The Growth Myth-Metaphor


The angst of the day is the prospect that low growth will become a permanent feature of the world economy. Flashman has asked what it would mean if the GFC was permanent? As he notes, the Asian Development Bank is cutting its growth forecasts. Europe and America are struggling to grow at all and Japan is, well, Japan. Many are starting to blame the baby boomers for loading up economies with debt and having the indecency to live longer than the actuarial tables forecast. Perhaps we could kill a few to balance the books, as it were. Of course the biggest problem was the destruction wreaked by the financial sector, as The Economist points out. It notes that in the 1950s and 1960s the US economy grew by 3% despite its maturity. There was stagflation in the 1970s, but the rate returned to 3% in the 1990s:

“Today the growth machine is in trouble. It all but exploded in the financial crisis of 2007-08. But even before that it had been juddering. Examine the machine’s three most powerful pistons — capital markets, innovation and the knowledge economy — and you discover they have been malfunctioning for a decade.”

What is missing from this analysis is a simple question. What is this “growth” of which we speak? In a literal sense it is a record of transactions. The Economist uses GDP figures from 1950 to now. What is not mentioned is that GDP statistics were only created in the late 1930s, in the run up to the Second World War — John Maynard Keynes being a major player, as is pointed out in the book Double Entry. Keynes expected the records to be dismantled after the war; he was no doubt astonished to see them take over the global imagination.


So “growth”, usually GDP, is a record of transactions, and those transactions have only been recorded for about 60 years. Thus when people say growth is evaporating, what they literally mean is: “Our newly created records indicate that the volume of transactions is slowing.” Sounds a little different, doesn’t it?

There is an enormous cost to the failure to define precisely what is being said — a seemingly limitless tendency to be seduced by metaphors. Growth, as the Economist article shows, is depicted as the driver of a machine, its energy source as it were. If that energy dried up, then we are all rooned, as it were. But the image is plain wrong. Transactions are a social artifact that is created when people agree to share activities and agree over the value of those activities. If the rate of transactions slows, it is because people are not agreeing. What is causing the problems in developed economies is that relentless improvements in productivity has created over supply in many product areas.

A second, bigger cost of the “growth metaphor myth” is a deep confusion over the tangible and the intangible. Transactions are intangible. They can be recorded with tangible things, such as gold or coinage, but that occurs after the fact. By adopting the metaphor of the engine, however, people can persuade themselves that “growth” is tangible and analyse it accordingly.


This leads to all sorts of errors.

It can be seen in the confusion of consumption of resources and the rate of transactions. People who say that the environment will not support endless growth are confusing consumption with transactions. They are right that the consumption of resources has limits. They are wrong that this is the same as growth figures. Most of the economic activity (that which leads to transactions) in developed economies is services and they can consume very few resources. If I write a story and get it published it can create a transaction that mainly uses my time and perhaps a bit of electricity, maybe a bit of damage to my computer, a coffee or ten. If a babysitter gets paid for a few hours work they are simply being paid for their time, any consumption of resources is minimal.

More crucially in relation to recent events, the severe financialisation of economic activity — the massive volume of “meta money” that inevitably caused the global financial crisis — showed that transactions can be created virtually without limit. One bet on top of another, as it were. There was plenty of growth (of transactions) but it was extremely dangerous, more like a cancerous growth. The problem was the disjunction between theoretically limitless potential for the creation of transactions, and the limited character of the resources and activities that underlie those transactions. A United Nations report shows how this has played out in the commodity markets, where financialisation (the creation of too many transactions) has become rife:


What is really needed is a better understanding, and control of, the transactions that we have created. What they are for, and how we can judge whether they are creating socially desirable outcomes. Bearing in mind that transactions can be limitless, while the tangible world that they reflect is very much subject to limits.

It is often said that economics is the study of scarcity. But the financial world is a study of a lack of scarcity, and the inter-relationship between the two needs to be better understood.