“Exponential economist meets finite physicist”
View(s):Saroj Jayasinghe, Professor of Medicine at Colombo University, had recently sent a mail sharing an Internet link. The link directed me to a physicist’s blog post under the title ‘Exponential economist meets finite physicist.’
It was an interesting conversation between an economist and a physicist, who have met each other at a banquet dinner table and happened to sit together. I glanced at the conversation which was on an issue raised by the physicist, who argued that “economic growth cannot go forever, because resources in the world are limited”.
“Resource limitation” is, anyway, not strange in the subject areas of economics. Any student of economics should have learnt the subject with the idea that “resources are limited, but human wants are unlimited” as the foundation of economics! But they must have never thought of this economic problem, posed by a non-economist.
Physics and Economics
Before we turn to the crux of the matter in the conversation between the “exponential economist” and the “finite physicist,” it is worthwhile noting the connection between these two subject areas. They are closely related. Though economists hardly go into physics, it is quite common that physics students sometimes end up being economists!
Some of the students who have studied physics at their undergraduate degrees later choose to do economics at postgraduate levels. And I knew that they have done it well. Sometimes, I questioned why economics degrees in the Sri Lankan universities are not open to the science students who have studied subjects like physics and mathematics in school.
One of the important reasons why students with science background do well in economics is the competence in quantitative knowledge that they have acquired by following subjects like physics and mathematics. But there is a fatal risk too: If they don’t look beyond the quantitative formula into the world of economics, they often run into troubles. And the trouble leads to an absurd outcome, especially when there are practical applications.
The source of the trouble is that economics is not only a “science” with quantitative relationships, but also a “social science” with qualitative fundamentals.
Let me elaborate the point with a simple example: Imagine a cylinder-shape container like a soft drink can. A physics formula would reveal that if its height is reduced and the width (diameter) is increased enabling it to hold the same liquid content, then the amount of material required to manufacture that cylinder (such as plastic or metal) could be reduced too.
If a cylinder manufacturer takes the idea and tries to maximise profits by reducing just the material cost, would it be a successful business?
Absolutely not, because the manufacturer has to look at many other factors – such as consumer preferences and their income levels, design attractiveness, handling convenience, storage and transportation costs and, competitive products by others. Perhaps, the manufacturer might decide to move in the opposite direction by increasing the height of the cylinder, causing higher material cost, which would lead to improve the consumer preferences resulting in even higher profits.
Exponential economist
The physicist’s terminology for the economist against himself – “exponential economist” and “finite physicist” – implies the way that he thinks about the world of economics: Growth is exponential (increases more and more), and continues without ending!
File picture of a rice field in Sri Lanka. The writer argues that economic resources like this would be limited in the future.
From the physics point of view, this is an impossibility. Earth’s physical resources such as energy are limited so that one day growth should come to a halt. They are not arguing about a timespan with millions of years to the future, but to the near future – perhaps, a shorter period of time less than few centuries.
The economist, on the other hand, who moved out of the context by ignoring the usual ceteris paribus assumption of “other things equal”, seems to have got caught up in the physics formula.
Of course, he argued that alternative energies and energy technologies would do the job, sustaining growth indefinitely. But the physicist seems to have already done the homework in calculating energy growth with all that. Still the potential resource availability would fall short of the potential economic growth.
The debate didn’t end too. Neither the physicist nor the economist would agree to compromise their position too. The physicist was with the view that economic growth would come to an end sooner than later, while the economist was with the view that it would continue.
Economics: “more out of less”
Economics is about making more out of less. Throughout the human history, people learnt how to get more and more value out of less and less inputs – resources, labour, and time. As a result, the amount of resources required to produce a given output value has become much less today than it was 100 years ago. To put it in the other way around, the same amount of resources can produce more output value today than it could 100 years ago.
Thus, growth is not necessarily about pulling out and consuming more and more resources. It is also about knowledge, technology and, productivity. This is, however, not to say that growth is infinitely exponential or at least linear. In fact, it is not, but not for the reason that the physicist has given – limited resources.
Growth is not indefinitely exponential. It is more logistic and even cyclical. This means that growth gets accelerated at its early stages, decelerated at maturity and, then turn out to be even negative. Thus, growth is subject to the business cycles or trade cycles, which have been studied well by economists for over a century now.
In the early 20th Century, it was an economic puzzle to many as to why the UK economy that had become the great economic power in the world began to lose it to the US. In fact, today the US is losing it to China.
For instance, one of the economists at the time – Nicholas Kaldor wrote in his paper published in the Economic Journal in 1954: “Since the very beginnings of speculation on the problem of the Trade Cycle, the cyclical swings of the economic system have been regarded as being inherently connected with the essentially dynamic process of economic growth.”
In this publication, Kaldor reasoned out why the UK economy lost its growth momentum: “…the historical boom periods of the last 150 years were, in many cases, clearly associated with the exploitation of major technical innovations, such as the railways, electricity or the automobile.”
Problem of correlation
It is the new technological innovations that produces a growth momentum, which is indeed a “finite” growth momentum. It is bound to slow down at maturity and, lead to a downturn thereafter. The long-term business cycles in the world are the inherent outcomes of a major technological innovation or a set of innovations, which creates capacity for investment and profits to grow, resulting in higher growth.
Expansion comes to end, when the productive capacity of the innovation is fully exhausted. The real economy begins to contract, even though it can be disguised under money and credit growth. Then the growth momentum can begin somewhere else, again with major technological invention and innovation.
As we all know, at present time it has begun in Asia with major innovations in the areas of IT, biotechnology and robotics. As Asia has become the fastest growing region in the world, the advanced countries – particularly the US and the EU -, have been struggling to maintain at least their slower growth rates which existed prior to the 2009 global crisis. It is noteworthy that there are other factors that create different types of growth cycles with different timespans.
We just mentioned another important dimension of economic growth – it’s bumpy! Although we average the “world economic growth” to a single figure eliminating all pluses and minuses, growth is actually, uneven across the geographical space.
So, finally, can we say that growth continues infinitely? Absolutely not, but it is a more complex outcome of inherent factors than a simple correlation problem between growth rate and resource limitation.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).