I Review article Note bibliographique Theconsequencesof economic growth

Marc 3. EpsteinO

Growth: The Price We Pay. By E. J. MISHAN. London: Staples Press, 1969. P p . v, 193. $7.55 (cloth) Cost-Benefit Analysis. By E. J . MISHAN. London: George Albn G Unwin Ltd., 1971. P p . 364. $17.95 (c loth); $9.35 (paper) The Limits to Growth. By DONELLA H. MEXDOWS, DENNIS L. WADOWS, J ~ R G E N RANDFBS, and U~LLAM w. BEHRENS m. New York: Universe Books, 1972. P p . 205. $7.35 (cloth); $3.25 (paper)

Perhaps it is true that society does not plan effectively for the future; that society does not move toward a growing menace until that menace has reached catastrophic proportions. Perhaps it is true also that society does not recognize that many of the ‘luxuries of life’ are, in actuality, future disasters cloaked in satin. Whatever the case is generally, it is evident to this writer that the post-war clamour for and excitement over economic growth, besides creating some great benefits for the industrialized world, has also created some of the most serious problems society has ever faced.

Webster defines growth as ‘gradual development toward maturity.’ Many of the problems we now face could have been avoided if ‘maturity’ had been defined, that is, governments (whether international, national, or local) should devote more energies to the setting of national priorities. Much has been written about goal setting and management by objectives and many Canadian government agencies have already begun the task of defining organizational objectives. Generally, however, we find that national governments do not face up to the responsibility of setting national priorities. Going one step further, it seems that what is needed are complete cost-benefit analyses of alternative programs that are aimed at satisfying societal needs and wants. Government should be attempting to measure the social and economic values to society of various government actions and various alternative allocations of public resources.

In 1967, Dr E. J. Mishan, the internationally k n o w welfare economist of the London School of Economics and Political Science, wrote The Costs of Economic Groath (London: Staples Press). In that book, Mishan at- * The author is assistant professor of Business Administration, University of Texas at Arlington.

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tempted to convey to the layman his conception of the problems related to, and caused by, economic growth. Because he did not succeed in reaching non-economists with that book, he reworked parts of it and published it in 1969 under the title Growth: The Price W e Pay. (The reader should note that in the United States this latter book has been published, with no revisions, under the title Technology and Growth (New York: Praeger Publishers, 1970). )

In Growth: The PTice W e Pay, Mishan meets his task with extraordinary skill. The book is well-written and is of value to anyone interested in the present or future state of our society. Even those with no formal back- ground in economics should have no difEculties in reading t h i s book

Mishan questions whether the great economic progress that we have seen in the last two hundred years has contributed favourably to what we shall call the ‘overall quality of life.’ He asks whether the economic indices that have been developed and faithfully followed higher and higher have any correlation with what should be our greatest concern, namely, social welfare. He also questions whether traditional economic assumptions, approaches, and methods of analysis are useful for the kinds of problems facing society today.

In developing complete answers to these questions, Mishan discusses some important economic concepts that have been ahnost totally ignored in traditional economic analysis. For example, the familiar concept of spill- over effects is central to much of Mkhan’s argument. When a factory produces a ‘good,’ presumably it is being produced to meet some demand on the part of some segment of society. But, the factory often produces air pollution ( a bad’) in addition to the production of the good. It is argued here that the cost of this pollution, which becomes a spillover on to society, should be borne by the factory that produced it. Some government regula- tion is necessary to protect society from these spillover effects. Mishan states it in a slightly different way. ‘Machines that are employed to produce services for the public may simultaneously produce “disservices.” The recipients of the services acknowledge their value by a willingness to pay for them. Symmetrical reasoning would require that the recipients of dis- services receive sums of money in compensation for the damage sustained.’

This becomes just a segment of the total argument for the reconsideration of the benefits and costs of economic growth. It is agreed, of course, that economic growth does produce many significant bendts and advantages in our society. We should aIso recognize, however, that it produces dis- advantages of pollution ( and other spillover effects) and possibly, a change in life style that some may consider to affect negatively their total well- being. Mishan, for example, mentions his ‘conviction that the invention of the private automobile was one of the great disasters to have befallen the human race.’ Whether or not one agrees with that statement, it is clear that

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the automobile has created severe problems and has contributed, in some areas at least, to the deterioration of the ‘quality of life.’

Continuing with his argument that economic growth does not add to social welfare, Mishan contends that we should reduce the amount of con- sumer goods produced and consumed by our society. (Given that total world resources are limited, a conservation of energy and material may be in order. ) In addition, Mishan sees that ‘the rising tide of consumer goods may create as much diswelfare as welfare.’

It should be evident that Growth: The Price W e Pay presents a strong argument against economic growth. It should also be evident that an ob- jective weighing of alternatives through some systematic manner has not taken place. At the completion of this book, that void had not been filled. It is in this framework that Mishan’s latest book, entitled Cost-Benefit AnaZysis, becomes so very important. In this book, Mishan presents a general framework in which the problems of spillover effects and other elements of the economics of welfare, the environment, and growth can be analysed. In Cost-Benefit Analysis, Mishan presents the first introductory textbook in the burgeoning field of cost-benefit analysis. Both the univer- sity economics student and the administrator interested in learning more about cost-benefit analysis should find this book especially useful. The book begins with excellent examples of some cost-benefit studies, followed by some of the rudimentary concepts involved in the analysis. Chapters are devoted to consumers’ surplus, transfer payments, shadow prices, the theory of second best and other fundamental concepts. The last sections of the book focus on some of the investment criteria used in cost-benefit analysis and the problem of dealing with uncertainty in project evaluation. The book is a non-mathematical work presenting a complete exposition of cost-benefit techniques. The traditional economist will find this book much to his liking. Both rigorous analysis and adequate explanations are in- cluded.

