Financial Extraction and Never-Ending Growth
Why it’s time to move from exponential growth curves to flat ones.
Financial Extraction
Extraction is the original sin of business. This is illustrated by a parable called ‘The Story of the 11th Round’ from economist Bernhard Lietaer in his book The Future of Money. The parable, as extended and interpreted by Charles Eisenstein in his book Sacred Economics, is paraphrased here.
The 11th Round
There was a small village in the Outback, where people swapped and bartered for everything they needed at their local market. This included chickens, hams, and other goods. One day a stranger with shiny black shoes and a white hat showed up, and he said: “Poor people. The way you do things is so primitive and inefficient. Bring me a large cowhide and I will eliminate a lot of the hassle for you.” So they brought him a cowhide and he cut out ten leather “rounds” per family, which he imprinted with his ring. He then explained that each round has the value of one chicken each. And they can now trade and barter using the rounds, rather than needing to carry chickens around. They tried this at the next market day, and it worked great! The villagers were very impressed by the stranger. They asked him, “How can we thank you?” He said: “I will come back in a year from now. I want each of you to give me back an 11th round, as a token of appreciation for this technological innovation.” The villagers asked, “How are we supposed to do this? Where is this 11th round supposed to come from? We don’t understand.” The stranger just smiled and said, “Just wait… you’ll see.”
This left the villagers with a dilemma. Each round was equivalent to one chicken, and they needed to repay the stranger. There were three possible ways to tackle this problem:
Option 1) Cut out one of every 11 families — you would then have 10 families with 11 rounds, who could pay back the stranger. The 11th family would go bankrupt and lose their farm.
Option 2) Default — when the stranger comes back, all families would grab their pitchforks and say “we’re not giving you anything!”
Option 3) Breed more chickens
The villagers didn’t want to harm anyone, so they decided that they would breed more chickens. At the end of the year the stranger came back, and the families repaid him the 11th round from the extra chickens that they had bred. The stranger said, “Wonderful! Here’s some more rounds for next year”, and he lent more new rounds into existence. Things continued this way for several years, with chicken flocks growing 10% per year. The system mostly worked. A small number of families went bankrupt, due to bad luck or mistakes, and they were hired as labor on their neighbor’s farms. But these were exceptions. The stranger assured the villagers that, as long as they kept increasing chicken production, there would never be a problem.
Gradually, something unexpected started happening. The chickens were pooping all over everything, and people got tired of eating eggs all the time, and nobody needed more feather mattresses. The fields around the village, once green and fertile, had been stripped to plant grain for the chickens. Lakes started turning into stinking cesspools from the manure. Despite best efforts to continue growing the chicken flocks, the pace began to slow.
Debt began to rise in relation to income. Many villagers went bankrupt and worked at subsistence wages for the farm-owning neighbors who themselves could barely repay the stranger. Fewer people could afford chicken products, which also lowered demand for the chickens, and slowed growth even more. Despite an overabundance of chickens, many villagers now barely had enough rounds to live on, thus leading to a situation of scarcity among abundance. And this is where we stand today.
This parable shows how financial extraction affects us all. The stranger introduced extraction (usury) into the system, which induced competition among the villagers, breaking a historical tradition of community spirit and cooperation. It also led to the degradation of their physical environment. This translates directly into our modern day economic, social, and planetary issues.
Where does extraction happen?
Financial extraction occurs at multiple abstraction layers, from the personal to the national.
1) Micro: Personal
Personal debt is the most obvious form of usury. Debt is an obviously widespread epidemic — from credit cards to student loans to underwater mortgages.
2) Meso: Business
Corporate equity is also a form of usury. Extractive investment keeps companies beholden to their shareholders. This is canonized in the law books as ‘shareholder primacy’.
3) Macro: National
Interest-bearing loans can destroy nations. Poor countries enter debt slavery by taking loans from foreign banks (like the IMF) to kickstart ‘development’ projects, like schools and dams. The countries are unable to grow their economies rapidly enough to repay these loans, and this creates a loss of national sovereignty via a debt that can never be repaid. The book Confessions of an Economic Hitman by John Perkins contains a first-hand account of how this mechanism works.
Extractive debt, at all levels, is a tool for control and manipulation. It ensures that the borrower (whether a person, business, or nation) functions primarily in the interest of the lender of the capital. And this is why usury is labeled by many major world religions as a highly immoral business practice.
Growth
Macroeconomic growth
Growth is a largely unquestioned dogma. We individually and collectively assume that growth is both desirable and logical. We view growth as progress — necessary to evolve and create. But how much growth do we need? And when does growth go too far?
National economies are measured by their Gross Domestic Product (GDP). Wealth has taken on a narrow, purely financial, definition. But what about health, meaning, or time with our loved ones? Experts have been working on other indicators of wealth, like Gross National Happiness. But happiness isn’t prioritized by our governments as it doesn’t earn our country’s seat at the G20.
Most people assume GDP will grow indefinitely — we bet on this with our stocks, houses, and pensions. But what happens when growth starts to flatten? Recession. Layoffs. Suffering. Why is this the case? Economists explain that there’s so much financial extraction from our economy that our economy needs to grow just to maintain a steady state. This growth puts pressure on our societies and our planet. And we know by now that this is no longer sustainable.
We need to ask ourselves the question: how can we create an extraction-free economy?
Growth curves in business
Exponential curves are prominent in business. They can be found everywhere: from MBA programs to startup incubators to pop culture. We are obsessed with ‘scaling’ — from businesses to impact-oriented nonprofits, we are taught that ‘losers think linearly and winners think exponentially.’ But we need to ask questions about scaling. Are exponential curves getting us where we need to go? And how much growth do our organizations really need?
The Oxford macroeconomist Kate Raworth offers a different look at things. She has a TED talk called ‘A healthy economy should be designed to thrive not grow’. Raworth makes beautiful metaphors about nature, examining the growth of a living creature like a human child or a tree. At the beginning of its life, a tree will grow really quickly — almost exponentially. But then this growth starts to flatten out, the tree reaches its maximum size, and it stops growing and starts thriving. The tree then drops seeds, which grow into new little trees. Her question is: “If this is how nature does it, then why is it any different with our businesses?” There’s a name for something that grows exponentially forever: cancer. Exponential growth is toxic to whatever system it lives upon. So why then does exponential growth inspire how we do business?
We need to question exponential curves in businesses, and ask: how can we move from exponential growth curves to flat ones?
