Saturday, October 21, 2017

Economic Insanity: Chapter 3 (part 1)

Not Everything
That Grows Is Good

Growth of healthy organisms is a natural phenomenon, but unregulated
and unlimited growth is found in nature only in cancers that ultimately
destroy their hosts and themselves. We are creating an unregulated
economic system that has become the equivalent of a cancerous tumor,
and its unfortunate host is human society. In the name of free markets,
prosperity, and democracy, modern society is embarked on a path that
ultimately can lead only to the destruction of all three.

—David C. Korten,
“A Deeper Look at
‘Sustainable Development’”

In their book The Second American Revolution, James Patterson and Peter Kim give a somewhat outdated analysis of our recent economic woes, then present four widely divergent plans for strengthening the economy—one promoted by Lester Thurow, another backed by Robert Reich, a plan devised by the Council on Competitiveness, and, finally, Jack Kemp’s proposed return to supply-side economics. Though individual pieces of each plan have some merit, all four are based on the assumption that economic health is a function of growth. If American companies can just become more competitive, the economy will grow, and everything will be all right.
Well, American companies in general have become, or are rapidly becoming, very competitive, the economy is growing once again, but everything is not all right. The problem is that we are looking for answers in the wrong place. We are trying to find solutions within a system that makes sense in the short term but is illogical for the long haul. We need systemic change, not just a more efficient economic machine.
Why should we want a different system, though? Isn’t the current arrangement good enough? Perhaps we can find the answers to these two questions by asking two related questions: Is it possible for the modern capitalist economy to grow forever, without hitting any kind of ceiling? and Is limitless growth a good thing? My contention is that our continued belief in the assumption of limitless growth will bring catastrophic results. At some point, growth comes only at a tremendous price to society. Further, the capitalist economy simply cannot grow forever. It has built-in limits, and both economic and environmental ruin is the price of ignoring them.

Cancerous Growth
Every economic plan I’ve ever seen begins with the assumption that growth is necessary for a healthy society. Herman E. Daly and John B. Cobb, Jr., point out that although economists, like other scientists, claim to be value-neutral, “their shared values are [in fact] easy to identify. They are, above all, for economic growth. To challenge that as a goal is to place oneself outside the community [of economists].”1 But what if growth is no longer the panacea it once was? What if our economy has grown to the point where its size and continued growth are actually hazardous to our social and economic health? What if the answer is not growth? If so, then the community of economists has been asking the wrong questions, which means that all their answers are also wrong. It is not the way the system functions or malfunctions that is the problem; it is the assumptions upon which the system rests and that have guided its evolution.
As David Korten points out in the epigraph to this chapter, not everything that grows is good. Indeed, the only instances of unlimited growth found in nature are cancerous tumors, which grow by stealing sustenance from healthy tissue, by fooling the immune system, by deceiving nearby cells into forming food-bearing vessels and producing growth-enhancing chemicals, and by opening new pathways for the malignancy to spread throughout the body. In essence, cancer tricks the body so that it actually contributes to its own destruction.
The unlimited-growth assumption makes capitalism similar in many respects to cancer. It creates economic growth at the expense of health in other areas of social concern. And as it becomes entrenched, it converts the surrounding society into a support structure for its continued growth. Everything becomes economic, and self-perpetuation becomes the guiding rule of the economic system.
Is there an alternative, though? Can we even imagine an economic system not dependent on perpetual growth? I suggest that we must begin to think along those lines, because the growth assumption is fast reaching the end of its long, long rope.
Let me introduce three arguments against limitless economic growth that may help put this issue in perspective. The first argument is simple and straightforward and has been presented in greater detail by others who have a more specific interest in environmental matters. The last two are more theoretical in nature, but point to an inherent flaw, an internal illogic in our system of unlimited capital ownership that suggests we must look beyond the present system.

