Prosperity Without Growth

Keywords: smart growth, sustainable growth, sustainable business, Edward D. Hess, Strategy+Business

In the latest issue of Strategy and Business, David K. Hurst reviews Smart Growth by Edward D. Hess. The review is below. For more on growth and sustainability see:

Nobel Laureate Joseph Stiglitz on Sustainability and Growth

Prosperity without Growth: A review of Smart Growth by Edward D. Hess

Edward D. Hess, professor of business administration and Batten Executive-in-Residence at the University of Virginia’s Darden School of Business, has a heretical thought: Growth may not be good. In Smart Growth, he questions the four major assumptions behind the conventional wisdom of corporate success, which he calls the “growth mental model” (GMM): that businesses must grow or die, that growth is unequivocally good, that growth should be smooth and continuous, and that quarterly earnings are the primary measure of success. In addition, he supplies a series of trenchant questions for managers to ask themselves about how, why, and even whether their firms should grow.

In nine crisp chapters, Hess demonstrates that the GMM is neither possible in practice nor feasible in theory, and that attempts to meet its demands can create insurmountable obstacles to corporate sustainability. His arguments are supported by a series of case studies showing that growth is usually uneven and episodic — impossible to sustain for more than relatively short periods of time. Thus, attempts to “implement” the GMM result either in profitless growth, especially through acquisitions, or in ersatz earnings produced via a wide variety of financial manipulations. To test whether the concept of the GMM is supported by theoretical perspectives on growth, Hess turns to economics, organizational strategy and design, and biology. He finds that neoclassical economics is the framework that is most sympathetic to the GMM, but its assumptions do not hold up in the real world; that the strategic and design perspective offers little support for the GMM; and that biological theories are notable for the stress they put on the limits to growth. So there is little support for the conventional wisdom in theory.

Hess’s conclusion is that corporations should aim for sustainable or “smart” growth by asking some key questions, especially regarding the resources most needed to support such growth. Following economist Edith Penrose’s resource-based theory of the firm, he contends that the true limit to growth is usually defined by the capabilities of the firm’s managers — supporting this argument with the well-documented case of Starbucks’s overreach, in which the rapid expansion in the number of stores caused liabilities to rise precipitously and diluted the value of the brand.

All this makes good sense. The only shortcoming may be the author’s failure to examine why the GMM is so robust in the face of all the evidence against it. Is it because there are large constituencies in the economy that generate revenue by pushing the GMM and thriving on the turmoil it creates? If so, is there a need for public policy addressing it? And what risks do firms run if they eschew the flawed GMM in favor of smart growth?

Author Profile:

David K. Hurst is a contributing editor of strategy+business. His writing has also appeared in the Harvard Business Review, the Financial Times, and other leading business publications. Hurst is the author of Crisis & Renewal: Meeting the Challenge of Organizational Change (Harvard Business School Press, 2002).

Reprinted with permission from the strategy+business website. Copyright 2010 by Booz & Company. All rights reserved.

More on Smart Growth at

Rethinking the Measure of Growth

Lat year I posted an article (Nobel Laureate Joseph Stiglitz on Sustainability and Growth) about an interview with economics Nobel laureate Joseph Stiglitz at the Asia Society in New York City. Stiglitz talked about how “what we measure determines what we grow” and the dramatic negative side-effects a metric like GDP can have on societal well-being.

Today, Wayne Arnold at The New York TImes builds on this idea in his article Rethinking the Measure of Growth.

Highlights from NY Times Article

  • The quest for more plentiful and less expensive oil for fast-growing Asian economies has also brought a wave of offshore drilling from India and the Gulf of Thailand, to Vietnam and Bohai Bay, on the northeast coast of China.
  • In considering this risk and the increasing evidence of the toll that rapid economic development is already taking on Asia’s environment, economists and other experts in Asia have taken up the call to re-examine the prominence of economic growth as a measure of policy success, particularly the use of gross domestic product.
  • Asian governments have become particularly enthralled with gross domestic product (GDP) statistics for validation, becoming what Vishakha Desai, the president and chief executive of the Asia Society in New York, has called “G.D.P. junkies.”

