How difficult would it be for individuals to adjust to zero economic growth?

 

It would not be difficult for governments to achieve zero economic growth. They would just need to do more of the things that they are doing at present to slow down the adoption of new technology, create policy uncertainty, protect inefficient firms and industries from competition, and reduce the incentives for people to work. I could make a more detailed list of policies they could adopt, but I am not in the business of advising politicians about how to achieve zero growth.

Those who argue for lower economic growth don’t talk much about adverse psychological impacts that people might experience as a consequence. They seem to assume that if economic growth was stopped, average life satisfaction would stay where it is now. The basis for that assumption is that in high-income countries, further increases in income offer negligible benefits in terms of increased life satisfaction. That is consistent with the views of Richard Easterlin, who was made famous by his pathbreaking research on the relationship between economic growth and indicators of subjective well-being. Easterlin argues:

“At a point in time, happiness varies directly with income both among and within nations, but over time the long term growth rates of happiness and income are not significantly related.”

That passage is quoted in an article by Michael Plant which provides quite a strong defense of Easterlin’s position.

In my view, Easterlin is broadly correct. As incomes rise, additional economic growth can be expected to make a progressively smaller contribution to psychological well-being (as commonly measured by average life satisfaction ratings). Nevertheless, people may have good reasons to seek to have higher incomes. As I discussed in Chapter 1 of Freedom, Progress, and Human Flourishing, psychological well-being is only one of the goods of a flourishing human.

However, the main point I propose to make in this essay is that adoption of policies to achieve zero economic growth would be likely to pose substantial psychic costs (psychological adjustment costs) for many people as they are forced to revise their expectations downwards. I begin the essay by discussing international data on the perceptions that people have about their standard of living relative to their parents and then link that data to average life satisfaction.

1.        Are perceptions of standard of living relative to parents related to economic growth?

In the latest round of the World Values Survey (WVS 2017-22) respondents were asked the following question about their standard of living: “Comparing your standard of living with your parents’ standard of living when they were about your age, would you say that you are better off, worse off or about the same?” (I downloaded that data for as many countries as possible using the WVS’s excellent facility for online analysis.)

Matching the WVS data with World Bank data on per capita income (NY.GDP.PCAP.PP.KD) and rate of growth in per capita income (NY.GDP.PCAP.KD.ZG) left me with a data set covering 63 countries. I used income data for 2002, and growth data for the period from 2002 to 2022. The reasoning behind that was to separate the growth experience prior to 2002 (reflected in income levels for 2002) from subsequent growth experience.

(It would have been nice to be able to conduct this analysis using a larger data set, but beggars can’t be choosers. I hope that one day someone will attempt to replicate and extend the study using a data set for a larger number of countries.)

Countries were allocated to four groups of approximately equal size:

• Low-income, low growth e.g. Pakistan, Kenya
• Low-income, high growth e.g. China, Indonesia, India
• High-income, low growth e.g. U.S.A., Germany, Australia
• High-income, high growth e.g. South Korea, Singapore.

The average percentage of those who consider themselves to be better off than their parents at a comparable age is shown in Figure 1a. As might be expected, a higher percentage of people are in the “better off” category in the high-income and high growth countries.

Figure 1b shows that the percentages in the “worse off” category are lowest in the high income and high growth countries.

Figure 1c shows that the percentage who are “about the same” is higher in the low growth countries than in the high growth countries.

Overall, this analysis suggests that perceptions of standard of living relative to parents are positively related to past economic growth experience of the countries in which people live. Historical growth experience, reflected in per capita income levels in 2002, and more recent growth experience over the last 20 years are both relevant.

2.        Do perceptions of standard of living relative to parents differ according to the age of respondents?

As might be expected, Figure 2a shows that in the high income, low growth countries older people are less adversely affected by low growth than are young people. The fact that more than half of respondents aged 50+ still perceive their standard of living to be better than that of their parents, presumably reflects the benefits of higher economic growth rates earlier in their working lives.