The Environmental Argument
Kenneth Lux points out that our capitalist economic theory does not concern itself with human needs. In economics, need is a nonword. Economists are interested only in wants, or demand. “An important thing about wants,” says Lux, “is that they are ultimately infinite and therefore unsatisfiable.” Add to this the overall objective of conventional economics, which is to satisfy these wants, and a paradox emerges.
It appears that economics has construed itself so as to attempt to accomplish the impossible: to satisfy that which cannot be satisfied. . . . From this we can start to see that economics, even at the level of its theory, may have something to do with why we are destroying our natural world.
We live on a finite planet. If human beings are defined as being made up of infinite wants, and the task of an economic system is to fulfill that infinity, then such a system will go on endlessly churning out goods in an attempt to reach what is from the beginning an impossible goal. When the infinite production of goods meets up with a finite planet there is bound to be a collision.2
If we were to imagine the traditional capitalist system as a container for wealth and consumable products, its shape would be that of an inverted cone, extending forever upward and outward. The growth assumption insists that we can keep pouring time, energy, and natural resources into the cone in the form of consumable products, and that it will never be full, never overflow. It will simply hold everything, forever. This, however, is an utterly irrational assumption.
Environmental factors alone should convince us that eventually two things will happen: (1) we shall run out of various natural resources to pour into the economy, and (2) we shall discover that all along the cone has not been self-contained, that it has been leaking toxins, contaminating the world around it, creating an enormous, costly mess.
Both economists and businesses have always operated on the assumption that the future will be similar to the past, that since the capitalist economy has grown over time, it will continue to grow. They don’t consider the possibility that as the economy grows, it encounters constraints that were irrelevant when it was small. We might liken the economy to a seven-foot-six basketball player who had no trouble with doorways or finding clothes that fit when he was ten. But at twenty he has to duck to leave a room or to dodge light fixtures and must special-order pants, shirts, and shoes. The minimal impact of industrialization on the environment when the earth was a seemingly infinite, sparsely populated place has little relevance to our present circumstances. Times change. We cannot logically expect the effects of the ever-expanding capitalist economy to remain negligible.
      “If capitalism has one pervasive untruth,” declares Paul Hawken, “it is the delusion that business is an open, linear system: that through resource extraction and technology, growth is always possible, given sufficient capital and will. In other words, there are no inherent limits to further expansion, and those who wish to impose them have a political agenda. . . . [But] ever-expanding abundance is not a theory based on science, or history, or nature. It is based solely on self-interest.”3

Capitalism’s Imperialist Tendencies
John Hobson, a frail little Englishman with a speech impediment and a penchant for economic heresy, argued a century ago that in order to grow, indeed, in order to survive, capitalism had to become imperialistic. Without exporting both production capacity and products abroad, he maintained, capitalism will eventually suffocate itself. At the time, no one really took him seriously except the Marxists, who twisted his ideas into a strange confirmation of their own misconceptions. But Hobson’s reasoning was both fascinating and deceptively simple: growth, the very engine that drove capitalism, also created a situation in which a nation could never consume everything it produced.
The poor, Hobson argued, didn’t have the means to buy their fair share, and the rich had too much money to consume their proportion of the nation’s production. Someone with a million-dollar income couldn’t (or wouldn’t see any reason to) buy a thousand times more consumer goods than a person with a thousand-dollar income. In fact, the wealthy in every society are mindful of what they don’t spend, for if they spend all they have, they are no longer wealthy. Wealthy people, because they both want to and have to, save a good portion of their excess, but those savings must be put to use. If they are invested in new production capacity, which they usually are, it only compounds the problem, says Hobson. If society is already having difficulty consuming all it produces, then this perpetual increase in production capacity will only flood an already saturated market.
In order to grow, Hobson concludes, capitalist economies must not only invest their capital abroad, they must also sell their increased production abroad. They must export more than they import. From one nation’s perspective, this provides a temporary solution for the necessarily imperialist capitalist economy, but in the long run it ruins a world economy, as more and more nations need an outlet for their excesses.
Hobson’s ideas, although largely forgotten, are nonetheless significant, especially when seen in the light of American expansion after World War II. Because it was the dominant and, for a long time, the only real economic power on the block, America was able to fill the world not only with factories and production equipment, but also with Coca-Cola and Levis and Chevrolets. We ran large trade surpluses. And at home our standard of living shot skyward. There was no underconsumption to bog down our economic growth, because we sent excess production abroad and real wealth was our most significant import.
Predictably, though, the rest of the world began to catch up with us, even surpass us. We tend to see this as a tragedy, of course, for many of our industries have either failed or lost their competitive edge, but it had to happen. We could not expect to live forever in the unreal economic conditions that prevailed after World War II. Now the tables are turned. Japan and Korea and Germany and other countries are investing in America, selling us their excess production, pursuing the same policy of economic imperialism that gave us such prosperity in the 1950s and 1960s. And we have a huge trade deficit, for we insist on overconsuming in an environment that suggests we should actually be underconsuming. Somehow, we’re actually consuming much more than we produce. How is this possible?
It’s simple, really. We have found a way around Hobson’s insistence that capitalist societies cannot consume all they produce without becoming imperialistic: debt. We are buying on credit. Not only is the trade deficit healthy and growing, but consumer debt accounts for an incredibly large portion of the average family’s monthly budget. And what we can’t afford to pay for with our own credit, Uncle Sam covers. Government spending over the past decade exceeded government revenues by about $3 trillion. And on top of this we have a mountain of corporate debt, which directly funds economic expansion. In short, we’re paying for our expanding production with debt. We’re not even coming close to covering it with money we earn today. Theoretically, it is impossible to do so. And unless we replace our assumptions about growth, we’ll just continue to dig a bigger hole for ourselves.
Interestingly, of the four economic plans I mentioned at the beginning of this chapter, Patterson and Kim found through extensive surveys that the American public overwhelmingly favors Jack Kemp’s return to supply-side economics. In other words, most Americans want to use government resources to spur an even greater expansion in our production base, in hope that we can somehow consume all that production and keep the economy growing. This is both madness and a sure-fire recipe for economic disaster.