It is part I11 (80 pages out of a total of 360 pages in the book) that provides the link between the three books being discussed here. In this part, Mishan analyses, in a more rigorous manner than he does in GroWth: The Price W e Pay, the problem of spillover effects. He examines the valuation of the spillovers, the internalization of the costs, the correction of the spillovers, and the concept of compensation. All of this is very interesting reading for anyone concerned with the economics of welfare, the environment, growth, or techniques of cost-benefit analysis.

In a cost-benefit approach to these spillover effects, it is argued here, the second and third order costs and benefits must be included for complete analysis. Second and third order costs would be those indirect costs that are neither readily identifiable nor easily measured and are caused by or are the result of the occurrence of an event. For example, if a new highway is

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built, there are obvious economic costs involved in the purchase of the land and the building of the highway. There are also economic benefits, usually measured in the amount of travel time saved multiplied by some measure of value of time. In addition, there are social costs which may include the destruction of the environment and social benefits that may include facilitating enjoyment of outdoor activities due to better access to surroundings. Furthermore, there are additional benefits of increased em- ployment of construction personnel (and the multiplier effect additional employment brings) and additional costs to society brought on by more people, more travel, and so on. Thus, it can be seen that this argument could be continued ad irdnitum. It can also be seen that the social costs of a particular project, not only the readily identifiable and measurable economic costs, must be measured and included in the cost-benefit calcu- lation. (It should be noted that any social benefits should also be included. These might include the benefits of providing employment, the production of a good, the adding to social welfare, and so on.)

It is understood and agreed that the social costs and benefits of business enterprise are ditEcult to measure. But they are of utmost importance. Thus, public administrators, business managers, economists, accountants, management scientists, and others should be attempting to develop tech- niques for the measurement of social costs and benefits. I t is only in this way that the cost-benefit calculation can be considered complete. It is also the only way that the consequences of economic growth and the costs of the development of new technologies can be assessed.

Technology assessment is an area that is only now beginning to be in- vestigated. Related to social cost measurement, it attempts specifically to measure the impact on society of new or expanding technologies. Though the field is just now emerging, some groups have been devoting significant energy to the development of measurement tools. (Included in this group is the National Science Foundation in the United States.)

The third book that I would like to discuss is concerned with the impli- cations and effects of continued worldwide growth. The Limits to Growth is a non-technical report for the Club of Rome's project on the predicament of mankind. Those interested in a more technical approach to the same project may want to see World Dynanics by Jay W. Forrester (Cam- bridge: Wright-Allen Press, 1971). Forrester, whose system dynamics approach has made him famous, presents a dynamic model of world interactions. He presents broad aspects of the world system and, it is obvious, lays the foundation for The Limits to Growth.

The Club of Rome is an informal organization devoted to the under- standing of the various components that make up the global system whether they be economic, social, political, or physical. With the Forrester model, the team of the project on the predicament of mankind, under the

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direction of Professor Dennis Meadows of MIT, ‘examined the five basic factors that determine, and therefore ultimately limit, growth on this planet - population, agricultural production, natural resources, industrial production, and pollution.’ The Limits to Growth is the non-technical report of that study. The book is fascinating reading. In a systems perspec- tive, it discusses economic growth, population growth, and the maintenance of a world balance. I t proposes simulation models of the world incorpora- ting all possible combinations of the above five variables affecting growth. It discusses in detail the concept of exponential growth (when a quantity increases by a constant percentage of the whole in a constant time period). The study demonstrates the consequences when population grows ex- ponentially and available food grows linearly. The application of the Forrester model to different conditions concludes that the limit to exponen- tial growth in our finite world will be reached by the year 2100. The authors state that ‘the most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.’

There have been many criticisms of both Forrester’s model and t h i s report. Some of the assumptions and some of the parameters of the model have been questioned. But, it should be agreed that this is a commendable start at a most important problem. The answers will not be easy, and we must begin now to consider solutions to the problems and consequences of economic growth.

I t is interesting to consider these consequences in light of the United Nations Conference on the Human Environment held in Stockholm last June. The conference set many different tones, attempted to accommodate many different viewpoints, and the accomplishments are even now difficult to assess. But, there is one additional item essential to any discussion of economic growth that was seen quite clearly at the Stockholm conference - that it is only the developed countries that can be concerned with pollu- tion. It is only the developed countries who can be concerned with the consequences of economic growth. The peoples of the underdeveloped nations of the world cannot, until they satisfy their lowest level needs for food, shelter, and clothing, be concerned with pollution. (The concept of a need hierarchy is probably most notably developed by Abraham Maslow in Motivation and Personality, 1954.) It can also be shown that this same need hierarchy can be applied to cities and regions in a developed nation. (The residents of a company town for example, are more concerned with the continued existence of the factory than any pollution that may be emitted by this factory, and rightly so.) Thus, any proposal that suggests that all countries must curb pollution since air pollution knows no national boundaries is absurd. Any nation that has not yet adequately fed its people cannot concern itself with the consequences of economic growth. It must, instead, attempt to generate a rapid national economic growth

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rate. Canada, then, must take either unilateral action or bilateral action (with the United States, for example) to reduce the spillover effects dis- cussed earlier. It cannot wait for the United Nations, which includes mostly underdeveloped nations, to act. Only in this way, can a developed country rid itself of some of the social costs like pollution that are consequences of economic growth. Large cities in Canada have pollution because they have prospered. Now, with their prosperity, they should attempt to reduce pollution as one element of a total program to increase the quality of life.

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