GDP growth and planetary limits

The essentials

GDP and its growth are central indicators of economic discourse and policy.

GDP is a measure of new production in a national economy over the course of a year.

This indicator, which came to prominence after the Second World War, still plays a major role in the orientation and evaluation of public policy. GDP and its growth are seen as the manifestation of the power of states, as a measure of the standard of living of their inhabitants, and as a sine qua non for achieving most public policy objectives (combating unemployment, financing social spending, ecological transition).

National accounting was born out of the great crises of the first half of the 20th century.

While the first attempts to estimate national income date back to the end of the 17th century, it wasn’t until the 1930s that national accounting really began to take off, in other words, the desire to provide a global, quantified representation of the main dimensions (production, income, employment, consumption, productive capital, debt, etc.) of a country’s economy.

The two world wars and the crisis of 1929 demonstrated to governments the importance of equipping themselves with tools for measuring the national economy.

The crisis of 1929 was an important moment in the development of GDP.

On the one hand, it calls into question the then-dominant view in economics that supply creates its own demand, and that public intervention should be kept to a minimum to ensure that the economy functions at its best. Not only were crises possible, but state intervention appeared necessary to overcome them. Inspired by the ideas of economist J.M. Keynes, the New Deal launched by U.S. President Franklin D. Roosevelt in 1933 was designed to boost the economy by increasing aggregate demand through public spending (public works, public employment, social spending).

On the other hand, the crisis of 1929 highlighted the inadequacy of the statistical apparatus available to public players. If government intervention in the economy was no longer taboo, it still needed to have the elements to guide and evaluate its actions. It was to meet this need that Simon Kuznets commissioned the U.S. Senate to produce a report on the evolution of National Income from 1929 to 1932. ⁵ . This work constituted the first (rough) calculation of an indicator approaching GDP.

The production base, a determining factor in power

The two world wars highlighted the importance of mobilizing a country’s productive base to sustain the war effort and win the war. This heightened the interest of work aimed at strengthening statistical tools. During the First World War, the first national accounts were drawn up in various countries ⁶ . Following the Bretton Woods conference in 1944, GDP became the reference indicator for measuring and comparing the size of economies.

The post-war period saw a deepening of this statistical and accounting production dynamic to accompany the reconstruction of Europe and, in the United States, the reorientation of war production towards peacetime goods and services, as well as their disposal. The Thirty Glorious Years, marked by strong growth, full employment and rising living standards, validated economic growth in the collective imagination as an instrument of social progress.

National accounting developed in parallel in various countries before being standardized internationally with the adoption of the 1993 System of National Accounts. ⁷ (which will be updated once to give the 2008 SNA).
The SNA is a highly detailed nomenclature that explains all the definitions, rules and conventions used to draw up a country’s national accounts and major economic aggregates. It applies to every country in the world, although certain countries and zones may adapt it to suit local conditions. In the European Union, for example, the European System of Accounts(ESA 2010) applies.

One of the great strengths of GDP, and of national accounting in general, lies in this universalism of standards and conventions, which makes comparisons over time and between countries possible.

This brief history shows the extent to which the development of national accounting (and its central indicator, GDP) is the result of the dramatic events of the first half of the 20th century. GDP, as an indicator, came into being because it was felt necessary to measure production in detail in order to emerge from the crisis and support the war effort, followed by reconstruction. Such concerns have not disappeared today.

“Alongside the mobilization of resources for the war economy, it was attempts to forge effective demand management as a way out of the economic slump caused by the financial crisis of 1929 that prompted the introduction of national accounting. The focus on GDP is therefore not simply a convention. It certainly stems from a singular historical trajectory, combining the experiences of the twentieth-century wars and the Great Depression. But these two sources derive from ever-present constraints: on the one hand, the balance of power within the “concert of nations”; on the other, the electoral weight of a policy to support employment. Continued growth is therefore partly a response to structural imperatives.

Antonin Pottier ⁸

Nearly a century after its birth, GDP remains at the heart of economic discourse and policy.

In a 2013 study, the think tank The Shift Project ranked the different uses of GDP in order to assess the extent to which other indicators could replace it.

As can be seen in the box below, this classification gives the impression of an omnipresent “all-purpose” indicator, whatever the subject. It can be used to assess a country’s power (comparing countries according to their GDP in value terms) or wealth (comparing GDP per capita), to calibrate public policies (limiting public spending, setting environmental objectives, R&D targets), to draw up budget forecasts, or to calculate countries’ contributions to various international organizations.

This multiplicity of uses of GDP clearly demonstrates the centrality of this indicator. Most heads of government see GDP growth as the primary objective of economic policy, and indeed of public policy in general. It is seen not only as a sign of a country’s power and wealth, but also of its ability to meet the many ecological and social challenges it faces.

In a nutshell, the reasoning behind this deeply-rooted belief is as follows: GDP growth would increase employment, purchasing power, investment capacity and innovation. These are all necessary conditions for improving well-being or collective well-being, and for solving ecological problems, thanks to science, technology and human ingenuity. These are clearly the arguments put forward by economists when talking about growth and ecology.

Despite growing recognition of the limits of GDP, it remains at the heart of policy objectives.

As we shall see inEssentials 5 and 6, GDP and the quest for its growth are the subject of much criticism: they are no guarantee of improved living conditions for populations, and growth is accompanied by massive environmental degradation.

Initially voiced by researchers and activists, the inadequacies of GDP as an indicator of a society’s good health are now widely recognized at institutional level, as demonstrated by European initiatives to go beyond GDP and place other objectives at the heart of public policy (see below). However, despite these positive developments, it has to be said that the objective of growth (now described as green, sustainable or inclusive) remains central.

The development of a “beyond GDP” strategy in the European Union

Institutional recognition of the limits of GDP began with research. In 2007, the European Commission launched the Beyond GDP initiative to develop “indicators that are as clear and attractive as GDP, but take greater account of the environmental and social aspects of progress”. In 2009, this led to the publication of the roadmap Beyond GDP: measuring progress in a changing world. ¹³ .

The same year saw the publication of the report by the Stiglitz, Sen and Fitoussi Commission on the measurement of economic performance and social progress, commissioned by the President of the French Republic. Composed of eminent economists, including several Nobel Prize winners, the commission’s work marked a milestone in the institutional recognition of GDP’s limitations, for while the criticisms were widely known, it was the first time they had been voiced by mainstream economists. The report’s recommendations on the measurement of well-being and sustainability will feed into the work of various European statistical bodies.

At the political level, the beginning of the 21st century is also marked by the increasing display of social and ecological objectives. This is the case, for example, with the EU 2020 strategy for smart, sustainable and inclusive growth, adopted in 2010 ¹⁴ .

In its Conclusions of October 24, 2019, the Council of the European Union calls on the Member States and the Commission to “integrate concern for the welfare economy horizontally into national and Union policies, and place people and their well-being at the heart of policymaking.”

Taking office at the end of 2019, the Commission chaired by Ursula Van der Leyen is going one step further by making the Green Deal for Europe one of its six strategic priorities. In the wake of the COVID-19 pandemic, resilience ¹⁵ becomes “a new compass for EU policies.”

Despite these advances, growth remains the overriding objective

Thus, the rationale for including welfare economics in all public policies is that it “is of key importance for economic growth, productivity, long-term fiscal sustainability and social stability in the Union.” Theinfographic produced by the European Council to explain what welfare economics is shows the extent to which people’s well-being and economic growth remain intrinsically linked in official discourse.

The Green Pact for Europe is described by the Commission as a “new growth strategy” that “aims to transform the EU into a just and prosperous society, with a modern, resource-efficient and competitive economy, characterized by zero net greenhouse gas emissions by 2050, and in which economic growth is decoupled from resource use.”

Here is the trajectory presented by the Commission to achieve the climate neutrality objective at the heart of the Green Pact:

As can be seen, GDP growth remains central to the analysis. The presence of such a graph in a document dedicated to climate policy illustrates the extent to which this objective is still perceived as at least equivalent to, if not a prerequisite for, the reduction of greenhouse gas emissions.

As a final example, in the Porto Declaration on social issues adopted on May 8, 2021, the Heads of State meeting within the European Council welcome “the fact that the European social partners have drawn up a joint proposal for an alternative set of indicators to measure economic, social and environmental progress, which would complement GDP as a measure of well-being at the service of inclusive and sustainable growth.” The legitimacy of alternative indicators is fully recognized, but growth remains the ultimate goal.

European Union countries pursue austerity policies in the belief that they are “growth-oriented”.

While the objective of growth is common to most governments around the world, the policies designed to promote it can differ greatly from one country to another, depending on the prevailing economic thinking.

Keynesian policies versus structural reforms

During the “Trente Glorieuses”, Keynesian-inspired policies prevailed. These were based on the importance attached to aggregate demand and to the steering of the economy by the public authorities: strict control of the financial sector, wage enhancement and redistribution policies, stimulus via public spending (major works) in the event of an economic slowdown, proactive industrial strategies and so on.

Since the 1970s, neoliberal-inspired policies have become the norm. The aim is to “liberate” growth by acting on the supply side, by reducing regulations and constraints (particularly tax constraints) weighing on companies and investors, by deregulating financial markets, by implementing structural reforms concerning the cost, duration and organization of work, and by controlling public spending (which would weigh on companies’ costs and harm their competitiveness).