The Problem of Profit
The preceding discussion of John Hobson’s ideas hints at the underlying question of this chapter. What makes the capitalist economy grow? The answer is very simple: profit. Profit is of course the difference between what a company charges for its products and what it spends. If the company reinvests that excess to expand production capacity, we call it capital, and it is the pursuit of capital that makes the capitalist economy grow. And Hobson would tell us that it is this engine of growth itself that prevents a capitalist society from consuming all that it produces—unless it invests abroad or purchases on credit.
The lust for capital is what causes the gap between the haves and have-nots to widen. Most people are motivated by the desire to increase their wealth. Why not? I don’t know many people who would rather be poor than rich. But those who own or control capital have leverage in this quest for wealth. They profit by keeping costs down while charging as much as the market will allow for their products. Their incentive, therefore, is to pay their employees as little as possible, and to keep for themselves as much as possible. The widening gap between rich and poor is simply evidence of this incentive.
So those who already own capital strive to increase that capital by reaping a profit. And this brings us to a question that perplexed worldly philosophers for centuries: Where do profits come from? Curiously, only three reasonable answers were ever put forward: one by Karl Marx, another by Joseph Schumpeter, and a third by Thorstein Veblen. Even the venerable Adam Smith wavered on this question between two possible answers.
For a more detailed examination of these theories, I recommend Robert Heilbroner’s classic, The Worldly Philosophers, but let me briefly outline the three answers to this pivotal question. Marx would tell us that in capitalist economies, profits tend to disappear over time as market forces equalize wages and advantages. This was not an original insight. Adam Smith, David Ricardo, and John Stuart Mill had already pointed out the same thing. What Marx did was to create a model of capitalism to show where this phenomenon would lead and to explain how it worked.
Marx’s model was not patterned after reality. It was a theoretically “perfect” capitalism. And what he concluded was that profit could exist in the capitalist system only when the capitalists stole it from the laborers. By paying them less than their actual value, capitalists were able to extract profit from their operations.
Marx’s model is very involved and does have several gaping holes in it, and others have adequately exposed these, but Marx’s ideas are significant because they do offer an explanation of where profit comes from.
To Joseph Schumpeter, profit was not stolen into existence; rather, it came honestly from innovation. He describes production and consumption as a circular flow that follows a regular and predictable course: people trading money and products with one another. So where do profits come from? They magically appear whenever the circular flow of production and consumption departs from its usual course. And when does this happen? Whenever an innovation enters the system. Whenever someone invents a new machine or new product, devises a new method of production, or improves quality, this disrupts the flow.
Innovation allows someone to take money out of the flow, either because quality has increased and people are willing to pay slightly more, or because production has become more efficient and the capitalist needn’t pay as much to someone else, yet can temporarily charge the traditional price for a product. Profit, to Schumpeter, is a temporary glitch in the flow of production and consumption. Before long, everyone’s quality will increase or their costs will decline as they learn the new method or purchase the new machinery. Then, as in Marx’s model, profit is squeezed out of the system. Profit exists in Schumpeter’s world only in a transient state. It is a temporary phenomenon, a constantly recurring temporary phenomenon, which explains the survival of the system.
Thorstein Veblen offers yet another view of profit. He saw “the economic process itself as being basically mechanical in character. Economic meant production, and production meant the machinelike meshing of society as it turned out goods. Such a social machine would need tenders, of course—technicians and engineers to make whatever adjustments were necessary to ensure the most efficient cooperation of the parts.”4 But, asked Veblen, where does the businessman fit in? The businessman, he concluded, was basically a saboteur of the system who extracted a profit by disrupting it.
