- Economics is a social science
built around solving one simple problem.
We as humans have unlimited desires,
but limited means in which to fulfill those desires.
Which inevitably means that we will go without
some of the things that we really want.
This problem is, for the most part, unsolvable.
But we can try and get the best possible results
by answering four questions.
What should be produced?
How much should be produced?
How should it be produced?`
And for whom should it be produced?
All economic theories and schools of thought
are built around answering these questions
in slightly different ways to deliver what we think
is the optimal outcome.
Capitalism will produce what is demanded by the market
in a way that investors and managers deem optimal,
and produce it for people with the means to buy
those goods or services.
Socialism will produce what is demanded by the people
in a way that the government deems optimal,
and it will produce it for those
with a need for those goods or services.
And yes, this is a very rough example
that I'm sure some political compass purists
will call me out on, but you get the idea.
All of economics is dedicated to answering these questions
in slightly more optimal ways.
Of course, the very best way to answer them
is to make a surplus of everything
in the easiest way possible for anybody who wants it.
But that isn't possible unless we lived
in a totally post scarcity universe, which we don't.
We live in the real world,
with real limitations on resources.
However, the next best thing we can do is grow.
If we are able to make more goods and services every year,
then we are able to improve living standards
for more people,
which makes all of these questions easier to answer.
Economics is a really tough field
if you are deciding between who gets food and housing.
It's a lot easier if you're deciding if people
should get free college or a bigger tax break.
The former are decisions that economists will need to make
if they don't grow their output,
and the latter are decisions made by economies
that have achieved sustained growth.
But is endless growth even possible in a finite world?
If it is possible, how?
And if it isn't possible,
what does that mean for the future of humanity?
This episode of "Economics Explained" was brought to you
by Brilliant.
I love teaching and that is why I know that the best way
to properly learn something is by doing,
and that's what Brilliant is all about.
I recently wanted to brush up on my statistics
and probability skills,
so it was a choice between reading through
my old university textbooks
or taking Brilliant's hands-on course.
Even as someone who had previously used probability models
on a professional level, I never felt as if the lessons
were moving at too slow a pace,
and the interactive experiments gave me new insights
into how I could use what I thought
was otherwise purely academic knowledge.
If you wanna learn and understand,
and I mean really understand STEM subjects,
there really isn't a better tool on the internet
than Brilliant.
To get started for free,
go to brilliant.org/EconomicsExplained,
or click the link in the description below.
And the first 200 of you will get 20% off Brilliant's
annual premium subscription.
Economic growth is measured as the change
in an economy's output, typically measured in GDP over time.
I made an entire video recently on my second channel
explaining everything you need to know about GDP.
So if you're unsure about anything
at any point in this video,
feel free to pause it and go check out
that quick explanation before you come back here.
Now, most developed economies target
a long-term growth rate of around 2 to 3%.
The world as a whole has had a GDP growth rate
of a little over 3% over the past five decades,
and developing economies like China
target an even higher rate because they want to catch up
with the general quality of life of advanced economies.
China in particular has been responsible
for lifting more than a billion people out of poverty
thanks to their intense economic growth
over the past three decades.
So, pursuing economic growth really does do a lot of good.
But it can also do a lot of harm.
Taken to the extreme,
there are only so many resources on earth.
There is only so much farmland, iron ore, fossil fuels,
and fresh water.
We can improve how much we get out of all of these resources
by using more efficient farming techniques, recycling,
exploring renewables, and building out infrastructure,
but there is still ultimately a limit.
A limit that we are likely to hit first
with the damage that the exploitation
of all of these resources is doing to our environment.
To combat this, a lot of powerful people
have started to champion the idea of a zero growth world.
If we don't increase our usage of resources,
then things like pollution and greenhouse gas emissions
will also stagnate.
This is not necessarily incorrect,
but the people making these arguments are not the ones
that are gonna benefit most from economic growth
in the coming decades.
