"Cake without Flour" — Duncan Foley on the Dilemmas of Economic Growth

by Sandwichman (at Econospeak)

“Cake without Flour” — Duncan Foley on the Dilemmas of Economic Growth
The following excerpt is from Duncan Foley’s outgoing Presidential Address to the Eastern Economics Association, “Dilemmas of Economic Growth,” presented March 9, 2012 (Reprinted by permission from Macmillan Publishers Ltd: Eastern Economic Journal (2012) 38, 283–295 published by Palgrave Macmillan). The title is an allusion to Herman Daly’s parody of Cobb-Douglas production function hyperbole “as implying that it is possible to bake a cake without eggs or flour as long as the cook whisks the empty bowl faster and faster.”


Some growth economists might regard the considerations we have just reviewed as rather quaintly anachronistic in putting so much emphasis on the material nature of economic production. Well-established patterns of economic growth show that as incomes rise, the proportion of output as measured by such indexes as real GDP consisting of material goods steadily declines. The major sources of growth in incomes (and, given the way we measure GDP, in indexes of output) shift to the tertiary sector, particularly services. The chief input to services is human intelligence, and at least in some accounts, intelligence is an unlimited resource. So why couldn’t real GDP, measured to include the use-value of services, continue to grow without limit?
There are some immediate problems with this conception. (below the fold)

Strictly speaking the production of almost all services does require material and energy inputs, as the gigantic server farms required for information technology are a concrete reminder. Maintaining the human capital to provide a glittering array of intellectual services requires material and energy inputs, and these very likely increase as the quality of intellectual output rises.
But this vision of endless growth without material or energy inputs requires some re-examination of just what it is that we regard as output and try to measure in indexes like real GDP.