The system itself saw no other end except making goods. The businessman, however, was interested only in making money. But “if the machine functioned well and fitted together smoothly, where would there be a place for a man whose only aim was profit? Ideally, there would be none. The machine was not concerned with values and profits; it ground out goods. . . . So the businessman achieved his end, not by working within the framework of the social machine, but by conspiring against it! His function was not to help make goods, but to cause breakdowns in the regular flow of output so that values would fluctuate and he could capitalize on the confusion to reap a profit.”5
And how did the businessman cause these breakdowns in the production machine? By creating the never-never-land of corporate finance. “On top of the machinelike dependability of the actual production apparatus,” explains Heilbroner, “the businessman built a superstructure of credit, loans, and make-believe capitalizations. Below, society turned over in its mechanical routine; above, the structure of finance swayed and shifted. And as the financial counterpart to the real world teetered, opportunities for profit constantly appeared, disappeared, and reappeared.”6
Now, all three—Marx, Schumpeter, and Veblen—were partially right. They isolated direct causes of profit in individual businesses, but none of them carried the question to the next logical level and identified the underlying source of all profit (and all growth) in the capitalist economy.
It’s easy to see where one company’s profit comes from. Xerox, for instance, simply charges more for its copiers than it pays to produce them. The difference between what it brings in as revenues and spends as various expenses appears on its financial statements as profit. But if we look at the economy as a whole, how does it profit, or expand, each year? Where does growth come from? Well, directly, it comes from the surpluses of its specific parts and pieces. Individuals and corporations either reinvest their wages and profits in production capacity to expand our product base or spend them on old and new products to increase the overall level of consumption. Who can deny that the economy encompasses more goods and services than it did a decade ago? There are more cellular phones, more microwave dinners, more books about the economy, more consultants, more accountants, and more fast food outlets than there were last year. But this explanation—that the economy grows because of recurring profit in its individual parts and pieces—misses something important: How is it that the sum of all businesses experiences more profit than loss in a given time period?
As we trade money and products with one another, shouldn’t profit and loss cancel each other out? In other words, in an economy where imports and exports balance (and therefore cancel each other out), shouldn’t total business revenues exactly equal total business expenses? Some may point out that business revenue is made up of both expenditures by other businesses and consumer purchases. But where do consumers get the money to spend? From their wages, which are a business expense. Where, then, does the surplus come from? How do we solve this paradox? The answer is that, yes, indeed, total revenues and expenses should be equal—unless the quantity of money in the system increases. If new money enters the picture, then total revenues can in fact exceed total expenditures.
This, then, is how the economy expands. New money is introduced—primarily through a nifty bit of financial magic we might call borrowing money into existence—and this sustains economic growth. The new money permits capitalists to extract a profit from their operations (it also permits individuals and organizations to profit from financial speculation), and it allows revenues to exceed total expenses in any given period of time.
[This explanation is incomplete, but it is as good as I could come up with in 1995. Maybe when I’ve finished posting the chapters of Economic Insanity, I’ll post a more complete explanation of where profit comes from. Next up will be the remainder of chapter 3.]
1. Herman E. Daly and John B. Cobb Jr., For the Common Good: Redirecting the Economy toward Community, the Environment, and a Sustainable Future (Boston: Beacon Press, [1989] 1994), 131.
2. Kenneth Lux, Adam Smith’s Mistake: How a Moral Philosopher Invented Economics and Ended Morality (Boston: Shambhala, 1990), 9.
3. Paul Hawken, The Ecology of Commerce: A Declaration of Sustainability. New York: HarperCollins, 1993), 32–33.
4. Robert L. Heilbroner, The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, 6th ed. (New York: Simon & Schuster, 1986), 235.
5. Heilbroner, Worldly Philosophers, 235–36.

6. Heilbroner, Worldly Philosophers, 236.