The European Union has gone the furthest in this direction: the economic principles involved in this type of policy have been enshrined at the heart of the European treaties, i.e. at the very top of the EU’s hierarchy of norms. ¹⁶

Potential GDP at the heart of European software

Since the Maastricht Treaty in 1992, European economic governance has revolved around two budgetary rules: member states’ public deficits must be below 3% of GDP, and their public debt must not exceed 60% of GDP.

These rules were then refined to take account of the fact that the public balance depends in part on the economic climate: an economic crisis can lead to a cyclical rise in the deficit (lower tax revenues, higher social spending, stimulus policies). As a result, European and national authorities have endeavored to calculate the structural public balance (i.e., the balance that would have been recorded if GDP had been at potential – see box), with the aim of achieving a balanced position.

These considerations are not just theoretical or technical: they have a profound impact on European public policy, to ensure that each country’s economy reaches its maximum production potential.

The “right” public spending, the “right” economic policy measures, are those that bring our economy back into line with potential growth. The aim is to close the output gap, i.e. the gap between actual growth and potential growth.

From an economic point of view, it is indeed desirable to fully utilize the production factors of labor and physical capital (machines, factories). ¹⁷ . However, the methodologies used to calculate this gap are more than scientifically questionable (see the fact sheet on potential GDP and the natural deficit), as are the public policy measures put forward in European texts to reduce the output gap.

These are so-called “structural” reforms, essentially aimed at cutting public spending, making the labor market more flexible and promoting innovation. This is how the “lightening” of labor laws, the elimination of “rents”, the simplification of administrative procedures, the deconstruction of public services, etc. are justified. In short, the measures that have been at the heart of European leaders’ economic programs for decades.

Thinking they are pursuing growth policies, European governments are in fact pursuing austerity policies, which obviously pose major problems for investment in the ecological transition.

The calculation of GDP is based on a number of conventions

Here, we look at how GDP is calculated, detailing how each of the major institutional sectors (see box) contributes to its formation.

In particular, we will see that it is the result of numerous conventions, which are themselves interpreted by national accountants. This makes international comparisons far less straightforward than they might seem. We’ll also see just how informative an indicator GDP is, once you get down to the nitty-gritty of its breakdown.

Gross domestic product is the main aggregate measuring a country’s economic activity. It corresponds to the sum of gross value added newly created by the country’s resident economic units in a given year, valued at market prices.

It provides a measure of the new wealth created each year by the country’s productive system and enables international comparisons.

INSEE

As the definition above illustrates, GDP is traditionally presented as a measure of a country’s productive activity. As we shall see, there are in fact three ways of calculating it: by production, by income and by expenditure. This is quite logical: the production of goods and services enables the distribution of income, which in turn is used to consume and invest.

Calculating GDP by production

GDP is not a measure of production in the strict sense, but of the value added (VA) generated by the various resident units of a national economy over the course of a year.

As its name suggests, VA is the value of production added to the national economy. To calculate it, it is therefore necessary to eliminate double-counting, i.e. goods and services sold by certain producers that are used in the production of other goods and services.

To calculate GDP you need :

• Add up the value of production (market, non-market or for own final use – see box) achieved by all producers over the course of a year.
• Then, to avoid double counting, subtract intermediate consumption (i.e. goods and services transformed or entirely consumed during the production process).
• Finally, to obtain GDP, we need to move from the base price (the price received by the producer) to the acquisition price (the price paid by final consumers). We therefore add taxes on products (taxes, such as VAT, paid by final consumers at the time of purchase) and subtract subsidies on products (subsidies paid to the producer to reduce the prices paid by final consumers).

In 2019, France’s GDP totaled 2437.6 billion euros. Nearly 59% of value added was generated by non-financial companies, 18% by general government and 17% by households. It should be noted in passing that public spending does indeed represent a contribution to GDP, and not a deduction from it, as is often claimed.

Note that GDP can also be broken down not by institutional sector, but by branch of activity (agriculture, industry, services, etc.).

How are production limits defined?

In SEC 2010 ²⁰ production is defined as “an activity carried out under the control, responsibility and management of an institutional unit which combines resources – labor, capital, goods and services – to manufacture goods or provide services. Production does not include natural processes without human intervention or control.” (p.58)

• The spontaneous growth of natural resources (fish in the ocean, primary forests, groundwater renewal, etc.) is therefore excluded from production. Conversely, the growth of fish in fish hatcheries, of farmed animals, of trees cultivated for their fruit or timber are all part of production. This explains why clear-cutting a primary forest or cultivating a nature reserve results in an increase in production (and is therefore counted positively in GDP).
  
• The unobserved economy ²¹ is theoretically part of production. For example, national accountants must try to include “underground” production ²² i.e. production not declared to avoid taxes (under-declaration of sales) or social security contributions (undeclared work), by making estimates based on indirect sources (such as tax adjustments). Certain illegal activities are also included in the production perimeter, as long as they are the subject of a “common agreement” (for example: theft is excluded, but the sale of stolen goods is included). The inclusion of drugs and prostitution has been the subject of much debate. ²³
• Production also includes non-market activities and activities carried out for oneself (see box above). Here too, the limits of what is and what is not included in GDP are conventionally fixed. Thus, the production of goods (food, construction) by households for their own consumption is part of production. On the other hand, domestic services (cooking, cleaning, childcare, care of the sick and elderly) are not included in the calculation of production (unless they are performed by paid employees).

How is production value calculated?

While the value of market production is determined by selling prices, this is not the case for the other two types of production.

PEFP is “estimated on the basis of similar products sold on the market. This production therefore generates a net operating surplus or mixed income.” If there is no market price for similar products, PEFP “is valued at production costs, plus an amount corresponding to the expected net operating surplus or mixed income”. ²⁴

The PNM is valued by summing production costs. ²⁵ This method has been the subject of much debate among national accountants. ²⁶ While it has the advantage of being based on measurable quantities, it remains largely conventional, and there could be other ways of evaluating it. For example, if, like the PEFP, the PNM included a producer’s margin (operating surplus or mixed income), its amount would be higher, which would lead to an increase in the GDP of countries in which public services play an important role.

Calculating GDP by demand (or by expenditure)

GDP can also be calculated as the sum of all final expenditure (i.e. excluding intermediate consumption) by resident units, plus the balance of trade in goods and services with the rest of the world.

This approach shows whether GDP is driven by final consumption or by investment. The trade balance shows the extent to which domestic demand depends on imports (if this balance is negative) or the extent to which foreign demand contributes to GDP (if this balance is positive).

For example, in 2019, final consumption accounted for around 77% of France’s GDP, and investment (GFCF – see box) for almost 23%.

Final consumption expenditure

It covers “expenditure by resident institutional units on the acquisition of goods or services that are used for the direct satisfaction of the individual or collective needs of the members of the community. ” ²⁷

It is mainly generated by households, and includes all goods and services purchased (excluding housing, which is considered an investment) as well as those produced for own final use.

This approach to household final consumption is rather restrictive, as it excludes expenditure that benefits households but is borne by public administrations (education, health, culture, etc.) or non-profit institutions (see box).

Companies (financial and non-financial) have no final consumption expenditure. Their purchases of goods and services are used either for intermediate consumption (in which case they are excluded from GDP), for compensation of employees in kind (in which case they are charged to household final consumption), or for investment (see below).

Gross capital formation (GCF)

GFCF is obtained by adding gross fixed capital formation (GFCF), changes in inventories and acquisitions less disposals of valuables (jewelry, objets d’art, precious stones and metals held as a store of value).

Gross fixed capital formation (GFCF) is the name given to the productive investment made over the course of a year by the various economic players. It is made up of acquisitions ²⁹ minus disposals of fixed assets (see box).

The boundary between investment (GFCF) and intermediate consumption is not set in stone

Intermediate consumption and investment both refer to goods and services used in the production process.

They differ in terms of time of use: in the first case, goods and services are entirely transformed or consumed during production; in the second, they are used over the long term.

As far as GDP is concerned, this distinction is of fundamental importance, since the value of intermediate consumption is deducted from production, whereas this is not the case for investment. However, the boundaries between these two concepts have evolved over time.

For example, the acquisition of military equipment ³⁰ research & development services or software and databases was classified as intermediate consumption until 2014 (when the new European System of Accounts, ESA 2010, was implemented by the national accountants of European countries). Thereafter, these various items were classified under investment. This resulted, for example, in an increase in France’s GDP of around €46 billion in 2010. ³¹

GDP does not include consumption of fixed capital (wear and tear on machines, buildings and infrastructure).

GDP is supposed to measure value added, i.e. the new value created by production in a country. This is why the value of intermediate consumption is deducted.

By the same token, we should also deduct wear and tear on the stock of fixed capital (known as consumption of fixed capital – CCF). Machines, buildings and infrastructure deteriorate over time. Some equipment (especially ICT, software and databases) may become obsolete. All this represents a reduction in added value.

