The impossibility of growth

In the wake of the onset of the Covid19 pandemic the world is confronted with the manifest collapse of most sectors of the global economy. The attention of governments has understandably been focused on how to restore as soon as possible the level of economic activity that prevailed before the outbreak. However, as they struggle to determine how far this may be achievable – if at all – it is right to ask whether such a goal is even appropriate, bearing in mind the constraints to maintaining, let alone expanding, global output that existed even before the outbreak of the pandemic.

Such constraints may be defined as being of two particular kinds:-

A. Economic

In macroeconomic terms this collapse is set to be reflected in a large contraction of Gross Domestic Product (GDP) – or negative growth – and corresponding attempts to counteract it are therefore being concentrated on achieving the highest possible positive rates of growth. This has in any case been the more or less explicit aim of official policy in the West ever since World War II, although one that has mostly yielded disappointing results since the early 1970s.

The macroeconomic policy instruments applied in order to achieve such higher growth have been those of monetary or fiscal expansion – i.e. keeping interest rates low and public spending high relative to government revenue – consistent with maintaining financial and budgetary stability. These are the very tools, sanctified by Keynes, which were applied during the post-war boom years (1950-73) and are widely – but wrongly, as is now apparent, see below – believed to have facilitated the relatively rapid growth that was achieved in the industrialised world during that period. Unfortunately, too many unreconstructed Keynesians still believe that pursuing such expansionary policies – including, for example, investment in publicly funded infrastructure projects such as Britain’s HS2 railway – tends to have a lasting impact in stimulating growth – i.e. beyond a project’s construction phase. Hence this is seen as justifying an emphasis on increasing fixed investment as a way of boosting GDP growth.

The basic delusion behind this policy stance is the notion that aggregate consumer or investment demand can be artificially stimulated by “kick-starting” the economy with fiscal or monetary stimulus. Likewise it ignores the reality that sustained high growth in demand is only attainable under exceptional market conditions, such as prevailed in the industrialised countries (OECD) after World War II, where pent-up demand for consumer goods combined with technological change and the massive need for post-war reconstruction to bring about an unprecedented boom in demand. The result was that GDP growth in the OECD averaged 4.3 per cent annually in the 1950-73 period, compared with a more typical historic long-term average of little more than half that level.1 Hence we should hardly be surprised that attempts to restore post-war rates of growth have proved futile since the 1970s, even though technology-driven advances in consumer product capacity (notably of electronic goods) and quality have continued to occur.

Unfortunately, however, these attempts at artificial stimulation of demand have led to distortions in the economy and society which have only grown greater the more that governments have persevered with them despite their demonstrated futility. In particular, they have encouraged the tendency to run up enormous debts, both public and private, in the apparent belief that this will help facilitate faster growth, whether at sector or macro level. The persistent failure of these efforts to result in anything but still greater debt has not deterred the parties concerned from persevering with the strategy.

What might have deterred such profligacy under normal market conditions would have been the refusal of the markets to continue holding the resulting increased debt without demanding much higher interest rates. Had this been allowed to happen in undistorted markets rates would have risen rapidly to unaffordable levels, probably 10 per cent or more, thus precipitating mass bankruptcy in both public and private sectors. To prevent such a financial catastrophe, while maintaining the appearance of a still functioning capitalist economy, the authorities have resorted to the use of debt monetisation (euphemistically called Quantitative Easing) in order to hold down interest rates artificially. This process, which amounts to money printing (creating it “out of thin air”) involves the issuance of public debt which is then bought up by the central bank at a high price – implying a very low interest rate – even though under free market conditions the rate would, as noted above, be prohibitively high.

This officially authorised market distortion – which now even extends to central bank buying of private debt – has been sustained for so long in the main Western markets (US, Japan and the EU) that by now it is evidently accepted as normal behaviour, even though it had for long been (rightly) rejected by the International Monetary Fund and World Bank (guardians of the “Washington consensus”) as unsustainable market distortion. It has even given rise to a belief in what in academic circles is called Modern Monetary Theory (MMT), according to which a country that controls its own currency can print it in unlimited quantities without eventually suffering high inflation or other adverse consequences.

It is a remarkable demonstration of the degenerate state of contemporary economics that such an idea could be accepted by so many of the most respected economists of the day, without considering that it implies a belief that there need never be any practical limit to budgetary spending – even though this is clearly a nonsensical position. The fact that interest rates are historically low is not recognised as an anomaly, ascribable to officially inspired market manipulation in the face of record high levels of debt. Rather it is regarded as an opportunity to finance borrowing at (fortuitously) very low cost. Yet there is little sign that this is translating into much increased productive investment – as opposed to official deficit spending. This is probably because potential lenders – at least in the private sector – are not attracted to put money into projects carrying an ultra-low interest rate while the risk of loan default involved remains considerable in their eyes – i.e. the potential rewards are seen as too low to justify the risks.

Seemingly the one notion that can never be allowed to crystallise in the minds of Western economists or their paymasters is that high growth rates such as prevailed in the immediate aftermath of World War II are no longer attainable. As explained in my book The Trouble with Capitalism (1998) and subsequent works, this is mainly due to a combination of chronic relative stagnation of consumer demand and rising productivity of capital resulting from technological change. Hence even historically typical average growth rates of, say, 2-3 per cent annually should probably be viewed as the upper limit of what can now be achieved over the long term.

It is perhaps unnecessary to point out that the reason for this apparent obtuseness on the part of the economic establishment is that any suggestion that sustained high growth of GDP, and hence the need for commensurate fixed capital investment, might be in long-term decline would be seen as fatal to the future of the capitalist market economy itself – and hence profoundly unwelcome to the ruling élite.

