Saturday, October 28, 2017
Economic Insanity: Chapter 3 (part 2)
That Grows Is Good (Part 2)
Our Outrageous Demand for Profits
It is important for us to make a distinction at this point. Infusing new money into the system doesn’t make the economy grow. It merely makes growth possible. It supports and sustains growth. Individual businesses still have to find a way to extract profit from the flow. And here we come full circle back to Marx and Schumpeter and Veblen—and to the fundamental problems with their solutions.
Capitalists can steal profits from employees by paying them less than they are worth, and this happens every day in the regular course of business. There are many underpaid individuals in organizational America—underpaid in the sense that they are unable to consume their share of overall production. Hobson’s dilemma again. Why must this be? For the simple reason that if organizational America paid its employees enough so that they could purchase the exact amount of production they add to the economy, there would be, by definition, no profit, no excessive executive salaries and bonuses, and no dividends to stockholders. In order to make a profit, businesses must pay employees a diminishing portion of the system’s total wealth, must prevent them from purchasing as much as they produce. The only way to keep this illogical system going, as discussed earlier, is for businesses to convince their employees to buy today’s production with tomorrow’s paycheck. But debt is merely a short-term solution. Over time, it is lethal, because it further reduces the ability of the working class to buy its fair share of production.
Schumpeter would tell us we can extract profit by introducing innovations into the system. The problem with this is that our economic health becomes dependent on continual innovation. We must perpetually make existing products obsolete by replacing them with newer versions; we must constantly improve quality, endlessly invent new products, and forever refine production processes so that we can make things less expensively. This constant obsolescence and the increase in available products, however, are filling our lives and our world with junk. I’ve been to the local landfill and have seen firsthand the mess created by our disposable society. But I also look around my house and can’t believe all the things my family possesses, and how few of them we really need or use. And it’s getting worse. As the economy grows, the total innovation needed to sustain growth multiplies, as does the waste in the system. This discussion, of course, dovetails with the environmental argument.
Finally, Veblen would tell us that profit is the result of financial manipulations by businessmen who actually sabotage the system. The problem with this source of profit is that it divorces the financial system from the apparatus of production and consumption and makes profit an end in itself. In Veblen’s world, just as in Schumpeter’s, most of the goods that clamor for our spare change (or remaining credit) are not an end in themselves, items that people actually need or that improve their lives. Most products sold in today’s market are means to an end, and that end is profit. They were created, not because we need them or even want them, but so that someone could manipulate and confuse the productive machinery and extort a profit from the flow. Production has become a tool of finance, not the reverse.
“Twenty years ago,” write Daly and Cobb, “the greatest power over the global economy may have been that of transnational corporations engaged in production. Today that power has shifted to institutions dealing with finance. Investment has come increasingly to mean the buying and selling of productive enterprises rather than their establishment or expansion.”1
Financial markets, adds Hawken, “reduce acts of commerce, which always have significant impact on human and natural life, to mere finance, to a decimal, to basis points, to net present value. We are turning over the financing of the world, if we haven’t already, to money lenders whose interests and incentives revolve around minute increments gained in the sale of abstracted financial instruments.”2 Indeed, financial manipulation has grown so prevalent that we now have what has been called a paper economy, or “the direct conversion of money into more money without reference to commodities even as an intermediate step.”3
Finance as an end in itself is a scary thing. When money becomes the most-sought-after product, something is terribly wrong, for money is no product at all. Money is a tool, a pure fiction we use to ease the exchange of real products. John Stuart Mill described money as simply “a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order.”4
Money in our day has indeed gotten out of order. It has become the most sought after commodity of all, able to expand exponentially without any reference at all to real economic growth or contraction. And because of this, an increasingly speculative currency market has arisen. The financial superstructure in our economy has lost touch almost completely with the actual production and consumption of goods and services. Consequently, the world economy is becoming what Willis Harman calls “one vast gambling casino.” The ballooning derivatives market—a universe of side bets as far removed from Veblen’s financial superstructure as the superstructure is removed from the real world—is the latest manifestation of speculation gone crazy.
To illustrate how out of control money is, consider that annual world trade exceeds $3 trillion. World financial flows, on the other hand, reach nearly $100 trillion per year. What this means, says Harman, is that less than 5 percent of the “funds sloshing around the globe” have anything whatever to do with “goods and services that enhance human life.”5 To put it mildly, both the world economy and the American economy are growing more and more distant from the real world in which people eat, sleep, live, work, die, and consume. The mitotic propagation of money has totally overwhelmed the direct, beneficial type of transactions in which people buy and sell products to better their lives.
In our out-of-control economy, we have too intense a demand for profit, especially profit derived from speculation. There is, however, a vast difference between money and real wealth. Money, which can be created out of thin air, can also grow endlessly. The real, physical economy, on the other hand, is bound by equally real, physical limits. In essence, much of the growth we have seen in recent years has been nothing more than a clever mirage. But growth we must have, even if it is illusory growth, because without growth, capitalism dies.