Consumption of fixed capital is, however, difficult to assess. Not all countries carry out this type of calculation, and those that do may use different methods. ³²

It is therefore customary to use GDP as the key indicator, rather than NDP (net domestic product), even if the latter is also calculated by national accountants. ³³ This means that the deterioration in fixed capital is not reflected, which is a problem, for example, when software and hardware purchases account for a large proportion of GFCF, as the lifetimes of these investments are short. GDP (which includes GFCF) can therefore grow faster than NIP, concealing the obsolescence of productive capital.

Calculating GDP by income

Finally, GDP can also be calculated as the sum of income distributed by producers during the production process.

The table above shows that income from employee compensation represented 1,243 billion euros in 2019, or 57% of value added. They were mainly paid to employees by non-financial companies (814 billion), then by general government (297 billion).

GDP is calculated by adding :

• Remuneration paid by producers to employees (including employer and employee social security contributions) ;
• Other net taxes on production ³⁴ paid by producers to general government;
• Gross operating profit (EBITDA), which corresponds to what remains for the producer once direct production-related expenses have been paid (wages, net production-related taxes and intermediate consumption). It is an indicator of the profit that producers have made from their activity. It is obviously particularly important for non-financial companies (NFCs), since EBITDA is their main source of primary income, unlike households (where the main source is labor remuneration) or public administrations (where the main source is compulsory deductions). EBITDA enables NFCs to meet obligations that do not arise directly from production (paying interest on loans, paying corporate income tax), to invest and to pay dividends to their shareholders;
• Mixed income”, which corresponds to income from sole proprietorships ³⁵ . It is said to be mixed because it includes, on the one hand (and for the most part) the remuneration of the self-employed work of sole proprietors and, on the other, the “normal” profit (EBITDA).

Don’t confuse GDP with National Income

GDP allows us to see which players are responsible for distributing income from production. However, it does not tell us what income is actually received by the various institutional sectors. For that, we need to look at gross national income. This measures the sum of primary income (from production and property) received by residents, whether this income is generated by the national economy or by the rest of the world.

To calculate it, you need :

• add to GDP income received from the rest of the world: this mainly concerns remuneration paid to resident employees by non-resident units, and property income (interest, dividends, etc.) paid to residents by non-resident units;
• subtract from GDP income paid to the rest of the world (remuneration and property income paid to non-residents).

Equating GDP with a country’s power or wealth is misleading.

What does GDP say about a country’s power?

As we said inEssentiel 1, wars were a powerful gas pedal in the creation of GDP and its affirmation as an indicator of a state’s power, or at least its ability to mobilize its productive resources to assert itself in the “concert of nations”. What is the situation today?

A simple analysis of the ranking of states by GDP shows that this indicator is insufficient to reflect political power.

Consider the paradox of a geopolitically overpowered Russia, which in recent years has taken its revenge on the United States for the Cold War, but whose GDP is 50% lower than France’s (and whose per capita GDP is four times lower). Or, conversely, the European Union, which is still unable to influence the course of the world despite having a GDP equivalent to that of the United States and China.

Eloi Laurent ³⁶

Nor does GDP say anything about a country’s dependence on supplies from the rest of the world. This factor was particularly highlighted during the COVID-19 crisis, when globalized production chains were disrupted or even brought to a standstill, leading to disruptions in supplies of essential goods needed to respond to the pandemic (masks, paracetamol, test reagents, respiratory equipment, food production) or for the overall functioning of the economy (microchips).

The same applies to energy independence. It is invisible in GDP, even though we have known at least since the oil crises of the 1970s the extent to which energy is a determining factor in global production.

Finally, it’s important not to confuse a country’s economic power with the wealth of its inhabitants (measured by GDP, which we’ll see later is a very crude measure). The example of China is particularly enlightening in this respect. The world’s second-largest economy in terms of GDP, China has been enjoying growth rates that have Western leaders dreaming for decades. Does this mean that its inhabitants are among the richest on the planet? Certainly not. If we look at GDP per capita, in 2019 China ranked 79th if measured in constant dollars(see here) and 83rd in purchasing power parity(see here).

A country’s wealth is its heritage

As we saw inEssentiel 3, GDP is a measure of the value added generated in a given territory in a given year.

It is therefore first and foremost an indicator that measures a flow and not a stock of wealth.

It’s quite possible for a country’s GDP to grow year on year, then suddenly collapse because this growth was based on the exploitation of natural resources whose stocks have dried up. This is the well-known example of the island of Nauru after its phosphate mines were exhausted.

An individual’s wealth is not just his income, but also his assets (real estate and financial), his health, his knowledge, his know-how, his culture and the links he develops with others.

In the case of a country, heritage has many dimensions

Public assets are made up of financial assets and, above all, physical assets: infrastructure (water, electricity and telephone networks, roads and railways, ports and airports, etc.), community facilities, buildings housing public services (schools, hospitals, museums, barracks, etc.). Some of these assets, such as monuments and works of art, are not valued in monetary terms. Notre-Dame Cathedral in Paris is worth nothing, and neither is the Mona Lisa, until they are put up for sale (to pay off the public debt, for example!).

A country’s heritage also includes its private production system: industries, agriculture and services. To what extent does an economy produce the food, clothing, basic materials (paper, steel, cement, etc.), medicines, energy, machinery, furniture, IT equipment consumed by its inhabitants? To what extent does it depend on global supply chains? Is our productive system capable of producing goods and services of interest to other countries, and does it therefore give us the financial means to acquire what we don’t produce?

Wealth also includes the institutions that enable the economy and, more generally, life in society to function: a judicial system, a police force, an army, a health system, an education system, and so on.

Finally, a country’s wealth is based on the natural heritage (public and private) that will enable future production. A more or less artificial national territory, a more or less rich terrestrial and marine biodiversity, forests, water tables, mineral and energy resources, living or dead agricultural soils, nature reserves, coastal areas.

In short, we are bequeathing more or less significant natural resource potential.

None of this is reflected in GDP: our economic system has reduced the notion of wealth to a very narrow dimension!

GDP is not a good indicator of economic and social health

Omnipresent in public debate, GDP and its growth are often equated with a measure of an economy’s economic and social health.

Yet as early as 1934, Simon Kuznets, the architect of American national accounting and inventor of GDP, warned against its use as an indicator of well-being ³⁷ . The limitations of GDP as a tool for diagnosing the state of a society have since been the subject of a great deal of research.

As economist Eloi Laurent neatly sums up, “GDP is misleading when it comes to economic well-being, blind to human well-being and mute when it comes to ecological sustainability. Belief in growth is either an illusion or a mystification.” Here we outline the criticisms of the economy and social aspects, and inEssentiel 5 the criticisms of ecology.

What does GDP tell us about a country’s productive structure?

As an aggregate indicator, GDP provides little information on the structure of production. On the other hand, going into more detail about the data used to calculate GDP provides access to a wealth of information.

For example, it is possible to analyze the formation of value added by branch ³⁸ (agriculture, industry, construction, market and non-market services) or by institutional sector (households, financial and non-financial companies, public administrations, etc.).

Does this dive into the details of GDP provide an accurate picture of the balance of power within the economy and the evolution of the productive structure? Nothing is less certain. As we shall see from the three examples below, GDP seems less and less well suited to describing the evolution of a country’s economy.

Financial companies

The following graph, for example, shows how little GDP reflects the rise of the financial industry since the 1970s. In France, the financial sector’s contribution to the French economy’s value added has hovered around 5% for 50 years, barely double that of associations. ³⁹

GDP therefore completely fails to take into account the dizzying growth of the banking and financial sphere since the 1970s (see the Role and limits of finance module) and the growing power of these players over the productive sphere (see the Role and limits of finance module) and over public policy (see the Public debt and deficit module).

This situation is linked to the fact that the power of the financial industry is a consequence of the weight of financial assets, which is not reflected in GDP.

The digital economy

The last decade has been marked by the emergence of the digital economy and its champions, the GAFAMs. ⁴⁰ .

To date, the breakdown of GDP does not reflect this dynamic, as there is no “digital economy” branch in the national accounting classifications. The companies concerned are therefore classified in various other branches according to their main activity.

This situation is normal: statistical nomenclatures adapt with a certain time lag to changes in production structure. ⁴¹ . The current version of the System of National Accounts dates back to 2008, the year the first smartphone came out!

There are, however, a number of studies that attempt to assess the digital economy’s contribution to GDP. This is done, for example, by the Bureau of Economic Analysis in the United States.

This work raises a number of methodological questions ⁴² that are far from being resolved. In particular, they come up against the fact that the power of digital companies, and in particular the GAFAMs, stems from a particular economic model: they provide “free” services, and in return capture and exploit the data of the users of these services. The primary source of revenue for Google or Facebook, for example, is advertising, whereas the real source of their power lies in their formidable capacity to capture data. This raises many questions that neither accounting nor GDP are able to answer today.

The weight of multinationals

Finally, recent decades have been characterized by the emergence of multinationals. However, the national accounting system that has developed since the mid-20th century aims to track economic activity country by country, with GDP measuring production by resident units. ⁴³ in each country.

