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South Australia's new 'limits to growth'

Analysis

A proposed new approach to integrating green principles in South Australia's economic strategy will lead to continued low growth and unemployment, writes economics commentator Richard Blandy.

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Readers over 60 years old will remember Limits to Growth – the 1972 publishing sensation written by Donella and Dennis Meadows from MIT and published by the Club of Rome.

This book used the then new technology of computer modelling to produce a generalised update of Thomas Malthus’ 1798 work predicting that the world’s population was growing too fast for the world’s potential food resources to keep up, leading to eventual mass starvation.

Limits to Growth generalised this theme to production generally – that the world’s resources were finite and unlimited growth was, therefore, an impossibility. At some point world production would reach a maximum and world living standards would then fall, perhaps catastrophically.

Since then, world production and population have continued to grow more or less as rapidly as expected. Global living standards have increased greatly. Catastrophe has not come to pass. But it is early days: the predicted crunch may be yet to come later this century. Some resources (for example, gold and oil) should no longer be available, however.

This is, of course, nonsense. The world has never run out of any resource. Nor will it ever –  provided prices are allowed to vary to reflect scarcity.  As a resource becomes scarcer relative to the demand for it, its price rises (in a free market, at any rate) and demand for it (use of it) falls.

At higher prices, it pays to find more of it, so the supply of it increases. It may become economic to recycle objects that contain the resource. Substitutes are discovered to replace the resource at some price premium or other, with technological and behavioural changes occurring to facilitate and reduce the cost of such substitution.

When autonomous, driverless cars sweep away the present automobile fleet (because they are cheaper and easier to make trips in – no driving skill required), the demand for steel and other car components will fall (because the fleet will be smaller, but more intensively used). People will give up owning cars. Houses will become cheaper because they will not need garages and driveways, saving the use of stone, bricks and cement.

These driverless cars will (almost certainly) be powered by electric motors. The demand for hydrocarbons used in petrol-driven engines will fall. Not because there is no more oil, but because it is no longer economic to drive petrol-using cars.

If bottle and can litter disfigures the landscape, a deposit on bottles and cans will encourage re-use and recycling of bottles and cans. The scarce component is the landscape. With an adequate price on litter, we can always have litter-free landscapes to whatever degree the voters are willing to pay for.

The connection between properly-functioning markets and not running out of anything, ever, has passed by the South Australian Government. Instead, gripped by a limits to growth “running out” mindset, last month the State Government expressed support for adopting so-called “Circular Economy” economic principles in organising the state’s economy.

On May 26, the Premier launched a report called Creating Value: The Potential Benefits of a Circular Economy in South Australia, commissioned by Green Industries SA – the government agency previously called Zero Waste SA.

The Premier thought this new agency’s agenda sufficiently compelling to issue a memo about its report to a large number of state public servants.

In his memo, addressed to “Dear Colleagues”, he said, inter alia:

“The concept of a circular economy refers to an improved economic system driven by renewable energy and an imperative to keep material resources in use, or ‘circulating’ for as long as possible, contrasting with the inherently wasteful traditional linear economic system of ‘take, make, use and dispose’…

“Using broad assumptions about a more circular economy, the report conservatively estimates that by 2030, compared with a business as usual scenario, a Circular Economy could create an additional 25,700 full time equivalent jobs in South Australia…”

Unfortunately, the modelling approach adopted:

“…kept the overall size of the economy (measured in terms of gross state product) constant between all scenarios…”

The “Circular Economy” was constrained in the economic modelling exercise to produce no more output than the “Business as Usual” economy (the actual economic growth rate is not revealed), but created an additional 25,700 full-time equivalent jobs anyway! How come? The only way that this could come about is if the jobs in the “Circular Economy” are less productive, on average.

Lower-productivity jobs mean that the jobs in the “Circular Economy” are less well-paid (otherwise the forecast GSP number could not be the same in the two economies). It means that the “Circular Economy” is even less competitive (in cost terms) than South Australia’s “Business as Usual” economy.

The “Business as Usual” South Australian economy is forecast to add 116,500 jobs from 2014-15 to 2030 at an average rate of growth of 1.0 per cent pa, while the “Circular Economy” adds 142,200 (less productive and less-well-paid) jobs at an average rate of 1.2 per cent pa over the same period.

Both of these are low-growth job scenarios.

Is this the future that South Australians aspire to? Of course not.

They aspire, like everyone else, to a rapidly-growing economy that rapidly generates both more jobs and higher incomes.

The “Circular Economy” strategy is part and parcel of Premier Weatherill’s “strong government” and Green approach to the economic development of the state –  an approach which has yielded very unsatisfactory results for our citizens.

Instead of a more rapid rate of job creation, we are likely to see a slower rate as productivity growth falls due to the Government interventions needed to keep material resources circulating when it is costly to do so. If it were cheaper to keep resources circulating it would be happening anyway, driven by profit-seeking businesses. It must be more expensive, therefore, and forcing businesses to go down this path must make them less competitive.

One can see regulations being unveiled in South Australia to support the sale of local products made using recycled resources against competing products made with non-recycled resources.

Costs of production will rise in South Australia. Economic growth will fall. We have seen it all before.

Government subsidies of one sort or another will keep some businesses investing. These will be hailed as yet further examples of economic success.

The business sector more broadly will flounder; unemployment and underemployment will continue to rise; net emigration from South Australia will continue.

Richard Blandy is an Adjunct Professor of Economics at the University of South Australia, an Emeritus Professor of Economics at Flinders University, and a regular contributor to InDaily.

[i]  Green Industries SA is the Statutory Authority in charge of implementing the circular economy agenda in South Australia, having changed its name by proclamation from Zero Waste SA on 1 July 2015.

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