In fact the only way such growth could conceivably be achieved is through promoting speculation in existing assets such that their value may be bid up to ever higher levels without any need for new fixed investment. However, since such a strategy clearly amounts to gambling pure and simple – without any possible long-term benefit to the real economy – it is bound to be seen, sooner rather than later, as not only anti-social from a public perspective but extremely risky from the point of view of the average investor.

This has not prevented increasing resort by investors to pure speculation in an ever more desperate effort to generate profits, even as many among them feel compelled to recognise that such activity is “socially useless”. It should be noted that such speculation has nonetheless been effectively encouraged by Western governments – as, for example, by allowing companies since the 1980s to buy back their own shares, a practice previously de facto outlawed since the Great Crash of the 1930s.

Another argument commonly deployed, implicitly or explicitly, in favour of continued expansion of fixed investment is that it is necessary to enhance or maintain the national competitiveness of a given country’s economy vis-à-vis the “national champions” of those countries deemed to pose a serious threat to its competitiveness in its own or global markets. An example of such competition – which is naturally underwritten or directly subsidised by the state – is the present struggle for supremacy between China and the US in relation 5G mobile networks. Such arguments, which in any case amount to an explicit negation of belief in ”free trade”, must be rejected by governments claiming to be in favour of limiting unnecessary growth of output and investment in the interest of minimising global warming or other forms of damage to the environment.

B. Environmental / demographic

While the lack of consumer or investment demand is a serious enough threat to the economic status quo, the fact that continued expansion of investment and output could pose a terminal danger to the environment and the biosphere constitutes a far more serious menace.

Hitherto this threat to the environment has been largely ignored by the global establishment while it seeks other ways to perpetuate the pursuit of profit enhancement, as described above. However, a growing number of activist organisations and individuals, such as Extinction Rebellion and the Swede Greta Thunberg have begun to demand earlier and more drastic action than the somewhat vague and less than unanimous commitments of different national governments to cut carbon emissions by 2050. In fact, it seems quite likely that many such activists will welcome the present outbreak of the Covid19 pandemic as the kind of dramatic event many of them have come to believe is needed to shake the world out of its complacency over climate change and force truly drastic action – such as, for example, the almost total cessation of commercial aviation which has now occurred by default in response to the Covid crisis, rather than as a result of government policy.

Population. Few have considered the possibility that the very survival of our species may depend on our ability to keep the size of the human population at a sustainable level within the planet’s finite limits. It is not widely understood that world population has quadrupled in the 75 years since the end of World War II – a rate of growth orders of magnitude higher than ever previously recorded in human history, and one that is likely to persist for the foreseeable future, so that on present trends another 2 billion people are expected to inhabit the world by 2050 (a 25 per cent increase over today’s level).

Remarkably, this problem is receiving hardly any attention either from activist supporters or governments who claim to be concerned about environmental pressures on the planet. This may be for a number of reasons:-

  1. Political sensitivity. Attempts to impose growth limits – e.g. through restrictions on family size, as briefly in China – are rightly seen as unworkable and unacceptable – while even the encouragement of family planning is often seen as contentious, typically on religious grounds, such that even the USA has barred the provision of aid to countries which incentivise contraception.

  2. Nationalism. A large population is often seen as actually or potentially a political advantage in international relations – e.g. UN Security Council, G20.

  3. Private sector bias. Corporate interests instinctively see market size expansion as advantageous to themselves – especially as other positive influences on market growth start to weaken (see above) and may often see rapid population growth as beneficial for this reason (the Economist newspaper has often tended to favour it).

Many commentators draw comfort from the fact that world population growth is now slowing and is projected to cease altogether by mid-century. This, however, ignores the fact that this process is very uneven, leaving huge imbalances between more and less heavily populated countries or regions.

On the face of it there is liitle danger that the agricultural sector will not be just as able to support the food needs of the additional billions as they have in the recent past (population growth being a function of productive capacity driven by technological advances in food production, rather than the other way round). However, concerns have been raised about the long-term dangers posed both to human health and other aspects of the environment by the steady intensification of farming methods, particularly in the area of meat and dairy production. For it is well known that cattle are a major source of methane, a greenhouse gas. Yet even if animal production could be sharply reduced from today’s level – which seems unlikely given the ongoing growth of the human population – there would clearly be serious negative impact on the environment in the absence of any restraint on global growth.

In summary we must conclude that growth at a sustained pace fast enough to assure a return on capital sufficient to satisfy the markets has by now become

  1. unattainable – owing to market demand constraints, and

  2. unacceptably destructive given its impact on the environment.

A number of commentators have expressed the hope that the Covid19 crisis may prove to be a watershed moment, in a positive sense, in the evolution of human civilisation. If that turns out to be so, it will mean that our species has – almost miraculously and for the first time ever – developed a capacity for recognising when it is on a dangerous and unsustainable course and has found the collective wisdom to step back from the brink.

1See Shutt, The Decline of Capitalism, pp 13-15

2 thoughts on “The impossibility of growth

  1. An excellent appraisal of our current situation. Without doubt, the misuse of QE by this and prior governments, will laden our children’s children to debt levels that will impinge on their ability attain the same levels of financial and economic security, that was once experienced by their great grandfathers. One song immediately comes to mind, Chris Rea’s ‘Road to Hell.’

    And all the roads jam up with credit
    And there’s nothing you can do
    It’s all just bits of paper flying away from you.
    Look out world
    Take a good look what comes down here
    You must learn these lesson fast and learn it well.

  2. Excellent piece! UK government is already talking up massive infrastructure spending. We had all of that in 2010 of course and the growth lasted exactly four years with recession conditions more or less arrived at by 2019. We need re-structure not another railway or there will be no-one to ride it.

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