As economist Jean-Paul Piriou clearly explains, this concept of residence “leads to neglecting the control exercised over certain resident units by resident units in other national economies. For national accounting purposes, IBM’s French subsidiary is part of the national economy (it is owned by IBM-USA, but its head office is in France), and Renault’s Spanish subsidiary belongs to the Spanish national economy. The residency criterion is therefore only partially realistic, as it does not allow for the integration of certain power relationships. Representing a national economy immediately makes it impossible to take into account the structuring of the global economy by transnational firms”. ⁴⁴

Finally, the development of globalized value chains and the significant share of intangible assets (software, R&D, databases, brands) in production make it increasingly problematic to attribute production to a given territory. The example of Irish GDP is particularly enlightening on this point (see box below).

These various examples show the extent to which GDP seems less and less suited to fulfilling its original purpose: to measure the overall volume of a country’s production and to reflect the structure of production (by analyzing its components in terms of branches or institutional sectors).

For this reason, some national accountants ⁴⁵ recommend moving from reporting GDP as an indicator of production to reporting GDP as a source of income (seeEssentiel 3). This would provide a clearer picture of what GDP measures, namely income flows that include revenues that can be extremely volatile (such as those linked to the location of intangible assets – patents, software, brands – of multinationals). However, this approach in no way resolves the question of power and power relations within the economic sphere.

GDP and well-being

It is undeniable that in poor countries, increasing the well-being of the population depends on increasing certain essential production (agricultural, industrial, health and education). More generally, economic growth conveys the idea of an increase in collective resources, and therefore in political and social room for manoeuvre, notably to improve people’s living conditions. As we shall see, however, the relationship between rising GDP and improved well-being is far from always proven.

GDP is not happiness: Easterlin’s paradox

Economist Richard Easterlin is credited with highlighting the paradox that bears his name. In a 1974 study ⁴⁶ he compared the evolution of real income ⁴⁷ and that of their “happiness” measured by declarative surveys in 19 countries for the period 1946 and 1970 (see box).

Its results show that, while richer people within a given country declare themselves happier than poorer people, this is not necessarily reflected by differences in income levels between countries.

On the other hand, in the United States, the 60%-plus rise in real income was not matched by a similar rise in the proportion of Americans who consider themselves “very happy”.

This initial study has given rise to many others along similar lines.

Beyond a certain level, “more income” does not lead to “more satisfaction” or “more well-being”. An INSEE study conducted in 26 European countries shows, for example, that “rising living standards have a marked impact on life satisfaction up to 20,000 euros a year, which gradually fades between 20,000 and 40,000 euros. Beyond that, variations in living standards have a marginal impact on life satisfaction.” ⁴⁸

GDP and social indicators

The “Trente Glorieuses” established the belief that GDP growth went hand in hand with improvements in a number of social indicators: job creation, reduced poverty and inequality, generalized improvement in purchasing power, higher life expectancy. Recent decades have shown, however, that such growth is by no means a sufficient condition for achieving these objectives.

For example, growth over the last few decades has not prevented mass unemployment from continuing in many countries, particularly if we consider the “unemployment halo”. ⁴⁹ and not just unemployment in the strict sense.

GDP growth can be accompanied by rising inequality, as shown by the evolution of the Gini index in the United States, the world’s leading economy (see data on the World Bank website). ⁵⁰ .

According to the OECD, “over the last thirty years, the gap between rich and poor has widened in most OECD countries, while the Gini coefficient has risen by three points, reaching an average value of 0.32”“. ⁵¹

A high level of GDP per capita does not necessarily translate into better performance on social indicators (level of education, health, social ties, etc.). Research on French regions has shown that there is no correlation between GDP per capita and social health index (see box). Ile de France, the richest region, is also among the worst rated by this indicator.

As we saw inEssentiel 3, we decided not to include in the scope of production certain activities that we perform ourselves or for others without monetary exchange. Certain activities essential to the quality of social ties, such as voluntary work and domestic services, are therefore not included in GDP.

So, to increase GDP, it would be better to replace volunteers in associations with salaried employees; to put children in crèches and grandparents in retirement homes rather than have the former looked after by the latter; to buy ready-made meals rather than prepare them yourself; to pay for private lessons for your children rather than help them revise in the evening. Would it be better in terms of social health?

Finally, as we’ll see in the next section, over-exploitation of natural resources and pollution do not have a negative impact on GDP (on the contrary!), whereas the consequences of environmental degradation can be significant both locally and globally (via climate change, for example).

Growth in GDP goes hand in hand with growth in the exploitation and degradation of nature

One of the main criticisms of GDP is its environmental impact. Not only is GDP blind to the destruction of natural resources and major ecological imbalances, but the quest for growth also contributes to increasing them.

The dominant theories of growth generally focus on two factors of production: capital (in other words, all the equipment and infrastructure used by the economic system) and labor. They increasingly include “intangible capital” (inventions, patents, know-how), but “forget” natural resources (seeEssentiel 8 on macroeconomic models).

The reasoning behind this approach to growth is based on the idea that artificial capital (machines) could indefinitely replace natural capital. This approach, known as weak sustainability ⁵² However, it is clearly false: geo-engineering techniques will not replace natural climate regulation. ⁵³ or bees and other pollinators by drones.

GDP is blind to the overexploitation of natural resources

It goes without saying that natural resources are the material and living foundation of all economic activity. We need water and arable land to raise livestock and grow food and textiles; wood and minerals to construct buildings, infrastructure and machinery; energy to heat our homes, cook our food, move people and goods, extract and transform matter and so on.

While the production and consumption process feeds on natural resources, much of it transforms them into waste and pollution (solid, liquid or gaseous) that is discharged into natural environments, disrupting and polluting ecosystems, turning the oceans into vast garbage dumps and destabilizing the planet’s climate.

Since the start of the industrial revolution, we’ve been drawing on the stock of natural resources, without GDP allowing us to see the limits. It’s simply not designed for this purpose: it only measures monetary flows generated by the production and exchange of goods and services.

We use water, soil, metals and energy, but the cost of building up these resources never appears on our bills. We pay only for the labor and rents involved in extracting, transporting, processing, marketing and advertising them, but never for the quantity of natural resources used, because Nature doesn’t charge for them…

What’s more, we benefit from a number of services provided by ecosystems (see the Economy, natural resources and pollution module) that are priceless in themselves. For example, we pay nothing for the water cycle, climate stability, the existence of an ocean conducive to life, photosynthesis or for the action of bees and other pollinators. Their disappearance, on the other hand, would have a very high economic, but above all human and ecosystem “cost”, of which we wouldn’t become aware until it was too late.

GDP is the driving force behind the destruction of nature

In addition to being blind to the dilapidation of our natural heritage, GDP and the quest for growth have until now been the driving force behind this destruction. When a primary forest is clear-cut, when a mine is put into operation, when industrial fishing fleets empty the oceans (while destroying the seabed), this generates jobs, goods and services sold – in short, GDP.

So, despite repeated warnings, global growth remains extremely well correlated with material and energy consumption, greenhouse gas emissions and, more generally, pollution and the destruction of nature (to the point where it is probably the best indicator of this destruction!

However, natural resources are not inexhaustible, either because they are finite on the planet (such as fossil fuels or minerals) or because they are renewed too slowly in relation to the amount we take from them (fish stocks, soil, fresh water, forests, etc.) (see the Economy, natural resources and pollution module). This is what the inhabitants of the island of Nauru and the cod fishermen of Newfoundland have learned the hard way.

On the other hand, the activities required to repair the problems generated by economic activity (known as “defensive spending”), far from weighing on GDP, actually increase it: cleaning up beaches after an oil spill, or soils following chemical pollution, building wastewater treatment plants, building dykes to protect against the waters following the destruction of coastal ecosystems (mangroves, coral reefs), providing care to repair the health consequences of pollution… all this generates economic activity and therefore GDP.

But you have to have the means to pay to repair the damage, otherwise all you can do is endure it, as is the case for many populations around the world. And not everything can be repaired. While some of the services we derive from ecosystems can be artificially reconstituted (water purification, for example), this is not the case for most of them. It is impossible, for example, to replace the climate stability essential to human survival.

When the costs of repairing ecological damage become too great for the human economy, GDP will inevitably start to fall.

A few examples of the excellent correlation between GDP growth, natural resource consumption and pollution

Numerous studies based on physical reasoning have demonstrated the strong correlations between GDP growth, consumption of natural resources and environmental degradation.

Researchers have highlighted the “great acceleration” of this process. ⁵⁴ i.e. the exponential growth, from the 1950s onwards, of socio-economic indicators, foremost among which is GDP, and of indicators relating to resource consumption (water, energy, fish) and environmental degradation (greenhouse gas emissions, deforestation, eutrophication of coastal zones).

GDP and natural resource consumption: the example of energy

It’s easy enough to explain the correlation between economic growth and energy consumption. Economic activity consists mainly in the extraction and transformation of materials to produce goods and services consumed by human beings.

Among these materials, energy occupies a major place. Not only do we consume it directly (to heat buildings, move people and goods, cook food, operate electrical and electronic equipment), but it is also the driving force behind the transformation of other natural resources: all extraction and transformation activities require machines, and therefore energy.

Symmetrically, tensions over energy supplies at certain times (the 1973 oil crisis in the West being the most spectacular case in point) have led to lower growth rates.

The links between energy and GDP are not simply a coincidental correlation: there is indeed a causal relationship between GDP and energy. However, this relationship is not absolute. Rising energy consumption alone does not explain GDP growth.