If an Australian has to do away
with a fifth bedroom on their house,
or an American has to make do with a car
that isn't the size of a one bedroom apartment,
then that's probably a worthy sacrifice to make sure
that we don't destroy our planet.
But asking a developing nation, which remember
are the ones that often grow at the fastest rate
to not improve the lives of their citizens
because all of the advanced economies have screwed up
the planet to enrich themselves is kind of unfair.
It's also an unfair thing to ask
of even the wealthiest nations in the world.
As the world has grown, it has grown more unequal.
Modern billionaires are the wealthiest people
that the world has ever known,
with living standards that easily put kings and emperors
of previous centuries to shame.
They are enjoying this wealth all while people
that live in the same countries as them
subsist meal to meal.
Now, while their lives are undoubtedly better
and more comfortable than most other humans
throughout the ages,
they are also much more aware of the vast wealth gap
because it is constantly shown to them.
In an economy where
every year we are all getting slightly richer on average,
this gap is easier to ignore because, on average,
everybody's living standards will be increasing.
It's Piketty's rising tide that lifts all boats.
But if nations around the world enact a policy
of zero growth, the world becomes a zero sum game,
where if someone else has too much
it's because someone somewhere else has too little.
I'm not a political scientist,
but it is very easy to predict that this would have
some negative impacts on social stability.
Even if it doesn't come to riots and guillotines,
it's inherently human nature to want more,
to strive for better things,
to improve the lives of ourselves and the people around us.
So saying that we have hit a wall and we need to be happy
with the status quo indefinitely is just not a sound plan,
no matter how high the stakes are.
It's also not good economics.
The entire reason that economics exists
is to solve this problem.
And just because we run into some limits on the means
by which we fulfill insatiable human desires
does not mean that we should give up.
That would be like a physicist giving up
on explaining the workings of the universe
because string theory
got a little bit too difficult for them.
And the reality is that we can grow endlessly.
And I don't mean in the sense that Elon Musk
is going to save us all by turning us
into an interstellar empire that can harvest the resources
of entire planets.
Hopefully that will happen one day,
but for now good economists need to prepare
some more mundane solutions to the central economic problem.
So for this next part,
I wanna reduce the scope of that problem a little bit.
I wanna change humans have unlimited desires,
but limited means in which to fulfill those desires into,
our global economy should continue to grow,
but it needs to do it in such a way
as to stop damaging the planet as severely as it has been.
Whether you believe in global warming or not
it really doesn't matter,
because most of the world's largest economies
are going to be enacting policies designed
to reduce emissions and pollution anyway.
And that has the potential to come at the expense
of absolute output.
Reducing global temperature increases is not
the only limitation that our global economy
will have to deal with, but it is the most pressing.
Other things to consider is that
on our path to endless growth,
we are also going to eventually run out of fossil fuels,
rare earth metals, fresh water supplies,
and productive farmland.
But for now, let's focus on the first hurdle,
which is simply not burning down our basket of resources.
If global economic growth was to continue
at its current rate until the year 2050,
we would have a global GDP 2 to 3 times larger
than we do today.
Although the thing's been equal,
this means that our emissions would also
be 2 to 3 times higher, which is obviously not optimal.
The simple solution is invest into renewables,
which would certainly help,
but it still doesn't solve the issue of us using
3 times as much of everything else,
including making 3 times as much trash.
This is not to mention the fact that developing nations
tend to opt for easier to implement industrial practices
which are more damaging to the environment
and emissions goals.
So that means that we are back at square one,
unless we break the golden rule of economics
and assume that maybe all of the things are not equal.
There are two broad ways that economies can achieve growth.
They can do it by simply making more stuff,
or by making better stuff.
Making more stuff is where we would run into problems
with living in a finite world.
If we ran our entire economy off making steel cable,
then the only way that we would be able to grow our economy
would be by producing more steel cable.
Unfortunately, we would not be able
to grow this economy forever
because eventually the world would run out of the iron ore
and minerals needed to make the steel to make the cable.
