When I was 17 I decided to study economics. One of my uncles was present when I announced it to the family. He told me to study it and then I figure out a model that doesn’t rely on growth. At the time I had no idea what he was trying to say but over the years I became extremely aware of the challenge he gave me and that this truly is the crux of it all
Does capitalism itself rely on growth or is that a requirement of a fiat currency and money supply managed by a central bank? I enjoyed the article but it failed to mention the fact that such things are not really features (or bugs!) of capitalism.
Say we had an economy with sound money and all the scientists in all the labs discovered all there is to discover (hard to imagine!). People are still going to die. Everything that is built immediately begins to degrade and needs to be maintained and eventually rebuilt. Why is growth required? We've already seen that humans naturally regulate population growth when societies reach a certain standard of living. Couldn't economic activity similarly reach a sustainable plateau?
That’s what I thought as well when I entered my undergrad in economics. Turns out the system would collapse and companies wouldn’t be able to fulfil their goals without growth. A system where every organisation makes just enough to cover their costs, is communism and not capitalism. In capitalism (as the word suggests) you take your capital, invest it to generate more capital which in turn you van invest again etc. the goal is to leverage existing wealth to generate more wealth. Because companies and humans want more tomorrow than they had yesterday. If this doesn’t happen, your system collapses and the government has to take over and run the system for you (which, as said above, isn’t capitalism anymore). It’s obviously so much more complex but the simplest way that I got it explained (in my graduate study - so only after 3 years of still pondering this question) was that most countries rely on either population growth or technological growth to sustain a system of capitalism that doesn’t collapse. A few countries have natural resources to prop up their growth or others have intellectual capital but most economies fall back on more people being born (which you already pointed out regulates itself when countries reach a certain standard) or technology catching up with others (all third world countries). So what happens when like in the western world technology seems to slow down and humans don’t reproduce as fast? You have an ageing population with fewer productive citizen that need to somehow finance the retirement of the old generation. The productivity goes down due to the lack of workers which means the wage of the worker goes down as they produce fewer goods/services. So they accumulate a lower amount of capital compared to the previous generations which means they can’t spend as much which again slows down the economy further. This results in some companies going bankrupt which means workers are out of jobs and further stress the system by collecting benefits. The government needs to finance the pensions and jobless benefits payments meaning they have to print money which causes inflation resulting in the little money that people had left being worth even less. Likely you’ll end up with bank runs and people returning back to using hard metals (gold) for trading or even direct exchange of goods without fiat currency. And back into the dark ages we go.
Again, it’s probably way too simplified but the current setup can’t function without growth unless there is severe government intervention which is more socialistic than capitalistic.
However... what were seeing right now with the pandemic is changing everything. The books that I studied from were based on information that may no longer be accurate so who knows. It’s an amazing time to be alive :)
Thanks for the detailed answer, super interesting stuff! And yes, very amazing time to be alive, indeed!
Makes you think.