In theory, while access to energy is key to “keeping our machines running”, and therefore the economy, it is not enough. We also need institutions, companies, knowledge, qualified and motivated personnel… to use and transform this energy.

Empirically speaking, some countries have (or have had) easy access to energy resources and have not seen their GDP grow. This is known as the “oil curse” or, more generally, the curse of natural resources. ⁵⁵ Countries with substantial oil resources may fail to develop, either because of technical incapacity (this was the case for all countries in the world before the industrial revolution), or because of the capture of oil rents by an oligarchy.

GDP and pollution: the example of GHG emissions

As the graph below shows, GDP per capita and CO2 emissions per capita are fairly well correlated. This correlation is obviously linked to the previous one (energy/GDP) insofar as the vast majority of primary energy comes from fossil fuels. Coal, oil and gas still account for 80% of the world’s primary energy sources.

While a decoupling between CO2 emissions and GDP can be observed in some developed countries (seeEssentiel 9), the orders of magnitude are far from being right.

The limits of GDP are well understood, but it is still far from being replaced.

As we saw inEssentials 4 and 5, the limits of GDP and the growth objective are now well established. Faced with these criticisms, national accountants and economists have come up with a simple response: GDP is not intended to measure the well-being, progress and, even less, the environmental sustainability of an economy. The indicator is not to blame for the media excesses and political veneration to which it is subjected.

For this reason, a great deal of work has gone into developing indicators to complement GDP, to put its use in public debate and public policy into perspective, and even to replace it. The ultimate aim is not only to provide other measures of the economy, but also to help shape other economic trajectories.

Alternative indicators to GDP

One of the fundamental debates at the heart of the debate on alternative indicators is whether or not to emphasize :

• a few synthetic indicators (see below) with sufficient communicative power to counterbalance GDP;
• or a table of economic, social and environmental indicators to provide detailed measurements of the evolution of society in its various dimensions.

Synthetic (or composite) indicators

Their purpose is to summarize various standardized variables in a single number. ⁵⁶ which are then weighted and aggregated.

In addition to the often-present economic dimension, these indicators may focus more on social dimensions (e.g., variables on inequality, poverty and exclusion, social insecurity, etc.), or on environmental dimensions (e.g., variables on greenhouse gas emissions, material and energy consumption, land use, etc.). Some indicators aim to cover all these dimensions.

The main criticisms are that the choice of variables and, above all, their weighting are necessarily arbitrary, and that these indicators cannot of course cover all the dimensions of well-being and sustainability. Their promoters acknowledge these limitations, which are inherent in any aggregation procedure, but also insist that they have strong communicative power and are therefore good candidates to counterbalance the predominance of GDP.

Adjusted GDP” or “green GDP” is a special form of synthetic indicator.

Their purpose is to correct GDP by adding monetary estimates of activities that contribute positively to “present economic well-being” (leisure, domestic work) and subtracting activities that reduce it (commuting, pollution control activities, destruction of primary forests, etc.).

The advantage of these approaches is that they can be directly compared with GDP, and are part of a familiar measurement space: that of national accounts and the expression of values in monetary units.

On the other hand, they pose a number of problems: i/ they don’t take inequalities into account ii/ they involve giving a monetary value to goods and services that don’t have one, with all the methodological and ethical questions this raises, and, in particular, putting a price on nature iii/ they are based on a logic of weak sustainability: the destruction of natural resources can be compensated for by the development of artificial capital (machines).

These approaches have their origins in a 1973 article by Nordhaus and Tobin ⁶⁰ which took very little account of environmental issues. Other examples include the genuine progress indicator and the sustainable well-being index.

Multidimensional dashboards

The most common approach at institutional level is to set up dashboards grouping together various unweighted indicators, either with a view to providing a global vision of the various dimensions (economic, social, ecological) of society, or with a view to informing specific public policies (education, transport, energy, etc.).

The value of dashboards lies in their ability to enable governments and experts to monitor and analyze in detail the various changes taking place in society. In addition, by using physical environmental variables, they provide warning indicators of the unsustainability of development.

However, these tables are extremely heterogeneous, making it difficult to select and prioritize the indicators they contain. Above all, they are poor communication tools.

“Public, political and media debate is largely dominated by economic and financial criteria: GDP, growth and stock market indices dominate the headlines and hold the audience record. They symbolize success. To organize public debates on how growth is or isn’t accompanied by social and environmental progress, with a powerful, well-known and much-publicized growth indicator on the one hand, and a table of several dozen variables on the other, is to place ourselves in a situation of unfair competition from the outset.”

Jean Gadrey ⁶³

How can we bring alternative indicators to GDP into the public debate?

Despite numerous studies on alternative indicators, we saw inEssentiel 1 that GDP and its growth remain at the heart of economic policy discourse and stated objectives.

In fact, it’s neither enough to measure alternative indicators, nor to proclaim them, to set in motion a profound social transformation. We also need to make them effective, in other words, to turn them into genuine tools for measuring and guiding public action.

Giving legitimacy to alternative indicators

A recurring demand of the promoters of alternative indicators to GDP concerns the modalities of their adoption. Since they are supposed to reflect the objectives a society sets for itself, it is necessary to give them legitimacy by initiating a public debate on what makes sense and the direction to take.

Make them genuine tools for guiding public policies

Public authorities need to get to grips with these indicators and make them operational. The general principle would be to justify the various public policy measures not because they are good for growth (or considered as such – seeEssentiel 2), but because they are beneficial to the ecological transition, to the reduction of inequalities, and so on.

The example of the SAS law in France is illuminating in this respect (see box): new wealth indicators are published regularly, but are not the subject of any specific communication and have no impact on public policy.

The reaction of public authorities during the economic crisis of 2020 is another good example of how little impact alternative indicators have had on public policy to date. Faced with the imperative of avoiding the collapse of the productive system due to its prolonged shutdown during the confinements, public authorities in rich countries spent lavishly to support the incomes of employees and companies. This funding has rarely been conditional on ecological or social objectives. While they have financed low-carbon energies, they have also largely fuelled the fossil fuel economy. ⁶⁷

Far from triggering a shift towards a less resource-intensive, more resilient model, the economic response to the COVID-19 pandemic was a desire to return to “normal”, i.e. to maintain the economic system as it was.

On the other hand, there are a number of initiatives showing that it is possible to mobilize indicators in an operational way. For example, the Well-being budget introduced in New Zealand in 2019 gives concrete direction to the use of the budget tool by prioritizing certain public spending (mental health, allowances for indigenous populations, the fight against child poverty and domestic violence, investment for the climate) on the basis of ecological and social indicators.

Indicators can’t do everything: giving governments back the means to steer the economy

As noted inEssentiel 1, GDP and national accounting were born out of the 1929 crisis, the world wars and reconstruction, i.e. a historical configuration during which governments had far greater leverage over the economy than they do today (more or less extensive planning, supervision of finance and bank credit, limited trade with the outside world, macro-economic closure through public spending).

As Antonin Pottier explains, these conditions no longer exist.

“The institutions that enabled national accounting to inform economic steering decisions were dismantled, the socio-economic conditions for steering disappeared, and economic supervision mechanisms were abandoned. In this neoliberal era, which all Western economies entered in the 1980s, the state lost much of its capacity for direct intervention. (…) With the return of laissez-faire, without adequate regulatory institutions, without the State’s ability to constrain or convince economic players, production growth is above all the result of a myriad of actions by economic agents. These actions are not guided by aggregate indicators like GDP, but by the profit prospects of these agents.”

Adopting new indicators and placing them at the heart of public policy discourse is therefore not enough. It is also necessary to review the institutional conditions in which public policies are constructed.

Challenging the totem of growth also means questioning the omnipotence of finance and its ability to destabilize the productive economy (see the Role and limits of finance module), the ways in which public spending is financed (see the Public debt and deficit module), the ability of the wealthiest players (whether households or companies) to avoid paying taxes, and the primacy of free trade over all forms of social and environmental protection. We also need to change the incentives, ways of doing things and calculations of private agents, for example by radically reforming accounting so that it is no longer possible to make profits while destroying nature. Research must therefore now focus on the institutional obstacles, as well as the mechanisms that could turn these indicators into a force for action.

GDP growth not explained by the most widely used macroeconomic models

We saw in the previous section that GDP growth remains the objective of macroeconomic policies. Here, we will attempt to take stock of the factors that explain this growth in economics, and to see how it is incorporated into the main macroeconomic models used in the major public institutions. ⁶⁸ .

These models are major benchmarks for the conduct of public economic policies. ⁶⁹ . However, they are not neutral: they reflect the theoretical choices that governed their development. Today, the macroeconomic models most widely used by major public institutions are based on the following postulates: markets balance automatically (via prices for the goods and services market, via wages for the labor market, via the interest rate for capital), even if rigidities are sometimes introduced by the modelers; production growth is determined by the increase in supply (which automatically meets its own demand); money and credit are neutral; natural resources and pollution are not limiting factors.

Before going any further, let’s stress that the economic “causes” or “factors” of the GDP growth mentioned below cannot be understood without an institutional, political, cultural or legal “context”. This context must be favorable to allow growth, as the history and current situation of the least developed countries demonstrate.

