Economic Growth and the Limits of Environmental Regulation: A Social Economic Analysis

Article excerpt

After a quarter century of environmental regulation in this country under the auspices of the Environmental Protection Agency and other government agencies, significant environmental threats remain. Ambient standards for ozone and other air pollutants are frequently violated in urban areas, lakes and rivers continue to be heavily polluted, groundwater is increasingly threatened with contamination, ambient levels of toxic chemicals in the biotic food chain are at high levels, little has been done about the potentially serious problem of greenhouse warming, and biodiversity is threatened as a consequence of reduced and fragmented natural habitats. Why has the regulatory system failed to fully address our environmental problems?

The goal of this paper is to suggest that the roots of environmental problems, and the failure of environmental regulation, are deeply embedded in the processes that generate economic growth. The logic of the argument to be presented will take the following form: long-run economic growth relies on the creation of new industries and new forms of economic activity; these new forms of economic activity create new kinds of environmental problems; and new forms of economic activity constitute vested political interests that oppose environmental regulation. Each of the three main sections of the paper will provide theoretical and empirical justification for each component part of the basic argument.


The insight that long-run economic growth requires new forms of economic activity flows from the works of Joseph Schumpeter, Arthur Burns, and others. The fundamental impulse for growth in a capitalist economy, according to Schumpeter, is the constant entrepreneurial search for new consumer goods, new methods of production or transportation, new sources of supply, or new forms of industrial organization (Schumpeter 1939, 1950). As a result, new industries are constantly being created and old industries reduced in relative scope. Schumpeter referred to this process as "creative destruction" and argued that the primary form of competition in a capitalist economy is from new industries and forms of activity that displaced the old.

While new industries indeed experience more rapid expansion than the old, Schumpeter probably overemphasized the destructive side of the growth process. Older industries, such as printing, paper manufacture, food processing, lumber, and steel, seldom disappear entirely because they serve key economic functions in society. They get transformed from time to time by new technologies, but they remain an essential part of the economy. Creative destruction no doubt operates at the level of the firm, but to a lesser extent at the level of the industry. As Nell (1988) has emphasized in his work, economic growth is built on pulling social and economic functions into the market arena that were previously served through nonmarket arrangements (i.e. in household production).

Schumpeter's theory of creative destruction suggests that industries have life cycle patterns of development characterized by initial rapid growth followed by a slowing of growth, and in some instances decline. An industry grows rapidly until it reaches market saturation where all those who desire a product at a given income are consuming it. This part of the growth process involves diffusion of information about the product or technology offered by the new industry, including advertising to convince the public they really need it. Once this period has ended, growth in demand for the product is related to income and population growth and the rate at which competing new products and technologies enter the market and attract consumer attention. As already suggested, older industries don't necessarily disappear because they may continue to serve essential economic functions. They may disappear, however, from a particular country as their production facilities are located offshore to take advantage of lower production costs (Duijn 1983: 20-32). …


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