The picture presented in Figure 2b is consistent with that in Figure 2a.

Figure 2c indicates that there is not much difference between age groups among respondents who perceive that their standard of living is about the same as that of their parents.

Overall, perceptions of standard of living relative to parents do differ somewhat according to the age of respondents. In particular, in the high-income countries, low growth has a greater adverse impact on young people than on old people.

3.        Are life satisfaction ratings influenced by perceptions of standard of living relative to parents?

Figure 3 shows average life satisfaction ratings for each of the four categories of countries and each of the three categories of responses to the question about standard of living relative to parents.

Several observations may be made:

First, average life satisfaction ratings are higher for the high-income, low growth group than for other countries. It is somewhat surprising that life satisfaction is not as high, or higher in the high-income, high growth group. It might be interesting to speculate about that result, but my focus is on the question of whether perceptions of standard of living relative to parents influence life satisfaction ratings.

Second, average life satisfaction ratings of those who perceive their standard of living to be about the same as their parents are not much lower than for those who perceive their standard of living to be higher than that of their parents.

Third, average life satisfaction ratings of those who perceive their standard of living to be lower than that of their parents are substantially lower than for those who perceive their standard of living to be higher than that of their parents. That is true for all four groups of countries.

The important point to note is that the perception of having a lower standard of living than parents had at a comparable age has a substantial adverse impact on life satisfaction ratings.

Implications

The implications of the observed relationship between perceptions of standard of living relative to parents at a comparable age and economic growth experience are obvious. Lower economic growth is likely to result in increasing percentages of people having lower living standards than their parents. If economic growth is brought to a halt, the percentages who perceive that their living standards are lower than those of their parents would presumably end up approximately equal to the percentages who perceive that their incomes are higher than those of their parents.  

The implications for average life satisfaction of an increase in percentages who feel worse off than their parents at a comparable age are also obvious from the analysis presented above. An increase in the percentage of people who perceive that they have a lower standard of living than their parents is likely to result in a decline in average life satisfaction. The extent and duration of the associated decline in psychological well-being could be expected to vary depending on the resilience of individuals.

The analysis suggests that the psychic costs of adjustment to zero economic growth would initially fall most heavily on young people. In countries where per capita incomes are relatively high, older members of the population have been able to retain the benefits of higher economic growth that occurred earlier in their working lives.

In an earlier study focusing on Australia I found that in the 18-54 years group 33% felt better off than their parents; 48% felt worse off, and 19% felt that their incomes were about the same as their parents’ incomes at a comparable age. Consistent with the findings of the current study, those who felt worse off than their parents had substantially lower life satisfaction.

The Australian study looked more deeply at the group who feel worse-off than their parents, to observe the extent to which their life satisfaction experiences interacted with their resilience. As might be expected, the results indicated that people with relatively high resilience were able to maintain relatively high life satisfaction despite feeling worse off than their parents were at a comparable age.

Implications of three different kinds follow from acknowledging that lower economic growth causes an increasing proportion of the population to experience the psychic costs associated with disappointed expectations.

First, at an individual level, those affected are posed with the problem of how to adjust to the new set of circumstances. They may need the support of family and friends, and possibly professional help, to moderate the psychic costs involved.

Second, governments, and those advising them, need to consider whether there are more sensible ways to pursue policy objectives. The psychic costs associated with zero economic growth make this outcome less desirable, irrespective of whether it is pursued deliberately or occurs as a consequence of the incompetence of those responsible for economic policies.

Third, observers of interactions within social and economic systems need to consider likely responses of voters who are disappointed that it has become more difficult to achieve the goal of being able to maintain a standard of living at least as high as that of their parents. Voters can be expected to blame government policies for their predicament. From a social science perspective, the interesting question is whether government policy responses are more likely to restore economic growth or make the problem worse.

