The perpetual growth problem under capitalism

While the economists are arguing for or against secular stagnation (which basically means no economic growth) by throwing around esoteric economic jargon these days, the perpetual growth model under capitalism seems pretty obvious to us to be fallacious, limited and unsustainable, because of two different sets of constraints. The first set of constraints arises from the environmental domain and concerns the physical and biological limitations and properties of resources and the fierce and relentless competition for the profitable and useful ones.  Firstly, natural resources are the main ingredients that drive our capitalist economy, mainly as valuable raw materials and life-supporting sources such as food, energy, medicines, clean potable water, etc.  Some natural resources are renewable or recyclable, but most are not and they are limited.  One day, sooner or later, they are going to be used up or become too difficult or expensive to find or extract at our disposal.

Secondly, the indiscriminate overuse and mismanagement compounded with climate change have diminished, compromised, aggravated or threatened the quality and quantity of some of our important resources and critical supplies for the economy, like fresh water supply, soil fertility, crop yield, ecosystem integrity concerning our food pollinators and pest invasion, human productivity loss from environmental pollutions, ocean health, saltwater intrusion, desertification, coastal erosion and flooding, etc.  We cannot grow an economy or increase productivity if we perpetually require more and more finite resources for similar production processes, or worse if those required resources are dwindling or disappearing fast.  Talk about the tragedy of the commons in the grand scale.

Thirdly, the increasing frequency and ballooning costs of climate disaster events supercharged by climate change have supplanted, diverted and overtaken resources and capital meant otherwise to grow an economy, as opportunity costs.  Even with the reinvestments into rebuilding the damaged communities, they are no substitutes for all the tangible economic losses of productive human lives, land and assets, as well as the intangible economic losses of disruption and dislocation of productive labor and businesses.

Fourthly, while we use and deplete our limited natural resources with abandon to push for perpetual growth, there is no responsible and powerful counter-force to adequately conserve and preserve critical and essential natural resources or judiciously monitor reserves and look for renewable substitutes or replacements for them. Even though we assume continuous human existence for the foreseeable future, we do not put into place the necessary safeguard or guarantee of resources for our human survival and sustenance. One day, when we face a catastrophic disruption, shortage or eventual disappearance of those resources, there will be a rude awakening and no last-minute scrambling can dig us out of the hole. The current capitalist market mechanism and our human nature have always favored short-termism over the long term and the future, and downplayed the lifesaving importance and value of investing heavily in unproven technologies of developing renewable and recyclable resources. When the capital owners’ eyes are only on profit and ROI (Return on Investment), they are not willing to wait any longer than absolutely necessary. Why worry about sustainability or contingency/backup plans while money can be made with existing investment and existing resources in the current entrenched industries? Let someone else worry about it. The collective attitude of selfish and cavalier disregard, especially of those controlling the economy, will only lead us to the inevitable collapse of our capitalist societies.

The second set of constraints arises from the human domain and is less obvious. Before we go into that, we have to understand how the money multiplier effect works and how much and how fast it affects economic growth.  If my spending is your income, then the more everyone spends, the more income there will be.  It works well when the increasing income is widely shared because the money is constantly cycling back into the economic pool to become the rising tide that lifts everyone’s living standard.

The economists have a special vocabulary for this phenomenon.  They would say that monetary exchanges have a frequency rate, or a velocity, and this rate is far higher at the bottom (lower income group) than at the top (higher income group), as fast money versus slow money.  As a result, fast money regenerates more economic growth than slow money, by making the economic pool or economic pie bigger and faster.  It makes sense that, in mathematical terms, fast money can possibly produce exponential growth while slow money can only produce logarithmic growth which is much slower.

But these days, it seems like the economic pool or economic pie is getting smaller and smaller and the economic growth is getting slower and slower.  There are a few contributing factors.  With the growing income inequality, the extra money has been going disproportionally to the wealthiest and is being siphoned off and stashed away.  No extra spending means no extra income, and no cycling back into the pool means no rising tide. To illustrate, if one CEO (Chief Executive Officer) is making 200 times more than one average worker, one of him does not usually outspend 200 average people.