Production growth depends on productive capital, labour and the availability of natural resources

First, let’s look at GDP in terms of production, without taking into account the “demand” aspect and the associated questions of income distribution and credit. A territory’s production must be able to grow in order to enable GDP growth (seeEssentiel 3 on how GDP is calculated). It relies on the mobilization of “factors of production”, which are listed in the following paragraphs (the ability to mobilize these factors of production being a necessary condition for growth).

Capital and labour are the two factors of production generally considered in economic theory.

A region’s production depends first and foremost on its production capacities: factories, machines, manpower… In economic terms, we speak of the factors of production: ” productive capital ” (the machines and infrastructures involved in production) and ” labor “.

An increase in production is made possible by :

• In the short term, an increase in the employment rate of the workforce or the utilization rate of productive capital;
• In the longer term (when production capacity is already fully employed), an increase in the absolute value of hours worked or productive capital;
• Or (still in the long term) progress in labour productivity (value produced per quantity of labour invested) ⁷⁰ or productive capital – which are closely linked.

To illustrate, let’s break down production per capita (GDP per capita) as follows ⁷¹  :

GDP/Habt = GDP/ H * H/ Popa * Popa/ Habt

With H the hours worked, Popa the working population and Habt the total population. Production per capita can grow :

• by the increase in the activity rate (Popa/Habt),
• by the number of hours worked per worker (H/Popa),
• or labor productivity (GDP/H).

It should be noted that productivity gains may translate into higher output if other parameters remain constant, but may just as easily not be reflected if employment or working hours fall.

The same reasoning can be applied by decomposing production as a function of the total quantity of productive capital, the rate of utilization of this capital and the productivity of this capital.

Natural capital”, a factor of production generally forgotten by economic theory

In addition to productive capital and labor, the production of goods and services requires energy and natural resources. It also depends on a stable climate and healthy ecosystems (particularly in view of the ecosystem services from which people benefit free of charge: water and air purification, pollination for agriculture, natural areas and tourism, etc.). All these elements are often referred to as “natural capital”.

Growth and even the simple maintenance of production can be made impossible by limitations on access to energy and natural resources, or when an ecosystem service is no longer guaranteed (polluted air, lack of pollination, damaged natural areas making tourism impossible…). Natural capital is therefore another factor of production.

In short, economic activity relies on three main factors of production: labor, productive capital and natural capital. Some activities require more productive capital, others more labor, others more natural capital. For most economists, these three capitals are entirely substitutable: it is always possible to replace natural resources with machines or labor; for others, the possibilities of substitution between these different factors of production (for example, using less labor and more machines) are limited. This question of substitutability is at the heart of the debate among economists on the strong or weak sustainability of development (which we present in the module Economics, natural resources and pollution).

Let’s stress here that all economic activity requires energy input, and that this cannot be reduced beyond certain limits (thermodynamic limits), which is a “physical” certainty and not a debate among economists.

Failure to take environmental feedback into account

Economic activity generates pressures on the environment (overexploitation of natural resource stocks, destruction of natural habitats, emissions of greenhouse gases, solid and liquid waste, etc.).

These degradations can have a negative impact on subsequent production by affecting the three factors of production (productive capital, labor, natural capital) mentioned above: we speak of an environmental feedback loop. For example, climate change can destroy or render inoperable productive capital (destruction of factories and infrastructure following storms or floods), make work less efficient or impossible during heat waves, and above all damage natural capital (forest fires, wildfires, loss of biodiversity, drought damaging crops)…

GDP growth must therefore be analyzed not only in terms of these three production factors, but also taking into account feedbacks from environmental pressures.

GDP growth also depends on the distribution of income and credit

In the early 19th century, Jean-Baptiste Say formulated an “economic law” according to which supply creates its own demand: the goods (investment or consumer) produced are necessarily sold, because the purchasing power generated by their production makes it possible to buy them. In this view, credit and money play no role other than a possible short-term adjustment. Growth therefore depends solely on production. Taken up by neoclassical economists at the end of the 19th century, this concept, which postulates automatic equilibrium between supply and demand, is still largely dominant today, and structures the construction of macroeconomic models.

However, the crisis of 1929, the work of John Maynard Keynes on the importance of demand in economic dynamics and that of Roy Forbes Harrod and Evsey Domar ⁷³ had largely challenged this view.

They have highlighted the possibility of structural imbalances (e.g. between supply and demand for goods and services, between “real” productivity gains and the distribution of their monetary translation, imbalances on the financial or labor markets, etc.). This leads us to integrate the question of income distribution and monetary creation, via credit, into our reasoning on growth.

An increase in production does not necessarily imply an increase in demand

If an increase in productivity, total quantity or the utilization rate of a factor of production enables us to “do more”, this does not automatically translate into GDP growth.

GDP only grows if producers anticipate that more production will be purchased, and if their products are actually purchased. This presupposes purchasing power and “willingness to buy”. ⁷⁴ to be present. This does not happen automatically, unless we believe in the spontaneous equilibrium of markets (i.e., in Say’s Law as described above). It is, in fact, entirely possible that the extra income generated by production will not be used to acquire additional production (because it is poorly distributed, because it is saved). ⁷⁵

In his book 40 ans d’austérité salariale comment en sortir? (Odile Jacob, 2020), economist Patrick Artus shows that, in OECD countries, productivity per employee has increased by a factor of 1.5 over the last 30 years, while wages have grown by only 1.25. At the same time, prices have remained generally stable. At the same time, prices have remained stable overall. Production has grown slowly. Consumer credit enabled wage earners, whose incomes were growing more slowly than output, to buy the extra production. It therefore played a compensatory role over the long term.

The fundamental role of money creation via credit for economic activity

In the neoclassical conception of the economy, money is neutral: it is the “lubricant” of the economy, a simple instrument facilitating transactions and avoiding barter. Injecting more money into the economy has no other effect than to raise the general price level. In the neoclassical model, then, there is no money, no credit, no financial sector. Households choose to spend the income they earn in the production process, either by consuming or by saving (the trade-off between the two being a function of the interest rate). Savings are used to finance business investment demand. It is the interest rate that balances savings and investment. Money and credit play no part in this dynamic.

This view is clearly contradicted by the facts.

As we saw above, credit first and foremost supports (at least for a time) the consumption of the middle and lower classes when the income earned during the production process is insufficient for them to purchase the goods produced. It thus helps to avoid (delay) a crisis of overproduction (but can lead to a crisis of overindebtedness ).

In addition, companies, governments and some households take on debt in order to invest. This indebtedness is based not only on the recycling of savings, but also on the creation of money by banks through the loans they grant (see the module on money). This money creation is in fact permanent: the flow of new loans is greater than the flow of repayments (except during financial crises, which are periods of money destruction). The new money put into circulation enables projects to be carried out that would not otherwise have seen the light of day.

Finally, credit and money creation can fuel over-indebtedness and speculative bubbles, generating financial crises whose impact on the economy is hard to deny.

Economist Richard Werner developed a quantitative theory of credit ⁷⁶ and applied it to the Japanese case. The two key ideas of his work are to focus on the role of the quantity of credit rather than that of interest rates, and to make a clear distinction between credit to the “real” economy and credit to “speculative” activities. Take, for example, this extract from an article published in 2018 in Ecological economics: “This suggests that markets are not in equilibrium and that the third factor in GDP growth is a quantity (…) (namely, the quantity of bank credit creation for the real economy, i.e. for GDP transactions, as postulated by quantitative credit theory).”

How do the most widely used macroeconomic models explain economic growth?

Macroeconomic models without natural resources, without environmental feedback curves, without money and without income distribution

As we have seen, the macroeconomic models most widely used by public institutions today essentially consider two factors of production: capital and labor. They are linked to GDP via an aggregate production function ⁷⁸ . They do not integrate natural resources or environmental feedback loops: in this way of modeling the economy, what goes into the economic system and what comes out … is out of its hands! ⁷⁹

Nor are income distribution, money and credit generally represented in this type of model: all goods produced are assumed to be consumed, and the purchasing power distributed in the production process is assumed to be sufficient to buy these goods.

In these models, the growth in the capital stock and the increase in the mobilization of labor (notably via the reduction in unemployment) enable GDP to grow, in a positive feedback loop (growth enabling, via savings, the financing of investment, and therefore the increase in the capital stock, which in turn enables an increase in production, etc.).

In these models, economic growth is mainly determined by an exogenous variable called total factor productivity.

At the heart of these models is the aggregate production function, which links GDP to the factors of production, labor and capital.

However, comparison with past data, using the “growth accounting” technique ⁸⁰ introduced by Robert Solow in 1957 (see box), showed that only a minor part of growth could be explained by the production factors capital and labour (via the positive feedback loop described above).

The remainder was then attributed to a “residual factor of production” known as total factor productivity (TFP) or the “Solow residual” (see box). In the various analyses, it is this TFP that explains growth far more than the other factors of production (see box).

Thus, in many macroeconomic models used today to inform public policy, GDP growth is determined first and foremost by TFP, which, as we have seen, is a residual element. It is, by definition, the share of output growth that can be explained neither by an increase in the capital factor nor by an increase in the labor factor. It is therefore an “ad hoc” term, exogenous to the model: in other words, it is not explained by the relationships with the other variables in the model. It is set conventionally by the modeler, without being based on observed data.