For local officials in China, gross domestic product was, until recently, more than just a barometer for gauging policies, it was the measuring stick against which their futures in the ruling Communist Party were determined. Economic growth still ranks as one of the chief criteria for determining party promotions, according to Tan Kong Yam, an economics professor at Nanyang Technological University in Singapore who offers a course for mayors from China.

For such officials, “there is an enormous incentive to promote investments and industrial production,” he said. “This explains why there’s enormous pollution.”

  • Gross domestic product has come in for some particularly hard knocks since the global financial crisis, notably after a report last year whose co-author was Joseph E. Stiglitz, a Nobel laureate in economics, that said reliance on gross domestic product had blinded governments to the increasing risks in the world economy since 2004.
  • Overlooking that risk has possibly cost future economic growth, the report said, and has contributed to a looming environmental crisis.

“Market prices are distorted by the fact that there is no charge imposed on carbon emissions,” the report said. “Clearly, measures of economic performance that reflected these environmental costs might look markedly different from standard measures.”

Economists in Asia say the debate about gross domestic product misses the point. Gross domestic product as a statistic is sound, they say; what is wrong is the fascination in government with what it measures — the sum total of a nation’s annual production.

“The problem is not G.D.P.,” said Bhanoji Rao, a visiting economics professor at the Lee Kuan Yew School of Public Policy in Singapore. “The problem is the culture of consumption.”

  • Mr. Rao is part of a growing body of economists, largely in academia, who question whether rapid economic growth rates in Asia — from the 10.3 percent expansion in giant-but-poor China to an expected 15 percent growth this year in tiny-but-rich Singapore — are necessarily producing a happier, healthier Asia.
  • Some Asian governments, China’s included, have been trying to recalibrate gross domestic product to include the cost of growth to the environment, creating a green gross domestic product. Such efforts, said Mr. Tan, the Nanyang professor, have been frustrated by the difficulty in determining the future cost of environmental destruction.
  • What is needed instead, some economists say, is a wholesale re-examination of development’s goals. “There needs to be an internal debate within the developing countries about what is the path of development we want to have,” Mr. Rao said.

Andy Xie, a private economist in Shanghai, has long argued that the 1.3 billion people in China cannot realistically hope to live like Americans.

“That statement is truer than ever,” he said.

Beijing, at least, appears to have gotten the message, if its investments in green technology and public transportation are anything to go by. The Communist Party has also revised the promotion criteria for officials so that environmental conditions are included along with gross domestic product.

But economists like Mr. Xie and Mr. Rao warn that even with greener development, the result may still be the same if the goal remains an American-style standard of living. Asia may instead need to carve out a vastly different vision of prosperity that does not rely on ever-increasing levels of material consumption.

Nobel Laureate Joseph Stiglitz on Sustainability and Growth

My wife and I live on an island in the Pacific Northwest.  We are in a county that has the lowest working wages in the state.  As you can imagine, there is a lot of belt tightening going on as the economy craters.

In a future blog post I’ll talk about how our community is finding ways to innovate in tough times,  but for now, what I am thinking about is something Joseph Stiglitz said last year in an interview at the Asia Society in New York City.  Stiglitz is a Nobel Laureate and professor of economics at Columbia University.

Toward the end of the interview, talking about GDP, he describes the dramatic negative side-effects a metric like GDP can have on societal well-being.  In short, something as simple as a measurement can lift a society up, or crush it.

Here is what Professor Stiglitz said:

What We Measure Affects Our Behavior

Joseph Stiglitz during 2008 Asia Society interview
Joseph Stiglitz during 2008 Asia Society interview

Accounting frameworks affect behavior.  More generally, information affects behavior.  What we gather our information about, and how we describe success,  affects what we strive for.  If GDP is what we think is success, people will strive for growing GDP.  Politicians, for example, will then describe how they increased GDP x%, creating a sense of importance to the measure.   By doing that though, they focus policies on things that will increase GDP.