Of course, real economies don't just make one product,
but even today, most of our growth still does come
from making the same things but making more of them.
In fact, we often push our economic growth in the direction
of making more stuff rather than making better stuff.
We don't offshore manufacturing to China
because the goods produced there will be more valuable,
we do it because we can make more for the same price.
If economies were instead
to focus on pursuing economic growth
through producing goods and services of higher quality,
then hard resource limits wouldn't be an issue.
Take our cable making economy again.
If this economy instead switched to producing cars,
then they would be producing much more value
for every unit input of raw materials.
And then if they produced luxury wrist watches,
they would produce even more value per unit input.
Of course, you can't run an economy
off making luxury wrist watches.
Even Switzerland has the good sense
to diversify into dodgy banking.
And you also can't grow an economy endlessly
by just making more and more expensive products.
Sometimes a project will just need a mile of steel cable.
But rather than just trying to build the most
valuable things we possibly can
out of the materials available to us,
we can instead choose to not build things
that intentionally forego quality for cheapness.
Fast fashion, disposables,
and even poorly constructed buildings
are perfect examples of this.
It takes just as many bricks and building materials
to put together a shoddy house as it does to build one
that will stand for a hundred years.
It just takes more careful planning and a better tradesman.
On the extreme opposite end of this spectrum,
we have the digital economy.
Some of the most valuable businesses
in the entire world produce services
that have practically zero marginal resource use.
I think you would agree that watching a show on Netflix,
or even watching this video right now,
has provided you with some value,
and it's also providing that value to hundreds of thousands
of other viewers as well.
It has provided this value despite the fact
that my small team and I barely used any finite resources
to make and share this video,
apart from maybe some fossil fuels to power our computers
and the data centers where it'll be stored with YouTube.
The value that this video provides, however small,
is contributing to economic growth
and can be scaled almost endlessly
without running into any of the limitations
of the finite world that we live on.
Of course, without fully embracing the matrix,
or the metaverse, or whichever one is more terrifying,
we are still going to need real tangible goods and services.
But our growth doesn't necessarily need to come from them.
A combination of focusing on growth through adding value
to existing resources rather than just using more of them,
and pushing the limits of the digital economy,
will mean that we can grow pretty much endlessly
at our current rate,
or at least give ourselves enough time
to actually genuinely become multi-planetary,
at which point all bets are off.
So how do we do this?
The good news is that market forces are strongly encouraging
the growth of the digital economy, so no problems there.
The bad news is that market forces are kind of doing
the opposite for everything else.
Fast fashion companies are so valuable
because people would rather spend $200 on a coat
that they can wear half a dozen times,
rather than $2,000 on a coat that they can wear
for the rest of their lives.
And the same goes for a lot of other goods that we consume.
On a national or international level
it's hard to ban these things,
and it's probably counterproductive
to prescribe economic policy on a video
on the internet anyway.
But perhaps the best thing that we can do
is simply measure this issue.
We supplement GDP figures with all types
of different measures.
GDP per capita, GDP adjusted for purchasing power parity,
GDP adjusted for inflation, being the most used examples.
But we can do the same thing with resource use as well.
If we divide total output by total material usage,
we effectively get GDP per resource.
Though most economists have agreed
to call this material productivity.
If an economy grows its GDP and uses the same resources,
it's material productivity will increase.
If an economy uses more resources
but its GDP stays the same,
its material productivity decreases.
And you get the idea.
The good news is that if we look back
we can see that material productivity is increasing
in most economies that we have data on,
but it's not increasing fast enough.
The best first step that we can take
to fixing this shortfall is to simply make
this measure a big deal.
By simply paying attention to this metric,
and giving it the same weight
as we do raw GDP figures, for example,
we will naturally enact policies
that promote material productivity, reelect governments
that deliver strong material productivity growth,
and all the while we will be pursuing limitless growth
in a finite world.
Thanks for watching, mate.
Bye.