Review: Beyond Accumulation and Technical Progress: Negative Externalities as an Engine of Economic Growth

This is a review of the paper “Beyond Accumulation and Technical Progress: Negative Externalities as an Engine of Economic Growth” by Stefano Bartolini (2004) (read free here)

It’s a long title for an elegant idea. This paper asks: “why does the economy grow?” It argues that the existing reasons of 1) accumulation and 2) technical progress fail to explain why a) people work so much for money and b) why they’re still so unhappy. Bartolini argues that the missing piece of the puzzle is negative externalities, which drive economic growth.

You’ve probably heard of negative externalities. A prime example is CO2 emissions, which hurt the rest of the world while the producer carries on happily. As such, the producer reaps more money than the net utility (benefit) they are handing out to the world is worth.
Now, how can negative externalities cause economic growth? And is that a good or bad effect? Let me illustrate with two examples of negative externalities (NE) leading to economic growth (EG).

  1. John works at a coal plant. His favorite hobby is fishing. The plant’s unscrubbed smoke leads to acid rain, which acidifies the local lakes, killing the fish (NE). Now, to fish, John must travel farther to other regions without acid rain (EG). To afford these trips, John must work more hours at the coal plant, cutting down his leisure time.
  2. Amy is one of many new car-driving residents moving to a city for work. This increases the air pollution (NE), which exacerbates her asthma. Amy must now buy asthma inhalers (EG), and prefers to take vacations to rural areas with clean area than stay in town (EG). To afford these added expenses, Amy works more, cutting down her leisure time.

You can probably sense the nature of the argument already. When negative externalities of economic activity damage the health of the natural world, which we previously took for granted (free!), we seek to replace those damaged resources by buying substitutes. The production of these substitutes then leads to more negative externalities, feeding back into the cycle. This is detailed in the Growth As Substitution Process (GASP) model.

In this framework economic prosperity does not increase happiness. Individuals are unable to enjoy the opportunities for greater well-being offered by increased labor productivity because they are forced into over-work and over-accumulation by negative externalities.

We know plenty of rich people are sad and lonely, which is another place where growth fails to deliver happiness. Bartolini touches on this deficiency in “relational goods” – the happiness gotten through human connection, like friendship and belonging. Closely related is the effects of urbanization, which strip away free places and opportunities to meet. Urbanization and the deficit of “relational goods” are also explained to contribute to economic growth, as people seek to fill the void with material goods.

The enormous accumulation of produced goods and the worship of everything that is private which characterizes market societies may be reactions to the erosion of everything that is common to people.”

To put some names to the faces, Bartolini identifies two kinds of negative externalities (my own abbreviations following).

  1. Positional negative externalities (PNE). Positional goods are things that have a set total amount, so for me to gain some, others must lose that same amount. For example, status and power. The main example of a PNE in the paper is relative wealth – how rich you are compared to your neighbors. If we all seek to get relatively wealthier by working more, then the resulting PNE is that nobody gets relatively richer. 
  2. Negative externalities that reduce social and natural capital (SNNE). The more typical NE discussed. Examples are pollution, lack of natural spaces, lack of free meeting spaces and opportunities. As a result of polluting activities and urbanization, previously free natural and social resources become scarce. People resort to paid substitutes of a similar (or different!) nature to fill the void.

Looking back, we can now categorize the prior examples of Amy and John as SNNEs. This distinction is important because policy response is different. Whereas PNEs are a thorny paradox where my first and best idea of a solution is just “stop being jealous,” SNNEs can be much more concretely addressed by simply safeguarding or restoring these resources to their former “free” glory by protecting nature, penalizing pollution, tackling the issues with urban planning, etc.

Fascinatingly, Bartolini notes, “It is curious that the stagnation/decline of happiness over the very long period in the industrial economies has never been cited as evidence for the argument that current patterns of growth are not sustainable.” An interesting take-down of the answers in sus dev literature follows.

The first explanation from literature is that the stagnation/decline of happiness is due to intergenerational greed – people helping themselves at cost to future generations. This is another thorny problem to which my immediate reaction is “just stop being greedy.” While being more generous is obviously good, it’s not much of a strategy. The GASP model offers a tantalizing alternative explanation: that our efforts to save money (private assets) for the future accidentally imperil the future due to – you guessed it – the negative externalities incurred by accumulating stuff! The GASP says we’re not selfish, just disempowered to help our descendants: “Being unable to leave them a better world, they try to leave them money.” Thus, the GASP answers that

decline in long-term well-being is due to a coordination failure, not to the intertemporal greed of each generation.

Yes! A coordination failure, not an ethical failure. There’s nothing wrong with us – it’s the system.

The last important point I’d like to touch is technology. Bartolini pivots against literature again here. He says that the literature argues the sustaining of wellbeing requires the sustaining of economic growth patterns, which requires increasingly powerful technology to provide just-as-good substitutes to natural capital. In contrast, the GASP says that growth does not guarantee wellbeing, and in fact can deteriorate wellbeing. Therefore, “the sustainability of well-being may not be a technological problem but instead an institutional one.”

Coming off the last lecture on the seminar I delivered about Energy and Human Ambitions on a Finite Planet, this meshes very well with message that a steady-steady economy is key for sustaining what really matters – well-being. Bartolini’s paper leaves us with similar critical, unanswered questions for ensuring future human wellbeing (albeit without global crises in mind): Can market democracies successfully represent the interests of all? And to what extent can we achieve the institutional changes needed to improve our conditions? 

I highly recommend reading this paper for the full discussion – it’s pretty readable. It also introduces a lot of relevant ideas and literature, which is great for me as a beginning reader in this field. The footnotes are very useful, too. 

Bartolini, Stefano. “Beyond Accumulation and Technical Progress: Negative Externalities as an Engine of Economic Growth.” SSRN Electronic Journal, 2003.

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