Conclusions

This essay has focused on the likely impact on average life satisfaction at a national level of policies to achieve zero economic growth. Data from the World Values Survey has been used to examine the relationship between the perceptions of respondents about their standard of living relative to their parents at a comparable age and economic growth in the countries in which they reside. That data has then been linked to average life satisfaction.

The main findings are:

Perceptions of standard of living relative to parents are positively related to past economic growth experience of the countries in which people live.

In the high-income countries, low growth has a greater adverse impact on young peoples’ perceptions of their standard of living relative to parents than on the corresponding perceptions of old people.

The perception of having a lower standard of living than parents at a comparable age has a substantial adverse impact on life satisfaction ratings.

These findings imply that lower economic growth rates would be likely to result in an increasing proportion of the population having lower living standards than their parents, and hence, lower average life satisfaction. The psychic costs of adjustment to zero economic growth would initially fall most heavily on young people.

Zero economic growth would have implications for individuals, governments and social scientists:

• At an individual level, those whose expectations have been disappointed are posed with the problem of how to adjust.
• Governments and their advisors are posed with the problem of considering whether there are more sensible ways of pursuing policy objectives.
• Social scientists are posed with the problem of assessing whether voters in different countries are more likely to respond in ways that will fix the problem by restoring economic growth, or to make it worse by favoring policies that will lead to economic decline.

The problems of psychological adjustment to lower economic growth should no longer be ignored.

Addendum

I have received the following comment by email from Arthur Grimes, Senior Fellow, Motu, Wellington, New Zealand:

"This is an excellent article - thanks for the contribution to understanding these issues.

Another angle is to think about how people's life satisfaction reacts when incomes in their country grow more slowly than comparable and/or neighboring countries. There are a couple of studies that show an analogous situation to your results; i.e. people in more slowly growing countries feel worse off (in subjective wellbeing terms) than do people in higher growth countries."

My response:

One of the articles that Arthur referred to is: Arthur Grimes and Marc Reinhardt, ‘Relative Income, Subjective Wellbeing and the Easterlin Paradox: Intra- and Inter -national Comparisons’, published as Chapter 4 in: Mariano Rojas (Ed.) The Economics of Happiness: How the Easterlin Paradox Transformed Our Understanding of Well-Being and Progress (Switzerland: Springer Nature, 2019).

The abstract of the article is as follows:

“We extend the Easterlin Paradox (EP) literature in two key respects. First, we test whether income comparisons matter for subjective wellbeing both when own incomes are compared with others within the country (intra-national) and with incomes across countries (inter-national). Second, we test whether these effects differ by settlement-type (rural through to large cities) and by country-type (developed and transitional). We confirm the intra-national EP prediction that subjective wellbeing is unchanged by an equi-proportionate rise in intra-country incomes across all developed country settlement-types. This is also the case for rural areas in transitional countries but not for larger settlements in those countries. International income comparisons are important for people’s subjective wellbeing across all country-settlement-types. Policy-makers must therefore consider their citizens’ incomes in an international context and cannot restrict attention solely to the intra-national income distribution.”

In combination with my results, the findings of the article suggest to me that a range of different reference points are relevant to life satisfaction ratings. Arthur has provided another reason to expect people in more slowly growing countries to feel worse off (in subjective wellbeing terms) than do people in higher growth countries.   

What is the problem with aggressive realism in international relations?

 

Before I outline John Mearsheimer’s theory of aggressive realism, I will present my version of the classical liberal view of international relations.

A classical liberal view

As the epigraph might suggest, I subscribe to a view of international relations that has been around, in one form or another, at least since the time of the Ancient Greeks. The poet Hesiod, one of the founders of Greek epic poetry, advised his brother, Perses, to avoid thinking of obtaining wealth by engaging in predatory violence, including war. He urged Perses to respect the rights of other people, and to seek prosperity by working and engaging in peaceful competition with economic rivals.