Based on endogenous growth theories (see box), some modelers attempt to “endogenize” TFP (i.e., make it a variable that follows from the model), but this remains partial and is far from being the case for the majority of models. Of all the institutional models studied in this chapter, only a variant of the Quest model used by the European Commission proposes a – partial – endogenization of TFP. In this model, TFP grows partly through investment in R&D, and partly exogenously.

In conclusion, in the models we mentioned at the start of this chapter (which are representative of the majority of models used by public institutions), growth is explained for the most part by exogenous (and therefore unexplained) growth in the productivity of production factors, and for the rest by equations linking investment to growth in the capital stock. GDP therefore grows by hypothesis, without it being explained how.

The role of credit and income distribution is not taken into account in these models, nor is the role played by natural capital. Finally, the feedback effects of climate drift and the destruction of nature on the growth that causes it are a blind spot in the reasoning and are not represented by these current models.

These models are not only unfounded, but dangerous. It leads us to underestimate (or even deny) the impacts of the ecological crisis, to overestimate our means of dealing with it, and to err on the side of public policy by putting growth first, when it can only be the result (or not) of our social and economic choices.

Decoupling is at the heart of the debate on the links between growth and ecology

The objective of decoupling economic growth from pressures on nature has been regularly invoked in public policy since the early 2000s. Here, we look at what decoupling means in practice, the arguments of those who invoke it and those who say it is impossible, and then ask whether the debate is still relevant.

What does it mean to decouple GDP growth from pressures on nature?

The notion of decoupling means that economic growth could be accompanied by a decrease in pressure on nature (measured by various indicators). In concrete terms, this would mean breaking the link between GDP growth and environmental impact (seeEssentiel 6).

However, this initial approach needs to be clarified. It is not enough to decouple a little: we need to decouple enough to preserve the habitability of our planet.

In a publication by Carbone 4, the authors detail the conditions that such an ambition implies.

• Decoupling must concern all ecological issues.

It must involve the upstream and downstream parts of the economic system, i.e. all natural resources. ⁸² used in the production system and all the waste and pollution generated (including greenhouse gases) during production and consumption. So it’s not just a question of decoupling economic growth and energy or greenhouse gas emissions, as is often the case in analyses.

• Decoupling must be global, not local

Reducing the pressures on nature must be considered on a global scale, and not just on the scale of one country or one region of the world. This is particularly obvious in the case of global issues such as global warming, the hole in the ozone layer or the preservation of marine resources.

• Decoupling must be absolute, not relative

Relative decoupling means that each additional unit of GDP is obtained from fewer natural resources or generates less pollution than the previous unit.

The aim is to achieve an absolute decoupling of natural resources and pollution.

For example, worldwide greenhouse gas (GHG) emissions per unit of GDP (PPP) fell from 613 g CO2eq in 1990 to 423 g in 2015. Unfortunately, this relative decoupling has not translated into absolute decoupling: over the same period, global GHG emissions have risen from nearly 33 to 49 Gt of CO2eq. ⁸³

• Lastly, this decoupling must be sustainable over time and fast enough to avoid irreversible environmental damage.

For example, the latest IPCC report ⁸⁴ indicates that to keep global warming to 1.5°C, CO2 emissions must fall to zero by 2050, and then become negative! This implies an average reduction of almost 3.5 billion GT of CO2 per year.

The arguments of those who believe decoupling is possible

The main argument in favor of decoupling is based on observation of the past.

In some of the world’s most developed regions, an absolute decoupling has been observed for certain impacts. This is particularly true of the European Union in terms of global warming. The European Union’s GHG emissions peaked at over 6 Gt eq CO2 in the late 1970s, before dropping to around 4.5 Gt eq CO2 in 2015.

A study published in 2020 by the journal Climate Policy goes into more detail. It analyzes the evolution of 24 countries (22 European countries, the United States and Jamaica) that have reduced their territorial_CO2 emissions in absolute terms, as well as their global GHG emissions (albeit to a lesser extent) between 1970 and 2018 (with peak emissions differing from country to country). In these 24 countries, consumption-related CO2 emissions (the CO2 footprint) have also been falling since at least 2008. This clarification is important because the countries concerned have relocated part of their production (and therefore their GHG emissions) to other countries around the world. ⁸⁵

For some economists, this development confirms the theory of the “Kuznets environmental curve”: beyond a certain level of income, any additional wealth also favors environmental quality and lower pollution (see the Economy, natural resources and pollution module).

If the European Union has been able to maintain economic growth while reducing its impact on global warming, this means that the world as a whole could do the same.

Two major levers must be mobilized to achieve decoupling:

• the efficient use of resources made possible by technical progress
• substituting polluting resources with others

The way in which the decoupling of greenhouse gas emissions and economic growth is envisaged is exemplary of this vision. Climate is not the only ecological challenge. However, being at the top of the ecological policy agenda, it is the most studied.

The think tank The Shift Project analyzed 17 energy transition scenarios ⁸⁶ from international organizations, research agencies, NGOs and companies. This publication makes a number of observations:

Firstly, in many scenarios, GDP growth is exogenous, i.e. it does not depend on the other parameters studied. Thus, the availability of natural resources or the damage caused by global warming have, by construction, no impact on GDP: their link is simply not studied (seeEssentiel 8 on macroeconomic models).

Secondly, the scenarios assume 1/ growth in energy efficiency ⁸⁷ and 2/ a drastic reduction in the carbon content of energy (fossil fuels are replaced by low-carbon energies) and 3/ to a lesser extent, energy sobriety (consuming less energy).

Last but not least, some of these scenarios also involve a major mobilization of CO2 capture techniques, whether based on reforestation or industrial techniques for capture at the time of emission or directly in the atmosphere, followed by storage in geological reservoirs.

All these developments are made possible by technical progress, itself stimulated by rising carbon prices and public support for investment and innovation. In short, the commitment to decoupling is often based on strong technological optimism.

The arguments of those who think decoupling is impossible

Once again, these arguments are based on observation of the past.

If we consider all the conditions set out in point 9.1 above, it’s clear that decoupling remains an objective, but not a reality.

An analysis of the subject of global warming alone (the most studied) is enough to convince you.

While a decoupling between growth and greenhouse gas emissions has been observed in relative terms on a global scale, or in absolute terms for certain regions of the world, at global level_CO2 emissions and more generally GHG emissions continue to grow in absolute terms. What’s more, to achieve carbon neutrality by 2050, as recommended by the IPCC, we would need to decouple at a much faster pace than has been the case to date.

According to the 2019 edition of the United Nations Environment Programme’s (UNEP)Emissions Gap Report, global greenhouse gas emissions must fall by 7.6% per year between 2020 and 2030 to limit global warming to +1.5°C.

In the study cited in 9.2, the authors distinguish three country profiles out of the 24 that have reduced their emissions in the 1970-2018 period:

• “Long-term decline”: six countries have steadily reduced their CO2 emissions since the 1970s (France, Germany, United Kingdom, Sweden, Belgium and Macedonia) at average rates ranging from -1.5% (Sweden) to -0.4% (Belgium);
• “Forming eastern bloc”: six countries of the former eastern bloc experienced a rapid reduction in CO2 emissions at the time of the dissolution of the Soviet Union, followed by a very slight decrease (average annual rates ranging from -4% for Ukraine to -1.6% for Slovakia);
• “Recent peak”: twelve countries (including the United States, Italy and Spain) experienced a peak in emissions in the mid-2000s, followed by reductions at a sometimes high rate (between -4.1% for Greece and -0.5% for the Netherlands).

These figures only concern CO2 emissions: the authors of the study point out that for the majority of countries, GHG emission reduction rates are slightly lower. We are therefore far from the levels required by international climate ambitions.

What applies to GHGs also applies to many other environmental impacts. Researchers have carried out a meta-analysis ⁸⁸ of 179 publications on decoupling, published between 1990 and 2019. Their conclusion is unequivocal:

“The 179 papers reviewed contain evidence of absolute decoupling between impacts, including CO2 (and SOX) emissions, as well as land and water use in geographically limited cases (at the national level) relative to GDP, but no decoupling of resources for the economy as a whole, either nationally or internationally. There is no evidence of sufficiently rapid absolute decoupling at global level.”

Source: Decoupling for ecological sustainability (2020)

Belief in decoupling is based on faith in technical progress

In a study published in 2019, the European Environment Bureau highlighted the main arguments against the possibility of decoupling, which are based above all on too great a belief in the efficiency of technical progress.

Here are some of these arguments:

• The rebound effect. Improvements in energy efficiency are often partially or totally offset by a reallocation of the money saved to the same consumption (e.g., using a fuel-efficient car more often), or to other consumption that has an impact (e.g., buying plane tickets for long-haul vacations with the money saved through fuel savings). They can also generate structural changes in the economy that induce higher consumption (for example, more fuel-efficient cars reinforce a car-based transport system to the detriment of greener alternatives such as public transport and cycling).
  
