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Monday, September 21, 2009

"The Costs of Economic Growth"

Lee Arnold says via email "this is interesting." It's an analysis of when and if economic growth should be maximized when technological progress involves risks as well as benefits:

The Costs of Economic Growth, by Charles I. Jones, Stanford GSB and NBER, August 18, 2009: 1. Introduction In October 1962, the Cuban missile crisis brought the world to the brink of a nuclear holocaust. President John F. Kennedy put the chance of nuclear war at “somewhere between one out of three and even.” The historian Arthur Schlesinger, Jr., at the time an adviser of the President, later called this “the most dangerous moment in human history.”1 What if a substantial fraction of the world’s population had been killed in a nuclear holocaust in the 1960s? In some sense, the overall cost of the technological innovations of the preceding 30 years would then seem to have outweighed the benefits.
While nuclear devastation represents a vivid example of the potential costs of technological change, it is by no means unique. The benefits from the internal combustion engine must be weighed against the costs associated with pollution and global warming. Biomedical advances have improved health substantially but made possible weaponized anthrax and lab-enhanced viruses. The potential benefits of nanotechnology stand beside the threat that a self-replicating machine could someday spin out of control. Experimental physics has brought us x-ray lithography techniques and superconductor technologies but also the remote possibility of devastating accidents as we smash particles together at ever higher energies. These and other technological dangers are detailed in a small but growing literature on so-called “existential risks”; Posner (2004) is likely the most familiar of these references, but see also Bostrom (2002), Joy (2000), Overbye (2008), and Rees (2003).
Technologies need not pose risks to the existence of humanity in order to have costs worth considering. New technologies come with risks as well as benefits. A new pesticide may turn out to be harmful to children. New drugs may have unforeseen side effects. Marie Curie’s discovery of the new element radium led to many uses of the glow-in-the-dark material, including a medicinal additive to drinks and baths for supposed health benefits, wristwatches with luminous dials, and as makeup — at least until the dire health consequences of radioactivity were better understood. Other examples of new products that were initially thought to be safe or even healthy include thalidomide, lead paint, asbestos, and cigarettes.
The benefits of economic growth are truly amazing and have made enormous contributions to welfare. However, this does not mean there are not also costs. How does this recognition affect the theory of economic growth?
This paper explores what might be called a “Russian roulette” theory of economic growth. Suppose the overwhelming majority of new ideas are beneficial and lead to growth in consumption. However, there is a tiny chance that a new idea will be particularly dangerous and cause massive loss of life. Do discovery and economic growth continue forever in such a framework, or should society eventually decide that consumption is high enough and stop playing the game of Russian roulette? The answer turns out to depend on preferences. For a large class of conventional specifications, including log utility, safety eventually trumps economic growth. The optimal rate of growth may be substantially lower than what is feasible, in some cases falling all the way to zero.
This paper is most closely related to the literature on sustainable growth and the environment; for example, see Gradus and Smulders (1993), Stokey (1998), and Brock and Taylor (2005). Those papers show that when pollution and the environment directly enter utility or the production function, a “growth drag” may result. Here, the key concern —the loss of life associated with potentially dangerous technologies —is quite different. Nevertheless, there are interesting links with this literature that will be discussed later. ...
...8. Conclusion Technological progress involves risks as well as benefits. Considering the risks posed to life itself leads potentially to first-order changes in the theory of economic growth. This paper explores these possibilities, first in a simple “Russian roulette” style model and then in a richer model in which growth explicitly depends on the discovery of new ideas. The results depend somewhat on the details of the model and, crucially, on how rapidly the marginal utility of consumption declines. It may be optimal for growth to continue exponentially despite the presence of existential risks, or it may be optimal for growth to slow to zero, even potentially leading to a steady-state level of consumption.
The intuition for the possible end to exponential growth turns out to be straightforward. For a large class of standard preferences, safety is a luxury good. The marginal utility associated with more consumption on a given day runs into sharp diminishing returns, and ensuring additional days of life on which to consume is a natural, welfare enhancing
response. When the value of life rises faster than consumption, economic growth leads to a disproportionate concern for safety. This concern can be so strong that it is desirable that growth slow down.
The framework studied here clearly omits other factors that may be important. Health technologies can help to extend life, possibly offsetting some of the concerns here. Even dangerous technologies like nuclear weapons could have a life-saving use—for example if they helped to divert an asteroid thatmight otherwise hit the earth.
This paper suggests a number of different directions for future research on the economics of safety. It would clearly be desirable to have precise estimates of the value of life and how this has changed over time; in particular, does it indeed rise faster than income and consumption? More empirical work on how safety standards have changed over time—and estimates of their impacts on economic growth—would also be valuable. Finally, the basic mechanism at work in this paper over time also applies across countries. Countries at different levels of income may have very different values of life and therefore different safety standards. This may have interesting implications for international trade, standards for pollution and global warming, and international relations more generally.
1For these quotations, see (Rees, 2003, p. 26).

    Posted by on Monday, September 21, 2009 at 09:21 AM in Economics, Technology | Permalink  Comments (8)


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