Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist. –Kenneth E. Boulding
Our world today seems full of contradictions. We seemingly need to work longer hours to secure our jobs when there aren’t enough jobs to go around. It appears necessary to bombard us with advertising to persuade us to buy stuff we don’t really want because that is the only way to ensure enough employment for people to afford what they need. Apparently much of this is in aid of economic growth and economic growth is important because without it we won’t be able to service our debt burden.
It is easy to come to the conclusion that debt and economic growth are at the root of our problems and so we should eliminate both. There is a campaign organisation advocating just that – the “Center for the Advancement of the Steady State Economy” (CASSE). Nevertheless, it is also easy to dream up imaginary fables where both debt and economic growth are entirely beneficial:
Imagine an economy where people relied on camel herding to provide food and fire wood for power. They had intermittent famines whenever droughts occurred and spent all day every day scouring the desert for fire wood, water and camel forage. Life was hard and getting harder due to desertification from camel overgrazing and tree loss.
To avoid the looming crisis they constructed solar powered desalination plants to provide fresh water from the sea and grew seaweed on floating farms to convert into aviation fuel, plastic materials and animal fodder. The waste from the seaweed was used as a soil improver and so plenty of camels could be kept on good pasture for use as family pets and recreational riding. Solar powered, robot staffed, factories provided everything everyone wanted. The land that had been overgrazed recovered and wild animals that had been rare became numerous again. Materials were recycled and the cornucopia of consumer goods and capital equipment entirely came from organizing existing materials using human ingenuity and renewable energy.
All the economic development was funded using debts drawn up between the people. The revenue from providing goods and services to each other provided an ample revenue stream for all the debts to be serviced. Everyone was both a creditor and a debtor. People used the revenue from their debt holdings to help pay their debts to each other. There was initially a debate as to whether to use a monetary system based on bills of exchange drawn up between the populace or whether to allow banks. It was decided that banks would add convenience and fortunately the excess interest charged by banks got spent back into the economy by the bank workers and owners. There initially was nothing much in the way of government but it was decided that so long as government workers spent what was received in taxes back into the economy, a mixed public sector private sector economy might be conducive to overall prosperity.
There was no inflation either of consumer prices or of assets. The price of a camel stayed exactly the same as did the prices of the buildings that predated the economic transition. However whilst previously the camels and few permanent buildings constituted essentially all of the asset stock in the economy; they became a tiny proportion of a vastly wealthier economy with masses of incredibly valuable high tech capital equipment. The stock of debt grew in proportion to the size of the economy; as the economy grew so did the revenue streams available to service the debts with. There seemed no end in sight to the economic growth. People owned more and more sophisticated machines that enabled them to do less and less drudgery. At no point was economic growth sort after as a way to service the debts. It was simply a by-product of people doing things better. If for whatever reason economic growth had stalled, the debts would have remained serviceable because all of the repayments were spent – returning the means of payment back to the debtors.
I think it is instructive to unpick how this imaginary scenario diverges from our real life situation that has led people to found the “Center for the Advancement of the Steady State Economy”. I think it boils down to the imaginary situation being based on money and debt being entirely used to direct current investment and consumption (I’m not using the word “investment” in its financial meaning as exchange of money for another asset but rather in its economic meaning as spending on new machinery etc.). In the imaginary situation the money and debt are simply a form of communication that enables people to organize and rearrange the resources they have. They are analogous to the pheromones used by insect colonies that enable a colony of insects to work together in harmony for the greater good of each other. My impression is that our real life problems stem from money and debt being instead used to concentrate power and control rather than to direct activity. Often money is lent not so as to obtain a revenue stream to spend on goods and services produced from the investment; but rather so as to gather more wealth to keep as an insurance in case in future there is competition for scarce resources.
It is perfectly rational to want to insure against an uncertain future. The problem is that collectively our ability to provide for each other depends on our real productive capacity not our paper wealth. If bees or ants saved up their pheromones, instead of using them to direct each other for gathering nectar, the colony would collapse. When the hive was in disrepair with no stocks of honey, it would be too late and the amassed stock of pheromones would be seen for the foolishness it was. It is exactly the same with money and debt for us. I think we need to think rationally about the glitch in the nature of finance that enables claims to be accumulated without an accompanying ability to honour those claims. When we talk about debt being unsustainable, what we are really meaning is that the debt has become disconnected from the real economy and money is being used to gather money rather than to build productive capacity. I think replacing our current tax system with a tax on assets could ensure that all wealth remains continuously grounded in the productive capacity required both to pay such a tax and so prevent that potential glitch in the nature of finance.
We also need to be extremely wary of exhortations for economic growth where what is actually meant is growth of debt disconnected from productive capacity. That is simply a demand for increased wealth inequality. Debts based on lending to fund consumption to paper over inequalities have to be recognised as reckless lending that provides no basis for real wealth and need to be left to default with no backstop for the creditors. It is wealth inequality that leads to disconnected debt being the most financially prudent form of saving. In my opinion, tackling wealth inequality is crucial if we are to have a sustainable prosperous economy.
The “Center for the Advancement of the Steady State Economy (CASSE)” have a “myth and reality” section. Two of the “myths” they refute are “We can grow the economy continuously because we can decouple growth from resource use and waste production” and “technological progress will allow unlimited economic growth”. Refuting those “myths” seems to me to be saying that people will stop learning from experience. I don’t believe that that would be desirable. I think it is vital never to conflate environmental conservation with eschewing knowledge and technology. A blind grasping for economic growth for the sake of sustaining non-productive debts may be leading us to neglect environmental concerns but in principle efforts directed at protecting our environment may actually lead to economic growth. Goods might become exquisitely designed with a view towards reuse and recycling. Potentially materials could just be remoulded again and again with no waste and no natural resource consumption. Humans have been doing exactly that with gold and gemstones for thousands of years. We will simply need to treat other mineral resources in the same way.
The sun provides our planet with an immense power source that renders the “thermodynamic” objections posed by CASSE complete nonsense. Do CASSE believe that evolution by natural selection will cease? Isn’t evolution simply a honing of the fitness of living things -the natural world’s equivalent of economic growth? I don’t consider that there is any more reason to evoke a “thermodynamic” objection to economic growth than there is against evolution. Of course humans are perfectly capable of screwing up and making each other’s lives miserable. The history of Easter Island illustrates that perfectly. That is very different from saying that we can’t behave differently.
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