• Technological solutions to one environmental problem can create new ones and/or exacerbate others. For example, the production of electric vehicles puts pressure on the planet’s finite resources of lithium, copper and cobalt. ⁸⁹ the production of biofuels raises concerns about the use of land, particularly for food production; nuclear power plants pose problems in terms of waste management, water resources and the risk of accidents.
  
• Gains in material efficiency cannot be sustained indefinitely: they necessarily reach a ceiling. To make a car, you need a minimum thickness of steel, so after the initial gains, you’ll need more and more steel to make more and more cars. Another example: energy efficiency gains diminish as process efficiency approaches the thermodynamic limit. For example, “steel production consumed around 50 MJ/kg in the 1950s and was halved between the 1950s and 2000. It will very probably not be halved by 2050, as the investment required to gain a few MJ as we approach the thermodynamic limit (10 MJ/kg) becomes prohibitive.” ⁹⁰
• Technological progress is undifferentiated: it does not necessarily target production factors that are important for ecological sustainability. It can lead at the same time to the development of innovations that reduce pressure on the environment and those that increase human impact on the planet.

Respecting planetary limits necessarily implies mobilizing the lever of sobriety to a much greater extent, in order to reduce material consumption and pollution in absolute terms.

Beyond the debate on decoupling

Clearly, a world in which the ecological transition has made it possible to preserve the habitability of our planet is a world in which the consumption of natural resources has been drastically reduced, as has the pollution generated by the production system.

To achieve this, we need to both reduce consumption of goods and services and increase investment. It will also mean changes in the respective weight of different sectors of the economy. Some are set to disappear (fossil fuels, the disposable industry and trade), others to gain in importance (agriculture, low-carbon energies, energy renovation, recycling, repair), still others to undergo radical transformation (transport, chemicals, digital, etc.).

The impact of these developments on GDP is not predictable. In the short and medium term, the balance between economic “gains” (linked to investments and the development of low-carbon activities) and losses (cessation of activities that pollute or consume too many natural resources) is not obvious a priori.

Furthermore, as we saw inEssentiel 3, GDP is an indicator largely based on conventions, including for the valuation of non-market exchanges. Accounting methodological adjustments could therefore also have an impact on the level of GDP and therefore on the perception of decoupling. This is exactly what has happened since the indicator was created (see box).

Projecting ourselves into a world that complies with the ecological objectives adopted by the international community means projecting ourselves into a world where the economic “rules of the game” have changed dramatically. To take just one example, if energy was cheap and easily accessible for a century, it should come as no surprise that it was wasted; conversely, a world that fights climate change is a world that decides to restrict (by various means) the use of fossil fuels, while low-carbon energies come up against numerous limits (space, raw materials, etc.).

Drawing conclusions about future evolution from the world of the past, when strong changes are assumed, is therefore not very relevant.

Symmetrically, if we don’t manage to drastically reduce our impact on nature, then the planet’s inhabitants will be increasingly confronted with planetary limits, which can only lead to tension, conflict and even war over scarce resources and humanly habitable spaces.

Imagining the world of the future in terms of ” business as usual “, as is the case with decoupling, is therefore a mistake in reasoning.

A country’s economy needs to be managed on a macro-economic level, and not just in terms of GDP.

Economic agents cannot be left to their own devices. In other words, the free market cannot achieve desirable social and environmental objectives. Public authorities have a responsibility to provide guidance. But today, in Europe and in most countries around the world, it is exercising this responsibility by focusing on a central macroeconomic objective: maximizing GDP growth, which goes hand in hand with unsustainable environmental degradation (seeEssentiel 6). How can we do otherwise?

Decreasing GDP, a repulsive objective

As developed inEssentiel 1 and inidée reçue 6, green growth is regularly invoked as the horizon for public policies to respect planetary limits.

On the other hand, the degrowth movement is often caricatured in public debate as focusing on a voluntary objective of GDP reduction, and hence economic recession. It is therefore seen as a repellent.

“For many people, reference to degrowth acts as a repellent, conveying an image of deprivation. Its detractors are quick to caricature it as a forced return to candlelight. It’s a particularly effective line of argument, because we’ve been collectively conditioned by the importance of growth and by the fear of its disappearance”.

Aurore Lalucq

In the business world, managers are almost always looking for ways to grow their organization: it’s very difficult to manage a reduction in a company’s sales, which means lower wages, part-time work, redundancies… As a result, business leaders are in favor of GDP growth, by generalizing this reasoning to all companies, and without taking into account the limits we discuss in this module.

More generally, critics of degrowth point to the need for growth in developing countries to achieve essential social and human objectives, and to the major problems in rich countries that a programmed recession would pose for debt sustainability, the financing of pensions and social security, and so on.

Lastly, in terms of ecological transition, the objective of reducing GDP would reduce the necessary room for maneuver, remove economic agents’ motivation to take risks and innovate, and favor the status quo, i.e. an unsustainable economy.

Wealthy movements looking beyond growth

In reality, degrowth movements and research are far richer and more diverse than the single objective of reducing GDP.

Degrowth is a planned reduction in the use of energy and resources aimed at rebalancing the economy with the living world, so as to reduce inequalities and improve human well-being.

Jason Hickel

Although the term degrowth first appeared in the 1970s ⁹¹ in the wake of The Limits to Growth report and the debate on the ecological limits to the growth of production, movements claiming to be “degrowth” have their roots in different currents of thought and intertwining philosophies.

The ecological argument and the call for a renewal of the dominant economic paradigm to integrate natural resources and pollution are obviously very present. But degrowth also draws on criticism of development policies in developing countries and anti-utilitarianism, reflections on the meaning of life in modern societies (centered on the idea of working more to earn more and consuming more), the call for renewed democratic debate and greater social justice through the reduction of inequalities.

Strategies are equally varied: they range from activist militancy opposing airport, freeway or shopping center expansion projects, to the construction of local alternatives showing that frugal, low-impact lifestyles are possible, to researchers and think tanks seeking to reform existing institutions or build a new ecological macroeconomic paradigm.

Since the beginning of the 21st century, a wealth of literature has emerged, with authors such as Giorgos Kallis, Jason Hickel, Tim Jackson, Kate Raworth, Timothée Parrique, Eloi Laurent, Dominique Meda and others.

The wide variety of people who are acting and thinking to implement the profound ecological and social transformation of our mode of development is reflected in the great diversity of terminologies used to designate the model: “welfare economy”, “stationary economy”, “post-growth economy”, “donut economy”…

At the beginning of 2021, the European Environment Agency published Growth without economic growth, which provides a good summary of the central question posed by these movements.

Economic growth is closely linked to increased production, consumption and resource use, and has adverse effects on the natural environment and human health. It is unlikely that a lasting and absolute decoupling between economic growth and environmental pressures and impacts can be achieved on a global scale, so societies need to rethink what is meant by growth and progress and what they mean for global sustainability.

European Environment Agency

Setting new collective horizons

Moving away from GDP growth means redefining our society’s collective horizons.

Three collective horizons need to be put back at the heart of economic governance, which is just one facet of social cooperation: well-being, resilience and sustainability.

Aiming for well-being means valuing the real determinants of human prosperity, over and above material conditions and economic well-being alone (i.e. concern for “quality of life” and human development).

Building resilience means ensuring that human well-being can withstand future shocks (particularly environmental), as illustrated by the major issue of adapting our territories to climate change.

Finally, making our societies sustainable means understanding the conditions under which human well-being can be projected and sustained over time, under increasingly severe ecological constraints, in order to draw all the consequences here and now, locally and globally.

Eloi Laurent

As markets are not self-regulating, these horizons cannot be reached without genuine economic steering, which only public authorities can legitimately carry out. In particular, this means monitoring and correcting major imbalances:

• poverty, unemployment and social inequality;
• insufficient use of the means of production (whether factories or workers);
• excessive indebtedness of private agents and financial imbalances, a potential source of recession or even deflation;
• the imbalance in the balance of trade ;
• excessive pressure on natural resources (water, soil, forests, fish, etc.) and massive pollution (of water, air, soil) that can lead to global imbalances (global warming, collapse of biodiversity – see the Economy, natural resources and pollution module).

It’s up to the public authorities to correct imbalances (at least the most significant ones, within margins of appreciation to be defined) and to try to prevent them from occurring.

It’s not a question of aiming for perfection and clockwork precision, but of thinking in orders of magnitude to change course and avoid negative spirals.

To achieve this, it is essential to move away from GDP and the growth target by adopting alternative indicators, but, as we saw inEssentiel 7, this is not enough.

An indicator is designed to show whether public policies are moving in the right direction. It is not enough to steer an economy.

As Aurore Lalucq writes, we need to “study the practical consequences of a change of model: how do we replace GDP in collective bargaining and budget voting? How do we finance our social model? And what about the financial markets, whose very existence is intrinsically linked to perpetual growth?

More generally, the aim is to reverse the deregulation and deregulation of recent decades, and restore full control of economic policy tools (budget, currency, standards and regulations, financial supervision, etc.) to public authorities.

This means restructuring the respective roles of the market, the state (including the European level) and local communities. It’s up to governments to set the framework, the national and international rules of the game, to set the necessary social and ecological limits for private enterprise, and to give territorial communities the freedom they need. The management of common goods, whether local, national or international, cannot be reduced to the marketing of access or use rights, and even less to their privatization.