There has been much writing here, in this blog, about the limits to economic growth – both ecological and social. It is not yet consensus that growth is a “bad thing” but there are many proponents of this stance and the debate has been going for some 40 years already. However, capitalist economies have been growing all the time – and if they didn’t, in times of crisis, they struggled terribly. The consequence mostly was unemployment and other unpleasant effects. This leads to the speculation that the current economic system is dependent on growth. There are numerous sources for this dependency. In the following post I would like to present one simple but deeply compelling explanation for where the compulsion to grow comes from.
The author of the example (one may call it a model) I would like to present is the German economist Niko Paech.
Imagine a simplified economy in which there is only one producing enterprise and an unspecified number of suppliers of factors of production (labour, capital, natural capital etc.). The latter are at the same time the consumers in this economy. This means that in every period they can spend on consumption at most as much as they are paid for the factors of production they own. E.g., if there is a consumer who is also provider of labour, he can spend only as much money as he get paid in the period considered (plus what he saved from the last period). Now let us run the model for a few exemplary periods of time.
The enterprise begins its activity. It invests 1000 € in factors of production (the consumers earn 1000 €).
For the above investment to “pay”, the production must be sold for more than 1000 € (otherwise it would not be worth the entrepreneurial risk and the entrepreneur would be better off by putting the money to the bank), say 1100 €. However, the consumers only have the 1000 € they earned for their factors of production in period 1. So, the enterprise has to invest another portion of money to bridge the gap. But 1000 € won’t be enough, since then the consumers would be able to pay for the 1100 € of production in period 2, but the gap in period 3 would be even greater. Therefore, the new investment must this time equal at least 1100 €. Consumers spend 1100 € of their 2100 € from both periods for the goods produced.
Again, if the earlier investment should pay, it has to be sold for more than the initial 1100 € – say, 1200 €. And, again, the consumers have too little money, which necessitates another round of investment, this time equaling 1200 €.
In all following periods, the pattern must be repeated if the enterprise wants to survive. So, each period our “economy” grows linearly by 100 € due to the time gap between investment and production. This (the linearity of growth) is true only under the assumption of own capital financing, which is rather unrealistic – where should the capital come from? If new investments are paid with interest bearing credits (i.e., the enterprise has to pay back interest in every period), the growth of our “economy” will be compounded.
This model, though very simple, provides a very good picture of how modern capitalist economies function. The necessity to grow is inherent for this economic system. Therefore, it is clear that a growth-less economic system would have to be shaped in a completely different way. Paech himself names a few possible changes that could make a transition away from growth easier:
- a fundamental reform of the banking system, away from interest-bearing credit (a possible paradigm may be provided by traditional Islamic banking);
- lower profit expectations on the side of enterprises (as in the case of nonprofit organizations);
- less globalization, more autarky/subsistence/self-provision with goods.
As you can see, these proposals are both ambigious and rather insufficient. There is surprisingly much room for research on how exactly a post-growth economy should be designed. We have made the first step of identifying the need for a transition due to the unbearable risks and harms related to economic growth. We also almost have made the second step – the identification of what in the current economic system leads to growth and thus has to be changed. Now it is time for answering a third question: how should we change that?