Interdependence of Growth, Structure, Size and Resource Consumption During an Economic Growth Cycle

TL;DR

This paper introduces the HARMONEY model to analyze how economic growth, structure, size, and resource consumption are interconnected, revealing patterns of decoupling, distribution effects, and structural trade-offs during growth cycles.

Contribution

The paper presents an updated HARMONEY model that links physical and monetary aspects of growth, providing new insights into resource efficiency, debt dynamics, and structural changes in economies.

Findings

Decoupling of GDP from resource use is due to physical limits, not avoidance.

Changes in resource efficiency and pricing affect debt and decoupling.

Distribution of transactions follows historical patterns, showing realistic structural dynamics.

Abstract

All economies require physical resource consumption to grow and maintain their structure. The modern economy is additionally characterized by private debt. The Human and Resources with MONEY (HARMONEY) economic growth model links these features using a stock and flow consistent framework in physical and monetary units. Via an updated version, we explore the interdependence of growth and three major structural metrics of an economy. First, we show that relative decoupling of gross domestic product (GDP) from resource consumption is an expected pattern that occurs because of physical limits to growth, not a response to avoid physical limits. While an increase in resource efficiency of operating capital does increase the level of relative decoupling, so does a change in pricing from one based on full costs to one based only on marginal costs that neglects depreciation and interest payments leading to higher debt ratios. Second, if assuming full labor bargaining power for wages, when a previously-growing economy reaches peak resource extraction and GDP, wages remain high but profits and debt decline to zero. By removing bargaining power, profits can remain positive at the expense of declining wages. Third, the distribution of intermediate transactions within the input-output table of the model follows the same temporal pattern as in the post-World War II U.S. economy. These results indicate that the HARMONEY framework enables realistic investigation of interdependent structural change and trade-offs between economic distribution, size, and resources consumption.