Capitalism, no matter whose model you like, requires a constantly expanding market, requires that luxuries become necessities, that we constantly improve and replace products in an endless upward spiral, that we extract an increasing amount of profit, and that we infuse new money regularly into the economic flow. Everyone agrees on this. These are the assumptions behind everyone’s solutions. No one questions the insanity of the system at its most fundamental levels.
But is the system never satiated? Must we forever buy and sell an increasing number of products, introduce new luxuries, transform old luxuries into necessities, make technologies obsolete at an accelerating rate, shop till we drop, worlds without end? The answer is apparently yes. The capitalist economy must grow. The alternative is, well, unthinkable. “When the monster stops growing,” explain the owner men in Steinbeck’s Grapes of Wrath, “it dies. It can’t stay one size.”6 Growth is the most fundamental assumption of capitalism. For without growth there is no capitalism, because there is no profit, no surplus to turn into capital.
The growth assumption worked well for many years. The supply of goods and services has grown and grown and grown, and our technological progress has been impressive. But what we never asked ourselves was where this line of thinking would take us. Is our path a never-ending upward spiral, or does it end somewhere, and, if it does, where does it end and how? I suggest that we are now beginning to learn the answers to those questions—some of them are economic, some environmental. Our economy is spiraling out of control, the slope is steepening, and to move forward we must accelerate our climb—we must reach the next level more rapidly, at greater velocity, or we won’t have the momentum to carry us to the next, even higher and steeper level.
This is why we are experiencing such an incredible demand for profits in our economy, why companies are so glued to the short-term bottom line. If they don’t have the capital to jump right now to the next step, which very often is dictated by new waves of technology that are hitting the shore with increasing frequency, they will be left behind—forever. They will never make the next step.
Aside from the disconcerting fact that intense competitive pressures are leaving numerous businesses in the dust, even more ominous is the fact that the economy also is abandoning millions of individuals. The economy, says Edward O. Welles, “has grown more Darwinian. The highly skilled prosper. The skilled survive. The unskilled fall prey to change.”7 Soon only the most educated and productive workers will occupy high-paying jobs. What will happen to the rest? How will they find enough cash to hold up their end of the equation, consumption, while the efficient and highly capitalized few quicken their already frenzied pace of production?
Unfortunately, the economy is not a machine that we can control scientifically. Rather, it exhibits the characteristics of a living system, and all living systems are, by nature, self-limiting. They grow normally to a certain point, after which they plateau and eventually decline. And the faster living systems grow, the sooner they reach their natural limits. If we try to push them past those limits, we damage them. And we have definitely pushed the economy past its natural confines.
Like a marathon runner at the end of the race, we’re no longer burning fat reserves; we’re burning muscle. Specifically, we’re burning out viable businesses and we’re burning up the middle class, creating a two-tiered society, and the lower tier is increasingly incapable of consuming all the products the upper tier is busily creating with its overabundance of capital.
Living beyond Our Means
One reason we have managed, on the whole, to stay on the steep upward growth spiral without collapsing is that we are extracting our natural resources and transforming them into products at an ever-increasing rate. We are using up many renewable resources faster than we can replenish them. And we are depleting our nonrenewable resources more rapidly than ever. In essence, the world economy is living beyond its collective means. If we look at the global economy as a business, it is headed for financial ruin. As Paul Hawken reminds us, “No business in the world can long survive on its capital reserves. Every businessperson understands this, yet many ignore the fact that this same principle applies equally to energy and the environment.”8 Our collective human business, the world economy, is not living on its current energy income, but on its capital reserves. Any business that pursues this strategy will be bankrupt as soon as the capital runs out.
The economy has reached and exceeded its natural limits, but we fail to admit it. We try to force it to grow, and so it has become like an athlete on steroids: in many ways it is inhumanly strong and agile, but because the growth is artificially induced, its long-term well-being is compromised, it is developing severe emotional irregularities, and it is even beginning to acquire certain freak characteristics. It is definitely not what you would term healthy.
The economy has reached a point at which the old theories no longer work. Our accepted explanations of economic phenomena are now the equivalent of Newtonian physics. They worked well up to a point, but are now inadequate. What we need is a new economic theory, based on different, sounder assumptions. We need an economy that can provide for our needs without being dependent on perpetual growth.
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,  1994), 436.
2. Paul Hawken, The Ecology of Commerce: A Declaration of Sustainability. New York: HarperCollins, 1993), 94.
3. Daly and Cobb, For the Common Good, 410.
4. John Stuart Mill, The Principles of Political Economy, vol. 2, bk. 3, ch. 7, 9th ed. (London: Longmans, Green:  1886), 9.
5. Willis Harman, “Whatever Happened to Usury?” World Business
Academy Perspectives 6, no. 2 (1992): 20.
6. John Steinbeck, The Grapes of Wrath (New York: Penguin Books, 1976), 33.
7. Edward O. Welles, “It’s Not the Same America,” Inc., May 1994, 98.
8. Hawken, Ecology of Commerce, 181.