Is Steady-State Capitalism an oxymoron? (part 1)

Richard Corin

The question about the viability of a “steady-state capitalism” is critically important to understand thoroughly before we attempt to transform our current economic systems and institutions. These institutions and the defining assumptions which produced the current arrangements evolved in a world full of resources and relatively empty of people. However, it has become clear that we now need an economic system that optimises the well-being of a world full of people, facing depleted natural resources and struggling life-support systems. If the essence of capitalism is growth, then we do need a whole new ‘ism’. But if growth is merely an optional extra, capitalism may only require major surgery.

The End of Physical Growth

Contemporary economic theories and practices are still based on ancient attitudes of plunder. I once described the problem as follows…

The rich can no longer assume that the Earth’s resources belong to whoever can exploit, consume and convert them into waste faster than anybody else. This is a frenzy of destruction fuelled by competitive greed to grab as much as possible before someone else gets it and before it’s all gone. It is a madness which has to end and be replaced by an ethic that recognises an equal right to access the free gifts of nature, so that resources can be respected, conserved and recycled justly and sustainably. If our institutions fail to evolve to meet this requirement, civilisation and its large populations have no future.

One of the necessary changes is the recognition of natural limits and the creation of economic institutions which ensure the sustainable management of natural assets. The human economy’s throughput of natural resources and waste will have to be controlled according to what are sustainable yields for the ecosystems we exploit. It is our consumption of the Earth which has to stop growing and reverse in order to preserve the source of everything except solar radiation and cold darkness. There is no sustainable yield for non- renewable resources, so the overriding goal should be to ensure that the materials or benefits are not lost from economic recovery. Rather than setting arbitrary limits on the rate of exploiting finite resources, royalties for non- renewable materials should be high enough to maximise recovery from the waste stream. Resource royalties should be continuously adjusted to ensure materials are recaptured and reused before we eat into natural reserves. Long term management will mean resource scarcity in the short term. As a side effect, high resource prices will automatically encourage substitution with renewable alternatives, wherever they are available.

I believe there is enormous scope for recycling the waste materials back into economic inputs, eliminating pollution and reducing our dependence on finite resources. Such resource sustainability is unavoidably energy intensive, so a plentiful supply of renewable energy is fundamental. However, once the economic infrastructure and incentives are installed, accumulated innovations will continuously improve resource efficiency, “de-grow” the material throughput of developed economies, restore ecological health and create ecological “space” for the economic growth of poorer communities. If we are to create a decent quality of life for 9 billion people within 40 years and a steady- state global economy after that, this is the challenge before us. As a first step, the growth imperative of the old developed countries has to be identified and remedied to avert chronic depression and a risk of being dragged into global “involuntary population reduction”.

A Common Defining Characteristic for Capitalism?

Philip Lawn’s definition of capitalism (P.A. Lawn, “Is steady-state capitalism viable?”, Annals of the New York Academy of Sciences, 1219, pp1-25) says:

“ an economic system, where a large proportion of the human- made capital within it is privately owned…”

He does not mention natural capital in his definition, but he subsequently talks about natural resources entering the economy through cap-auction-trade mechanisms where sustainably regulated quantities are periodically sold by the public sector. To me, this implies that a steady state economy requires natural capital to be subject to a degree of collective management and control which overrides traditional concepts of private ownership.

Far from an externality, Nature is a major source of wealth. Workers are usually paid for their labour, but Nature’s payment tends to be privatised. Competition may avoid monopoly profits and distribute value to contemporary customers, but nature’s wealth belongs to all and undervalued resources are soon depleted.

I am relieved and encouraged if we agree that the free gifts of nature belong to no person more than another – that natural resources should remain collective property, managed by specialists in their particular resources, empowered, entrusted and obliged to serve the common good of current and future generations. When these free gifts of nature do enter the human economy, either as commodity inputs, such as minerals, water or timber, or as natural capital, such as land or managed ecosystems, then, it follows that the scarcity value of those collective resources also belongs to everyone. In my view, the revenue from auctioning the year’s sustainable yield, plus the royalties from extraction of non-renewable resources, and from leasing land, should not replace taxation, but be distributed to every living person as a dividend or tax credit before applying a fair taxation regime.

Herman Royce (previous issue of this publication) is silent about property and ownership in his paper, but he makes it clear that the reasons “capitalist economies are compelled to grow”, “all … revolve around the nature of profit.” Phil Lawn agrees that profit is important for capitalism: “…far from eliminating profits, steady-state capitalism is a pathway to sustained, healthy profits”. I think we can agree that a capitalism without profit would not be capitalism at all. I hope to examine the nature of “profit” in part 2.

What Compels the Economy to Grow?

What lies at the heart of the growth imperative? Can an economy with a profit motive survive indefinitely without growth? Is the growth imperative merely a temporary artefact of an inessential subsystem that came along for the ride when capitalism started out?

Herman Royce tells us (and I paraphrase) that the growth imperative is an unavoidable consequence of the quest for profits (and interest) and that profits will continue to increase, even as everything else declines in a non-growing capitalist economy. Phil Lawn says the necessity for growth arises from –

“ the institutional framework that shapes and connects labour markets with product markets and because currency-issuing central governments fail to act as an employer-of–last-resort ”

At first, that sounded like, “I don’t really know, but here’s a nifty scheme to deal with unemployment”. But this ecological economist usually knows what he’s talking about, so I kept reading for several days, hoping to find an exposé of the growth demon. I enjoyed reading some excellent work, but never found an explanation of the growth imperative.

