Isn’t it weird that we think we will get richer forever?
Our Journalists frequently describe rapid economic growth as “robust”, slower growth as “anaemic” and an economy in recession is often portrayed as “sick” or “ailing”.
The world economy has grown every year since 1950, an incredible feat that has made it taboo to even question whether it will increase indefinitely, and more importantly, continue to make the world a better place.
The silver lining of recent political events is the erosion of that taboo, with many calling into question the merits of liberal democracy, free market capitalism the neoclassical economics that underpins it all.
While I believe that criticism is unavoidable, it’s also much too vague. To get to the root of our problems I think we need to question a fundamental principal at the heart of contemporary capitalism…
The idea that continual economic growth will make the world a better place
My argument starts at the most fundamental level: our natural environment
Economic growth of 3% is generally targeted in the west, which doesn’t sound much, but actually means western economies aim to double in size roughly every 23 years. This leads to a very obvious problem: growth is expected to be exponential, yet we live on a very finite planet.
This issue is brought to life brilliantly by Tom Murphy, professor of Physics at the University of California San Diego, who points out that growth goes hand in hand with increasing energy consumption.
He says, “From a physical point of view, if we grew at 3% a year, in about 400 years’ time we would actually be boiling the oceans, not because of global warming and CO2, but just because of the heat that is a natural by-product of the energy that we use”.
A 30 year computer simulation by Randers and Meadows (2005) adds further reason for concern. Their conclusion is simple: “We worry that current policies will produce global overshoot and collapse through ineffective efforts to anticipate and cope with ecological limits”.
So on a finite earth, the economic growth must eventually end. The idea that we can sustain the level of growth seen since 1950, knowing what we know now about the environment is fantastical. But why doesn’t policy reflect this common sense?
I believe the reason is a misconception so gross that it makes a mockery of the way most neoclassical economists (and therefore politicians) think about the world. For them, the global economy is a system in which all other sub systems fit (human society, the natural environment etc).
When you think about things in this way then the economy is free to declare its own operational boundaries and can grow at any rate it pleases. Unfortunately this is about as close to biological and thermodynamic illiteracy as one can get.
In reality, the economy is a subsystem of human society, which itself is a subsystem system of our planet, which itself is a subsystem of the solar system… etc.
The fundamental problem here is that economics is meant to be the study of how we manage scarce resources, yet it is critically failing to manage our ultimate scarce resource.
We can therefore debate day and night about whether continual growth is a good thing, but ultimately its all academic, as continual growth is physically impossible.
Then there is the wealth distribution ……
Gross Domestic Product (GDP) is the universally recognized measure of economic growth. Its a simple figure that voters can get their heads around, but the problem here is it’s too simple. It ignores the spread of wealth across the whole economy.
When you act like a growth junkie, you optimise for growth above all else. So when things get tough you panic and try to stimulate more growth. You make money cheaper through base rate reductions and money printing, all to stoke demand for products that people don’t really need. This has some important side effects.
On the liability side, large companies are able to borrow very cheaply via the bond market, but small companies, on whom long-term economic stability depends, can face cripplingly high borrowing costs from banks who are reducing risk to compensate for the ‘lower for longer rates’ that are eroding the margins further up the P&L.
On the asset side, printing money whilst keeping base rates at near zero inflates the value of assets that are usually owned by the rich, equities and houses for example, whilst completely wiping out the returns on low risk assets usually held by the working class, like savings accounts. This is backed up by Bank of England research which suggests that QE has boosted asset prices and household financial wealth but is “heavily skewed with the top 5 per cent of households holding 40 per cent of these assets”.
This unfairness leads to social discontent, which leads to unrest, which in turn leads to the kind of global political situation we are currently facing. At the time of writing the idiots really are winning: the UK has voted to leave the EU, Angela Merkel has lost her parliamentary seat to the AFD party, the first far right party to gain legitimate democratic support in Germany since the Nazi party, and Donald Trump, the bigoted and small minded misogynist who cannot even be trusted with his own twitter account, now has control of the US nuclear bomb codes.
This is not happenstance. Leaders with regressive and degenerate policies are gaining support simply because they oppose ‘the establishment’ — an entity created through the underlying unfairness of unequal wealth distribution, itself an emergent property of naive growth chasing.
My final point is that a society that optimises for economic growth above all else brings out the worst in human behavior.
Limited-liability, privately owned joint-stock companies are the core institutions of modern capitalism. These entities are largely responsible for organising the production and distribution of goods and services across the globe.
Their role is both cause and consequence of the revolution in the scale and diversity of economic activity that has taken place over the past two centuries, and they are central to the American dream of growth and prosperity.
How we run these important entities is critical to how we want modern civilization to work. Up until now I’d argue we've made a mess of it and the mess has a name: ‘shareholder value maximisation’. It’s the totemic motto of the Growth Junkie.
The economic argument for shareholder value maximisation is that, while all other stakeholders are protected by contract, shareholders are not. Being the bearers of this risk, they need to control the company in order to align the interests of management with their own. Only then would they be prepared to make risky investments.
This argument is flawed. They are not the only stakeholders to take risks. A host of others are also exposed to risks against which they cannot be fully protected by contract: long-term workers; long-term suppliers; and not least, the people that have to live on the same planet.
This bad logic creates a protective barrier so shareholders can act like psychopaths. A company aiming at maximising shareholder value might conclude it would be profitable, and so perhaps even its duty, to pollute the air and water. It might also use its resources to obstruct an appropriate regulatory response to such misbehavior. To cite an earlier example, a planet with boiling oceans would actually be very profitable for the shareholders of a water cooling company.
This interesting effect works the other way around. Consumers hide behind companies so they don’t have to worry about the questionable moral issues involved in the products they are buying. A Primark shopper for example, doesn’t need to worry that their £3 t-shirt was made in a sweatshop by a Syrian refugee earning close to zero because the shop’s supply chain is seen as their problem.
Investors and consumers chase financial growth, hiding behind companies that have the full rights of individual citizens yet enjoy exemption from the responsibilities and liabilities of citizenship.
Its a system that has repeatedly failed us at an ethical level.
One option is to carry on in this daze. Bouncing from economic bliss to economic crises, gradually making the rich richer and the poor angrier, either continually missing our growth targets, or worse, achieving them and destroying the planet and the moral compass of humanity in the process.
Or perhaps a favorable option would be to conceive and then operationalise a better brand of capitalism. One that allows for sustainable management of our assets to create wealth for both now and the future. One where we are brave enough to measure the correct things even if they are slightly harder for the public to understand.
This option requires the public to increase their understanding of the mechanisms that underpin our system. If the people are more cynical of accepted truths, they will be harder to hoodwink at the ballots and more likely to make informed product choices, so revenue flows to companies that fully appreciate and respect their important role in the world.
Steve Keen’s Debunking Economics and the Post-Crash Economics Society are doing a great job of spreading the word, showing us how capitalism is based on fatally flawed logic. But the message needs to make its way into mainstream media so the public can have this debate.
A common defense raised when capitalism comes under fire is Adam Smith’s ‘invisible hand’, a phrase used in his book The Wealth Of Nations to describe the unintended income distribution and production benefits of capitalism.
But people readily forget that Adam Smith was not only the author of The Wealth of Nations, but also the Theory of the Moral Sentiments, where he asserts time after time that self-interest has to be pursued by ‘people of conscience’, informed by their capacity for moral awareness. Without that, he warns, the invisible hand of self-interest will never work for the public good.
What a prescient warning that turned out to be.