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‘Degrowth’ Advocates Misunderstand The Business Cycle

‘Degrowth’ Advocates Misunderstand The Business Cycle

Authored by Joel Bauman via,

December saw a resurgence of “degrowth” advocates in the media, with two articles published by Nature garnering special attention on X (formerly Twitter).

The fallacies underlying the degrowth movement are not new in economics, but it’s worth revisiting them and their important connections to monetary policy in the age of central banking.

Proponents of degrowth will usually argue the following:

Wealthy economies should abandon growth of gross domestic product (GDP) as a goal, scale down destructive and unnecessary forms of production to reduce energy and material use, and focus economic activity around securing human needs and well-being. This approach, which has gained traction in recent years, can enable rapid decarbonization and stop ecological breakdown while improving social outcomes.” 

Now, this argument does have a kernel of truth; while it is wrong to completely throw out GDP as a useful measure of economic progress, it is equally wrong to focus on it exclusively. GDP is an imperfect metric. It counts wasteful government social programs, destructive military spending, and spending on natural disaster recovery as contributors to economic growth. It also severely underestimates growth in home production and black or gray markets that evade the calculation of government statisticians. 

This premise betrays perhaps the most central error at the heart of degrowth and central planning in general: both assume that the optimal use for scarce labor and capital are either obvious or that they can be ascertained with big data or burgeoning artificial intelligence technology.

This, as the Austrian School emphasizes, is not the case. Instead, the market is a means of discovering the optimal use of resources. This discovery takes place through the action of entrepreneurial agents, who make judgements about the uncertain future value of resources under their command and are rewarded with profits if they direct said resources to more highly-valued uses. 

Under degrowth policy, resources directed by state bureaucrats, PhDs, or machine learning algorithms would be subject not to the calculation of market profits and loss, but to the whims and subjective evaluations of whoever plans the economy. 

Degrowthers also misunderstand monetary policy and its role in the business cycle. Hickel and his coauthors, for example, claim that recession “is chaotic and socially destabilizing and occurs when growth-dependent economies fail to grow.” According to degrowthers, recessions are the result of “growth-dependencies,” which include the fiduciary duty of company executives, the unreliable funding of pensions and social programs, and the ease of capital movement across borders (oh, the horror!).

The economist Ludwig von Mises, a key figure in the Austrian School, offers an alternative to this perspective with the Austrian Business Cycle Theory. In this theory, the business cycle (i.e. the cycle of economic expansion and recession) is caused by credit expansion at the hands of central bankers, not growth dependencies. Central banks, by artificially lowering the interest rate, induce long-term projects to be undertaken that would not be started at the market rate of interest. When, as is arguably happening now, the interest rate returns to or approaches the natural market rate of interest, the unprofitability of these mistaken projects rears its head and causes them to fail. What follows is the recession, or “bust,” a period of slower or shrinking economic activity, during which the resources previously devoted to failed projects are reallocated to profitable ones.

In the Austrian perspective, the bust, while unpleasant, is the necessary correction mechanism that remedies the mistakes induced by expansionary monetary policy. Mises explains:

The return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money. People become aware of the faults committed and, no longer blinded by the phantom of cheap credit, begin to readjust their activities to the real state of the supply of material factors of production. It is this — certainly painful, but unavoidable — adjustment that constitutes the depression.”

Contrary to the degrowther perspective, where recessions are an inherent feature of growth-focused market capitalism, Mises shows us that recessions are the means by which markets cleanse themselves of mistaken and wasteful resource allocations, allocations that would not have occurred in the absence of central banking and that degrowth advocates themselves may oppose.

In their focus on GDP and private “growth-dependencies,” degrowthers miss what may be the central culprit in many of the United States’ economic ills: the Federal Reserve. Were it not for the Fed’s inflationary policy, recessions would be milder and less common, and the centrality of the finance sector, which Hickel and company lament, would be diminished.

If degrowth advocates want to improve the functioning of market economies, they should join libertarians and conservatives in demanding a stable currency that is subject to market forces, not political interests. 

Tyler Durden
Tue, 01/09/2024 – 12:45