever more people have their needs in the material sector satisfied – and turn ever more attention to the positional sector. What happens when the material pie grows while the positional economy remains confined to a fixed size? 

Classical economists focused their attention narrowly on mankind’s bodily needs and thereby managed drastically to simplify the economic problem. That made demand and increases in demand always into a good thing, it showed competition to be a beneficent force that diminished monopoly profits and caused market prices to reflect costs and preferences; and it made quantification possible by rendering GDP estimates a simple measure of the economy’s contribution to welfare.

But when positional goods enter the picture, the situation is muddied. So long as material privation is widespread, conquest of material scarcity is the dominant concern. As demand for material goods are increasingly satisfied, demand for goods and facilities with a public (social) character become increasingly active. The limited demand for things with augmentable supply  (material goods) and the unlimited demand for those whose supply is limited (positional goods), have created a great number of peculiarities and problems in our society.

The consumption of positional goods is valued at least partly by comparison with the consumption of these goods by others – e.g., having a manager’s job makes me better off not only because of its intrinsic characteristic (salary, power, freedom etc.), but also because others are not managers. In a further sense, positional goods define our position within the society and are thus socially scarce.

Social scarcity can have differing visible effects. One is physical congestion: the more people acquire the material good “car”, the more frequent are traffic jams. The other is social congestion: this is the case in the area of jobs, where there is limited scope for “leaders”, “bosses” and the like. Furthermore, some positional goods are socially scarce because they generate utility by being physically scarce – for instance, there is limited amount of “picturesque” natural landscapes. Another area where such “direct” social scarcity prevails is in arts: a Picasso is seen as valuable mainly because there is only one of its kind.

The scarcity of a positional good renders different people’s enjoyment of it interdependent, so that one person’s increased consumption  or use of it reduces its availability for other people’s enjoyment. This causes numerous problems. Smog, traffic jams, the deterioration of cities, the spoiling of much natural beauty by overcrowding and too many tourists, the poisoning of the soil and ground water by the burying of toxic waste products are a few examples. 

While the economy as a whole keeps growing, the positional sector gets ever smaller (i.e more scarce) in relation to the rest. This makes positional goods relatively more expensive and/or their quality deteriorates (e.g., due to congestion effects). Also, while any individual has the possibility to attain positional goods, it is impossible for everyone to attain them making an increasing fraction of the population frustrated. Therefore, economic growth is continuously aggravating the problems arising from social scarcity. 

Demands for positional goods tend to grow as general standards rise, a demand that can be satisfied for some only by frustrating demand by others. For most people,  they become objects of desire that the most intensive effort cannot reach.  This creates situations in which individually rational behaviour leads to socially irrational outcomes. Positional competition that is promoted by growth leads to ever more frustration within the allegedly ever better off society.

Social limits of growth – I

It has long been believed, especially in Western societies (contrary to ancient wisdom), that the pursuit of economic advantage is actually a civilizing, moderating influence in society. Many people accept the view that people are motivated to pursue their narrow economic and material self-interests, assume that people support policies consistent with their vested interests, and regard behavior that is not self-interested with suspicion. The assumption that selfishness is the fundamental human motivation rests on the view that selfishness is beneficial, whereas otherishness is costly; people are selfish because they benefit from selfishness. 

We keep hearing material abundance would make it possible for everybody to have enough to be perfectly happy. Franklin D. Roosevelt reportedly remarked that if he could put one American book in the hands of every Russian, it would be the Sears, Roebuck catalogue. A person with such a mindset views anything that history, literature, philosophy, or long-standing traditions might have to suggest about the prudence one ought to employ in the shaping of new institutions as romantic babble which can be ignored. Harvey Cox writes in an article The Market as God: 

Expecting a terra incognita, I found myself instead in the land of déjà vu. The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine's City of God. 

Behind descriptions of market reforms, monetary policy, and the convolutions of the Dow, I gradually made out the pieces of a grand narrative about the inner meaning of human history, why things had gone wrong, and how to put them right. Theologians call these myths of origin, legends of the fall, and doctrines of sin and redemption. 