Theoretically, the siphoned off money can be put back in the economy as investments.  However, the modern investment choices have not been very conducive to the money multiplier effect.  Inevitably, some of the money will be sitting in a vault as cash, precious jewelry or valuable art collection, which are not productive and does not generate the money multiplier effect.  Some other money will go to pseudo-investments mentioned before, that may bring handsome rewards to few capital owners but not much to everyone else.

The government can supposedly correct this somewhat by certain policies, like by taxing the rich to fund investments in social safety net programs for the poor, effectively moving some siphoned off money back into the economic pool.  There is even evidence that it actually works.  According to the Center on Budget and Policy Priorities, Moody’s Analytics estimates that in a weak economy, every dollar increase in SNAP (Supplemental Nutrition Assistance Program, formerly the Food Stamp Program) benefits generates about $1.70 in economic activity. However, in the U.S., there is a big pushback and resistance for any kind of income redistribution or wealth transfer, perpetuated by the ideologue conveniently favored and supported by the rich.

Whatever is left in the economic pool is further strained by the growing population in the U.S. and elsewhere.  When more and more young people enter the workforce, there are more and more workers who first need a salary before they can spend it to generate the money multiplier effect.  Their salaries are dependent on whether they can find a job and how much their future bosses are willing to pay them.  For the capital owners who aim at maximizing profit, they have a tendency to offer the lowest wages the market can bear, especially when the labor supply outnumbers the labor demand.  The lower wages result in less overall spending, which creates a smaller money multiplier effect.

Again, the government can supposedly correct this somewhat by certain policies, like imposing a minimum living wage, strengthening the bargaining power of labor unions and restructuring the corporate tax rate by prioritizing investment spending instead of dividend distribution.  But then again, in the U.S., the rich has continued to buy political influence and sabotage any such government policies that are against their financial interests.

Hypothetically, an economy can still grow fast and healthily with the right conditions, like a highly educated and skilled labor force, first rate infrastructure, abundant human, material and financial resources, ample business financing, vibrant entrepreneurial spirit, high level of innovation, positive consumer sentiments, optimistic business confidence, supportive government policies and everything that are conducive to creating productive businesses and offering plentiful good paying jobs.  It is still happening around Silicon Valley in California and some isolated technology hubs around the country.  It has also happened before. The period of economic boom following the end of World War II is dubbed the Golden Age of Capitalism.

So, why can’t we make it happen now?  History told us how it worked: The American government funded large infrastructure projects like the Interstate Highway System that literally paved the way and the foundation for all sorts of industries and businesses to flourish and offer a huge number of well paying jobs to the Americans who eventually formed a large prosperous middle class.  There were broad-based gains among the general population in the economy.  The income gap between the rich and the poor was not astronomical.  The money multiplier effect was robust and strong.

This time around, the government, which is in the best position to make it happen again, has different ideas.  The government, which is currently populated mostly by politicians elected with money from the wealthy, will do their biddings. The plutocrats will not raise taxes or use public funds for anything that does not enrich themselves further.  They keep perpetuating the ideologue that the government is the problem and pushing for no new taxes and continuous government spending cuts.  There will be minimal government investments in public education, public works or infrastructure, labor friendly practices like labor union or collective bargaining power, public and low cost housing, public transportation, public health, public grants for science, research and development, public parks and recreation, public employees, public oversight and rule-enforcement of businesses, public services especially for the poor or low income households, etc.  Meanwhile, government policies and resources will be redirected only toward projects, namely ‘pork’ in government parlance, that favor and reward disproportionately the vested interests of the politically connected, namely the rich and the capital owners.

This continuous diminished and constant assault of public investments has culminated in our current dismal state of affairs in the U.S.: crumbling infrastructure, low overall academic achievements, tampered scientific discourse, widened income equality, hollowing out of the middle class, eroded American economic competitiveness in the global market, etc.  Talk about the tragedy of the commons in the grand scale.

Even without the climate change debacle hanging over our heads, how do we, as Americans, move ahead to improve the economic well-being of the common population despite that we have faithfully championed the causes of capitalism?  We have tried the old capitalism and it has failed most of us.  It is all the more relevant now to include the idea of building sustainability, self-sufficiency and resilience into the new benevolent capitalism.

Let us imagine what if…

Next…

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