We have identified a lot of ways in which GDP is not a  good measure of economic performance or societal well-being.  So we are working with others to try and focus a global conversation about alternative measures, and also come up with some summary accounting frameworks and statistics that more effectively represent the economic realities on the ground.

Measuring the Middle Class

For example, GDP doesn’t tell you about what happens to the typical citizen.  This is an increasing problem because when you have growing inequality in society, you can have GDP going up, as it has in the US, but most people are getting worse off.  Not just poverty going up, but the median income – 50% or more of people getting worse off.

We ought to know what’s happening to the median person.  It’s very hard to find statistics about that.

Green GDP

There needs to be a focus on what we call “Green GDP” – taking account of environmental degradation and resource depletion.  This is particularly important in developing countries that may, for example, be growing by cutting down their forests.  But once they cut down the forests, there’s nothing there.  And so unless they do something, it’s not sustainable.  GDP tells you nothing about sustainability.  Another example – the IMF thought Argentina was doing great in the early 1990s.  In looking at the data though, in a more fine grained way, we found that their growth was not sustainable.  If you only looked at GDP, you would not have realized that.

There are ways that you can adjust for depletion of natural resources and degradation of the environment.  If you do that, China’s growth, for example, gets significantly lowered.  It’s still doing well, but it is much lower than it otherwise would have been.

Special Interests – The Invisible Hand

Here’s an interesting story about the role of special interests: When we tried to push for this (Green GDP), and people in the Department of Commerce were excited about doing this, the coal industry  basically threatened to pass a proviso to take away funding for any research that would support these alternative measures.  Because they new that Green GDP would not be good for the coal industry.  That reinforced our belief on why it is important to measure these things.


Here’s another example… the difference between GDP and GNP. Those of you who are older may remember GNP and around 1990 they switched to GDP.  Well, everybody said it’s just a little bit of difference.  It turns out that it makes a great deal of difference for many countries.  And I am sure somebody is going to write an article about whether there was a political context to the switch.  GDP looks at the output within the country.  GNP looks at the income of the people, in the country.  When you started privatizing a great deal, you had economic activity within the country, but the income from that economic activity more and more was going to people outside the country.  So you have a mine, for example, somebody taking [resources] out of the mine, leaving behind environmental degradation, getting royalties in some cases of 1 or 2 percent, so almost none for the income from the mine goes to people in the country.  So GDP is going up, but any measure of Green GNP would show the country going down.  There are some really dramatic examples like in Papua New Guinea, where this actually is true.

GDP, Prisons and Healthcare

Two dramatic examples – The US has about 10 times as many people per capita in prison as other advanced industrial countries.  That contributes to our GDP, because we have to spend money incarcerating them.  In some states, we are spending as much on building prisons as we are on universities.  That’s good for GDP, but any measure of societal well-being says it’s not good to have so many people in prison.  And it’s a symptom of something dysfunctional.  We can have a long discussion about what it is that’s dysfunctional, but the point is, it’s not positive.

Another example – We spend more on healthcare than any other country, as a percentage of GDP, yet our health outcomes are much lower than in  other advanced industrial countries, and actually, lower than many developing countries.  Well, the extra money we spent on healthcare shows up as a contribution to GDP.  If we got more efficient our GDP could go down.  But that is clearly not… you don’t want to… You’re looking at the wrong thing.


You can watch the GDP portion of the interview video here.

For me, what Stiglitz is getting at is:  We grow what we measure (GDP), and because we are measuring the wrong stuff, we are growing wrong.

It seems to be in our DNA to want to “grow,” but like a garden, don’t we have a choice about what we grow?  Are there ways we can grow our economy that restore abundance rather than consume it?  What are the essential things to measure so that we are growing good things?

What do you think?  What would you like to see grow?  What should we be measuring?