As I see it, it is natural for individuals to seek to flourish by engaging in peaceful pursuits in mutually beneficial collaboration with others. However, it is an unfortunate fact of life that some people - individuals, groups, and nations - seek to obtain wealth by predation. People can flourish by engaging in peaceful pursuits only if they are able to protect themselves from predation.

It is not difficult to identify predatory nations which have a recent track record of seeking to invade the territory of other jurisdictions or threatening acts of violence against them. 

People in neighboring jurisdictions have an obvious incentive to protect themselves, and each other, from such predatory behavior. Nations that do not have predatory intent toward other jurisdictions have an incentive to band together to form communities of peaceful nations. The purpose of these multinational communities is to establish and enforce international rules that outlaw invasion and other violent activities that predatory nations undertake.

The multilateral communities of peaceful nations (MCPN) that I have in mind would have more in common with some existing security treaties than with the United Nations. I envisage that the MCPN would exist solely for mutual protection and would avoid attempting to pursue other objectives such as protecting individual rights, promoting economic development, or pursuing environmental objectives.  Multilateral cooperation might be desirable to pursue some of those other objectives, but the MCPN are more likely to be effective in pursuing the objective of discouraging predation if they focus specifically on that objective.

The approach proposed above should enable liberal democracies to avoid becoming involved in pathetic attempts to impose the institutions of liberal democracy on people with different belief systems, values, and ideals. However, it would support provision of military aid to Ukraine - to support its defense against Russian aggression, to Israel - to support its defense against terrorism sponsored by Iran, and to Taiwan - to counter Chinese threats of invasion.

I have previously outlined some similar ideas in myreview of Christopher Coyne’s book, In Search of Monsters to Destroy.

The approach proposed here has much in common with the classical liberal approach to international relations theory described by Edwin van de Haar in a monograph entitled, Human Nature and World Affairs, published by the London-based Institute of Economic Affairs in 2023.

The theory of aggressive realism

When a friend suggested a few weeks ago that I should watch Lex Fridman’s interview of John Mearsheimer, my initial reaction was that I had already knew enough about Mearsheimer’s views because someone had referred them to me in 2022, soon after Russia’s invasion of Ukraine. I suggested that my friend should take a look at Niall Ferguson’s refutation of Mearsheimer. Surprisingly, he took up my suggestion, so I felt obliged to watch the Mearsheimer interview.

After watching the interview, my initial reaction was that I had heard enough from John Mearsheimer to last me for at least the rest of 2025. However, I had to acknowledge (to myself) that Mearsheimer’s approach to the issues was scholarly, So I decided that it might be worth trying to find out more about the basis for his views. That is how I came to read, The Tragedy of Great Power Politics (2014 edition).

Mearsheimer argues that the overriding goal of each state is to maximize its share of world power. Since no state is likely to achieve global hegemony, the world is condemned to “perpetual great power competition”.

His theory of aggressive realism is based on 5 bedrock assumptions:

1. The international system is anarchic, in the sense that the system comprises independent states that have no central authority above them. 
2. Great powers inherently possess some offensive military capability. 
3. No state can ever be certain about another state’s intentions, regarding the use of offensive military capability.
4. Survival is the primary goal of great powers – they are unlikely to be able to pursue other goals if they are conquered.
5. Great powers are rational actors – they think strategically about how to survive in their external environment.

Mearsheimer argues that these assumptions are realistic and that, together, they “create powerful incentives for great powers to think and act offensively with regard to each other”.  He suggests that hegemony is the best way for any state to guarantee its own survival.

The author views aggressive realism as a prescriptive theory as well as a descriptive theory. If great powers want to survive, they should behave like aggressive realists.

The extent to which states fear each other determines the severity of their security competition as well as the probability that they will fight a war. An “unbalanced multipolarity” is the power configuration that generates the most fear because it contains a potential hegemon which stands a good chance of dominating the other great powers in its region and the world.