But here they were again, and in only thin disguise: chronicles about the creation of wealth, the seductive temptations of statism, captivity to faceless economic cycles, and, ultimately, salvation through the advent of free markets, with a small dose of ascetic belt tightening along the way, especially for the East Asian economies.

The last couple of centuries witnessed an impressive array of scientific discoveries, technical inventions, and industrial innovations which seemed to make the mastery of nature an accomplished fact rather than an idle dream. Many took this as a sign that all ancient wisdom had simply been rendered obsolete. As one chronicler of the new technology wrote in Scientific American: "The speculative philosophy of the past is but a too empty consolation for short-lived, busy man, and, seeing with the eye of science the possibilities of matter, he has touched it with the divine breath of thought and made a new world. " 

The assumption of self-interest pervades the social sciences, particularly economics and psychology. Empirical research suggests that this assumption is wrong or at least overstated. After a lot of searching the economist Joseph Henrich found that the Homo Economicus of economists' dreams does exist but, it is not a human, but a chimpanzee. ‘The canonical predictions of the Homo economicus model have proved remarkably successful in predicting chimpanzee behavior in simple experiments,’ Henrich noted dryly. ‘So, all theoretical work was not wasted, it was just applied to the wrong species.’ As Langdon Winner says in The Whale and the Reactor:

‘To argue a moral position convincingly these days requires that one speak to (and not depart from) people's love of material well-being, their fascination with efficiency, or their fear of death. The moral sentiments that hold force can be arrayed on a spectrum ranging from Adam Smith to Frederick W. Taylor to Thomas Hobbes. I do not wish to deny the validity of these sentiments, only to point out that they represent an extremely narrow mindset.’

Of course, all of economics is not about Homo Economicus. There are models which try to incorporate the complexities of human behavior. There are many results from experimental studies showing that people don’t behave according to the Homo Economicus model of human nature. We are far more cooperative and willing to trust than is predicted by the theory, and we retaliate vehemently when others behave selfishly. But most people who study economics don't go beyond the undergraduate level where such complexities are not discussed.

In Economics Rules: The Rights and Wrongs of the Dismal Science, Dani Rodrik says that many economists may have the predisposition of being knee-jerk market fundamentalists but it is certainly not what economics teaches. The correct answer to almost any question in economics is: It depends. Different models, each equally respectable, provide different answers. All the valuable lessons that economics teaches are contextual. They are if-then statements in which the “if” matters as much as the “then.”’

Economists don’t regard physical limits as a major problem because of the potential scope for substitution as a result of technological advance. Thus economic theory focused on explaining how conflicting selfish interests of market participants balance out in a way that results in the production of goods and services according to consumers’ preferences and an efficient allocation of resources to their production. What is not discussed are the ways in which growth creates its own frustrating limits.

The common argument is that even though the masses today could never get close to what the well-to-do have today, they can get most of the way there with patience in a not too distant tomorrow, through the magic of compound growth. If the fruits of aggregate advance appear inadequate or disappointing,  it merely reflects inadequate economic effort or excessive demands by individuals, or poor organization or inadequate capital equipment currently available to them. Too much has been expected too soon. Conventional wisdom thinks in terms of “excessive expectations.” The populace wants it now. It cannot have it now. It is too impatient. 

But in Social Limits to Growth, Fred Hirsch argued that the promise of economic growth which has dominated society for so long has limits that were essentially social rather than physical which made their analysis flawed. The distributional struggle is heightened rather than relieved by the process of growth. He shows why the affluent compete among themselves and how they create social scarcity. Affluence, by creating a kind of congestion, limits the welfare attainable by society as a whole.  

The affluent society is the frustrated society, seemingly incapable of improving the quality of life through greater material quantity. Generalized growth then increases the crush. It is an exact reversal of what economists and present-day politicians have come to expect growth to deliver. ‘To see total economic advance as individual advance writ large is to set up expectations that cannot be fulfilled, ever’.