The Lure of Growth

There is a mantra which pervades society that everything must grow, people must update their systems, get the newest device, adopt the latest fashion, etc … Business spends vast amounts of money on advertising. The role of advertising is to create dissatisfaction, to make you dissatisfied with your current ‘stuff’ so that you will go out and buy new ‘stuff’.

Our capitalist society is predicated on growth. The concepts of profit and interest are seen as necessary for capitalism but they are merely growth by another name. This myth pervades our whole culture, the myth that things must always continue to grow. Populations must increase, the amount of money in the economy must increase, manufacturing output must increase.

If the amount of growth falls below that which is expected then economists and politicians start to panic and call it a recession, if the amount of growth decreases to zero or below then they call it a depression and things really get serious.

The dependence on growth is so deeply ingrained in the capitalist system I don’t think we will ever break free of it. Just keeping the status quo is not an option.

But there is a problem which is conveniently ignored by politicians and economists. The problem with growth is that it is not possible to have infinite growth within a finite system. Sooner or later something will be overloaded or some resource will run out.

There are always limits to growth.

A lot of people in our modern capitalist society are so busy accumulating wealth, property and power that they have forgotten what it is to be human, they behave as if the accumulation of wealth was the sole purpose of their existence. At some point these individuals within the system start to believe that they are not just proletarian slaves but that they are actually masters and that they are actually in charge of their lives. This is a very important misconception for capitalism to promote because it allows the system to go on driving these people faster and faster, it is a kind of submission by these people, the belief that you are in charge of your life when you actually aren’t is very important for sustaining capitalism.

Karl Marx, the 19th century German philosopher and economist believed that capitalism was radically unstable. He wrote that it had an inherent tendency to produce ever larger booms and busts, somewhat like oscillation in a very under-damped feedback system (although he did not express it in those terms), and over the longer term he thought it was bound to destroy itself.

In order to understand why the capitalist system is locked in to this drive for unlimited growth one must understand a little about how the capitalist system works. Never ending continuous growth is a surprisingly simple but specious idea.

Private ownership of the means of production is, generally accepted as being the definition of capitalism.

The capitalist system which characterises the consumer economies of the west is big-firm capitalism with a large dose of entrepreneurial capitalism mixed in, growth is the very raison d’être of this type of capitalism. However this type of capitalism is devoid of any consideration of ecological or environmental realism, profit is the only measure of success.

Businesses make use of people (the labour force) and capital (investments used to buy buildings and machinery) to produce the goods and services that households want and need. People offer up their labour (work) and capital (savings used as investments) to businesses in exchange for incomes. The businesses sell their goods and services at a profit and this allows them to pay people’s wages and to pay off the interest on their capital borrowing. People spend some of their income on consumer goods and save some of it. These savings are invested (directly or indirectly) back into businesses.

This is the ‘circular flow’ of the economy’. The system is actually a lot more complicated than this but that is the general idea.

The financial sector controls the flows of money in the circular economy and controls the dual role of saving and investment. This is also a simple idea to understand. People save some of their income. These savings are invested, usually through a bank, building society or investment house, in businesses to generate profits.

The banks charge interest on the loans they give out and a proportion of this profit is paid out to the owners of the savings in the form of interest. This ‘return’ on their capital is why people save their money in a bank.

Profit provides businesses with working capital (cash) to pay for maintenance and improvements in production. It is also needed to pay off the company’s creditors, people who’ve lent the business money in expectation of a return.

Another use for the profits is to pay dividends to shareholders, people who’ve bought a share in the company. Some businesses seem to concentrate all their efforts on ‘increasing shareholder value’ as if it were the primary purpose of the company.

A business that shows good returns attracts more investment. The value of the business rises because people are prepared to pay more for shares in it. When share values are rising, more people will buy them. Creditors know they will get their money back with interest. Shareholders know that the value of their shares will rise. The business knows that it has sufficient resources to maintain its capital and invest in new processes and technologies.

This ability to re-invest is very important. Machinery wears out and buildings decay with the passage of time. Investment is needed to repair or replace worn machinery. Without investment in new machinery product quality is lost. Sales decline. The business loses its competitive position and risks bankruptcy.

In order to maximise profits businesses will also try to cut costs of production. But capital investment is needed, in addition to its role in maintenance, to achieve cost reduction in the other two factors in the cost of production, labour and materials.

The key point in capitalist economies is towards increasing labour productivity. Since this means producing the same quantity of goods and services with fewer people, the cycle creates a downward pressure on employment that’s only relieved if production is increased.

There are two major factors contributing to economic growth, novelty and efficiency.

Efficiency drives growth. By reducing labour and resource requirements, efficiency reduces the cost of goods over time. This stimulates demand and promotes growth. Far from acting to reduce the throughput of goods, technological progress serves to increase production output by reducing costs.

But efficiency alone doesn’t guarantee success in business. Simply making the same thing more and more efficiently doesn’t work for a couple of reasons. The first is that there are physical limits to efficiency improvement in specific processes. At the basic level, these constraints are laid down by the laws of thermodynamics. The second is that failing to diversify and innovate risks losing out to competitors producing newer and more advanced products.

The second factor is novelty, the process of innovation, is vital in driving economic growth. Capitalism proceeds through a process which Marx called ‘creative destruction’. New technologies and products continually emerge and overthrow existing technologies and products. Ultimately, this means that even successful businesses cannot survive simply through cost-minimisation.

The ability to adapt and to innovate, to design, produce and market not just cheaper products but newer and more exciting ones is vital. Businesses who fail in this process risk becoming bankrupt. It makes little difference to the economy as a whole if individual companies fail. It does make a difference if the process of creative destruction stops because without it economic growth eventually stops as well.

The role of the entrepreneur, as a visionary, is crucial here. But so is the role of the investor. It is only through the continuing cycle of investment that creative destruction is possible. When credit dries up, so does innovation, and when innovation stalls, then growth will slow down and eventually stop.

But there is a fundamental question here which is not being asked. That question is; how does this capitalist system serve the needs and desires of ordinary human beings? The circular flow of production and consumption may once have been a useful way of organising human society to ensure that people’s material needs are catered for. But what does this continual cycle of creative destruction have to do with human happiness?

Does this self-perpetuating system really contribute to individual happiness in any meaningful sense? Isn’t there a point at which people have enough to meet their needs and we should simply stop producing and consuming so much?

The thing that prevents this happening is the dependence of capitalism itself on continuous growth. The imperative to sell more goods, to innovate continually, to stimulate higher and higher levels of consumer demand is driven forwards by the pursuit of growth. But this imperative is now so strong that it seems to undermine the interests of those people it was supposed to serve.

The cycles of creative destruction become ever more frequent. Product lifetimes fall as durability is designed out of consumer goods and obsolescence is designed in. Quality is sacrificed remorselessly for cost reduction and volume throughput. The throw-away society is not so much a consequence of consumer greed as a prerequisite for the survival of capitalism. Novelty has become a conscript of the drive for economic growth.

Our world is dying of consumption.

 

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