Much of Mearsheimer’s book is devoted to marshalling historical evidence in support of his theory, but the final chapter focuses on a specific application of his theory. In that chapter, he seeks to answer the question: Can China rise peacefully?

Mearsheimer does not believe China can rise peacefully. He argues that if China maintains rapid economic growth over the next few decades, it is likely to end up in an intense security competition with the United States and its neighbors. He views China as a potential hegemon and the current international power configuration as an unbalanced multipolarity.

According to Mearsheimer, the optimal policy for the United States to adopt toward China is “containment”, rather than other alternatives including preventive war, pursuing policies aimed at slowing China’s economic growth, or seeking to weaken China by fomenting trouble within its borders. Containment means “keeping Beijing from using its military forces to conquer territory and more generally expand its influence in Asia”. Mearsheimer suggests that the U.S. should form a balancing coalition with as many of China’s neighbors as possible.

Where is the problem?

As I see it, there are two main weaknesses in Mearsheimer’s analysis. The most fundamental problem stems from assumption 3. In order to argue that aggressive realism is the optimal strategy for a state to adopt, I think it would be necessary to argue that there is always a great deal of uncertainty about the intentions of neighboring states, rather than just lack of certainty. Perhaps it is true that no state can ever be certain about another state’s intentions, but I think states can usually make well-informed judgements about the intentions of their neighbors. Australia and New Zealand, for example, can be sufficiently certain about their intentions toward each other, to refrain from adopting offensive postures in that relationship. I think the same has generally been true of relations between Canada and the United States over the last century, but the recent rhetoric of the U.S. president might suggest that Canada would be wise to begin to re-assess the probability that the U.S. will continue to respect its territorial integrity.

Those examples illustrate the point I want to make. It is possible to make probabilistic assessments about the intentions of other states from past behavior and the rhetoric of their leaders. Some states obviously have peaceful intentions towards their neighbors whereas other states are currently engaged in predatory activities. In other instances, the probability of predatory behavior over the next decade might lie in the range from 0.1% to 1%; or from 90% to 100%; or in some other range.

The other weakness in Mearsheimer’s analysis seems to me to be an excessive focus on China as the potential hegemon. I agree with his analysis and policy prescription relating to China - as long as “containment” is pursued in a manner that can be presented to the Chinese government as a response to its aggressive policies toward its neighbors, rather than as an attempt to impede China's peaceful interactions with its neighbors.

 It seems to me, however, that communities of peaceful nations should be concerned to discourage all states from predation on their neighbors.  States that profit from predation have no incentive to stop until they assess that the costs of further predation are outweighed by the benefits. States in the neighborhood of Russia, Iran, and North Korea have good reasons to seek to contain the aggressive tendencies of those countries. Given that China, Russia, Iran and North Korea engage in military cooperation with each other, it would be particularly unwise for the U.S. and its allies to be unduly pre-occupied with responding to the rise of China.

Conclusions

John Mearsheimer’s theory of aggressive realism suggests that the over-riding goal of each state is to maximize its share of world power. He argues that there are powerful incentives for all great powers to act offensively with regard to each other.

The crucial assumption that Mearsheimer makes is that no state can ever be certain about another state’s intentions, regarding use of offensive military capability. I argue that it is possible for states to make probabilistic assessments about the intentions of other states based on past behavior and the rhetoric of their leaders.

It is not difficult to identify nations that have a recent track record of predatory behavior. Peaceful nations have an obvious incentive to band together to enforce international rules that outlaw invasion and other violent predatory activity.

Mearsheimer’s concerns about challenges that could arise from emergence of a new hegemon have led him to focus on the risks posed by the rise of China. While I agree with much of his analysis regarding the threat posed by China in the years ahead, it would be unwise for peaceful nations to overlook the threats currently posed by others (including Russia, Iran and North Korea) who clearly have predatory intentions toward other jurisdictions in their neighborhoods and are currently engaging in military cooperation in pursuit of their several objectives.