Perhaps I’m being obtuse. Perhaps “institutional framework” is widely understood to mean the structure of the banking, finance and money creation organs of this specific version of capitalism. I confess that is where I believe we will find the internal relationships which define an embedded Ponzi scheme that compels our economies to grow in order to stave off collapse.

Growth –> Loans –> Money –> Activity –> Employment

An economy needs a circulating pool of “liquidity” (money & near money) large enough to facilitate and maintain the ordinary transactions of economic activity. It is a balancing act to maintain an appropriate amount of liquidity circulating in the productive economy. Too much money in circulation is inflationary and too little stops people paying each other to produce. Something like 97% of the money supply is actually bank-credit money, much of which is constantly disappearing from circulation on a monthly repayment schedule. As bank loan principals are paid down, this credit money is destroyed. (I am informed that a tiny fraction of interest payments also vanish from circulation to become excess reserves.)

The big picture, cartoon image of the problem looks something like the following. The community’s circulating money gets soaked up, hoarded or otherwise removed from circulation, so a continuous stream of new loans is essential to provide new debt-money at a rate fast enough to more than counterbalance the rate at which the community’s economic life-blood expires from circulation. Confidence about future growth justifies issuing and borrowing enough credit-money to continue with today’s economic activities. Almost all of the liquidity which the economy needs to function is derived from this growth engine, so, when growth slows, the money supply begins to evaporate, taking spending and employment with it. It is a rather ill-conceived design. The stability of the money supply should not depend on growth. At zero growth, for example, the money supply should remain steady. Fix this flaw and the growth dragon will be tamed.

Money (measured as the aggregate M1) is withdrawn from circulation in the productive economy whenever:-

loan repayments pay down the principal of past loans;
total savings deposits increase;
currency-issuing-sovereign-governments spend less than their revenues.
While the circulating pool of M1 money increases whenever:-
new retail loans are issued by banks;
existing savings are spent into the economy;
currency-issuing-sovereign-governments net-spend (a.k.a. “print money”).

For the sake of clarity, this description leaves out international trade balance and the “casino economy” of high finance, derivatives and debt-driven asset bubbles. It also ignores delayed circulation, such as when money temporarily rests in piggy banks, kitties and shoe boxes, as well as equivalent delays in the banking system.

It is important to note that past loans are repaid on inflexible schedules, so future trends for loan repayments are largely determined by past trends of lending. In a situation where the overwhelming component of the money supply is debt-money carrying an expiry date for destruction (a repayment schedule) then a previously expanding rate of credit creation pre-commits the economy to a rising rate of repayments. If the volume of credit creation reverses or fails to increase for any reason, there will be an inevitable collapse in the money supply. A failure to dynamically balance such disturbances results in a financial crisis.

[Steve Keen talks about a “Credit Accelerator” when discussing the rate of change in debt. See http://debtdeflation.com/blogs/2012/01/28/economics-in-the-age-of-deleveraging/]

The grip of the growth imperative ought to diminish as the proportion of private bank-credit money is replaced by debt-free public money. If only half the money supply was credit-money, for example, then the overall rate of money destruction would be halved and the rate of issuing new loans to maintain the existing pool of circulation could also be halved. Naturally, banks would vehemently oppose this.

The above description is compatible with Herman Royce’s explanations, provided you assume that profit (and interest) payments remove money from circulation. But that is rarely the case. Profits and interest payments always return into circulation somewhere – except for that portion which ends up as increased “savings”. This is also true for wages, so, “distributional issues” aside, there is nothing unsustainable about interest or profits which are eventually spent back to circulation. A fluctuating level of savings is sustainable – but a continuous accumulation of savings is not sustainable without continuous growth, which is, of course, impossible in the long run. Basic physics suggests that the end of growth is likely to coincide with a failure to increase the energy supply or its productivity.

I found Royce’s identification of profit with the growth imperative unconvincing because he does not seem to understand circulation. I would be much more agreeable if he had argued that profit (and interest) tended to magnify inequality, and that any unbalanced tendency towards inequality was incompatible with a steady-state economy. I agree with Phil Lawn when he observes that a steady-state economy must somehow mitigate any on-going concentration of wealth and, I would add, power. I am not sure, however, whether his conclusion is based on purely economic or social reasoning. Perhaps a growing disparity produces spiralling savings amounting to claims on real wealth which can never be realised.

Suffice to say, that, in a steady-state economy, savings would not be able to increase indefinitely, and fluctuations in the levels of liquidity in circulation must be rapidly counter-balanced. Changes to government spending and taxes work much faster to adjust the money supply than tweaking interest rates. I mention such matters to make the point that a steady-state economy does not mean stasis. It is still a dynamic chaotic system which requires macro-management and perpetual “balancing”.

In my view, the growth imperative is not a necessary consequence of private profits generated in a productive economy, but an artefact of the design of the non-productive, parasitic sector we call banking and finance. A well- designed money system is a pre-requisite for a steady-state economy. One candidate is a full reserve banking system like William Hummel’s National Depository scheme. Otherwise, zero interest rates may not be low enough to stimulate a sufficient flow of new credit-money to maintain circulation, employment and social stability.

Richard Corin is an ERA member living in SA.