Can growth be sustainable?
April 27th, 2008
Free giveaways generate buying. Chris Anderson, in a recent article in Wired Magazine, rejoices in the idea. He perceives a new business paradigm in this form of selling. The article is called, “Free! Why $0.00 Is the Future of Business”.
It’s a confused and disjointed article burdened with irrelevancies and embarassing ignorance (on the solution to Zeno’s Paradox). But Anderson gives instructive examples of how money has been made out of free giveaways. Entrepreneurs take note.
What these examples exemplify is this: giving something away can induce people to buy things they don’t need. It expands the conscious menu of purchasable choices. It creates more in the world to buy.
Buying generates economic activity. General prosperity rises with commercial bustle. Economic activity produces jobs, consumes resources, generates waste and yields an increase in the level of general satisfaction. In good times even art and philosophy prosper. Thus the creation of a ‘desire to buy’ makes society wealthier! Wired Magazine rejoices.
Merchants prosper and order goods. Manufacturers buy materials and hire workers. The money paid out empowers consumers to generate further economic activity. And so wealth grows. When wealth grows we’re having ‘good times’.
Why can’t we have unending good times?
The elemental answer is simply this: Growth is not sustainable. The popular mantra suggesting otherwise is an oxymoron. Happily, economic contraction is not sustainable either.
I say this based simply upon common empirical observation. Times of prosperity are followed by times of austerity. Which are themselves followed, at some indeterminate interlude, by prosperity again. Somehow success breeds failure just as failure breeds success. What interests me is the mechanics of this process? What are the features of economic prosperity that drive it into decline?
A canonical example, in nature, of prosperity’s self-destruction is wine making. Saccharomyces cerevisiae is a yeast that is added to grapes and water in the making of wine. The organism ingests sugar and water and excretes alcohol. Finding itself amidst plenty in a bath of sugary grapes the fungus - the yeast - multiplies and rejoices in its prosperity. Finally it produces enough waste to kill itself by alcohol poisoning. The process is called fermentation. We celebrate our prosperity by drinking what killed the yeast - they who had, but recently, rejoiced in their prosperity.
Now, if we accept the evidence, from empirical observation, that growth is not sustainable, we must ask ourselves: “What are the mechanisms for this self-immolation in human economic prosperity?” It is this question which interests me.
My answers reduce to only four mechanisms whereby wealth destroys itself. These mechanisms are built into the structure of prosperity and, in past centuries, have crippled prosperity many times. Here they are:
1. Financial bubbles. Wealth is decreased because things, previously valued high, are suddenly valued low. A financial bubble arises, precisely, from the expectation that growth will be sustained; the expectation of sustainable growth. The bubble’s bursting corresponds to that expectation being dashed.
Like those talented in any discipline, the financially talented are creative. They invent financial instruments. Many of these have contributed mightily to the creation of wealth. Some are now commonplace. Like debit cards, for example. But some creations lead to financial bubbles - the destruction of wealth. This occurs when, in the expectation of continuing high returns, buying on credit drives prices up until demand falls. A large price drop ensues.
The recent loss in wealth due to the sub-prime mortgage bubble is typical. The price of housing was inflated by the readiness of brokers to arrange loans whose risk could be masked. The masking was accomplished via financial instruments created to ‘package’ loans. Packaging them hid the high-risk ones so that they could more easily be sold, at low-risk prices, to unsuspecting buyers. Large financial institutions invested money in these packaged mortgages. Their market value was inflated by speculation. When the inflation became apparent the value of the mortgages suddenly declined. Wealth disappeared.
A plethora of excellent books examine the phenomenon and give examples spanning centuries. Written by John Kenneth Galbraith is “A Short History of Financial Euphoria” (1990), by Edward Chancellor is “Devil Take the Hindmost” (2000), and the classic “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay, was first published in 1841.
2. Hubris. Wealth produces national arrogance leading to conquest or hegemony. Ultimately these drain wealth. That’s what ended the prosperity of ancient Athens around 410 BC. It ended Roman prosperity around 476 AD, and that of Napoleon’s France in 1815, and Britain’s hegemony in 1948. That the current Iraq war is draining the treasury of wealthy nations is a matter of great current concern.
3. Social Unrest. Wealth creation needs a peaceful setting. It’s crippled by social unrest. Associated with unrest is also property destruction. That diminishes society’s wealth.
- a. Unrest can be due to the poverty of many in the midst of visible plenty for the few. It arises when the distribution of wealth in the population is too skewed: a result of capitalism insufficiently restrained. Unrestrained free enterprise allows the financially astute to prey on the financially ignorant. This creates large wealth distribution inequalities. In the most egalitarian societies, the Scandanavian countries, steeply graduated income tax laws function to counteract earnings inequalities.
b. Unrest can stem from spiritual conviction. It shows itself as outrage against the morality which drives the economic engine: consumerism, unrestrained self-gratification, concentrated self-interest, the permission to pursue and even value ‘desire’ - in a word, selfishness. The disaffected value, instead, self-restraint, duty, responsibility, loyalty. They wish to establish a ‘moral’ society. The anarchists of the 1890s were such idealists as were the communists of the 1920s and as are the Islamic Fundamentalists of today.
c. Unrest can arise from the depletion of resources.
The effect is most apparent in the endangered seafood harvest, in declining oil reserves and other mineral resources and in reduced availablity of potable fresh water. Their scarcity drives their prices up precipitously. This causes violent disruptions in economic activity leading to social unrest.
4. Waste. This is the mechanism that destroys the prosperity of S. cerevisiae in wine making. The production of goods always entails waste. Garbage is produced. It must be disposed of. At best a small fraction of waste is recyclable. The disposal of waste consumes resources - land, water, energy. This is acutely true of radioactive and toxic waste. Pollution of the air and water are also the waste of economic activity. Economic activity injects CO2 and other greenhouse gases into the atmosphere contributing to global warming.
In the end wealth must be diverted to cope with waste. Flourishing wealth produces flourishing waste. Its disposal consumes wealth.
In each case above it is the generation of wealth itself which produces its decline. The cause of decline is embedded in the nature of the growth.
History tells us there is another cause of wealth decline. Threat from without. An aggressor arises who simply destroys or appropriates the wealth of the vanquished.
Nice Site layout for your blog. I am looking forward to reading more from you.
Tom Humes
- Tom Humes @ 27 April 2008This is great! I love the analogy of S. Cerevisiae.
One question that i have is rather than having sustainable growth… Is it possible to have a healthy, happy, and satisfied society without growth? And if so, is stagnation sustainable?
“History tells us there is another cause of wealth decline. Threat from without. An aggressor arises who simply destroys or appropriates the wealth of the vanquished.”
On a global level, has there ever been a wealth decline from without?
- Peter Chester @ 4 May 2008I recently wrote an article asking, I think, a very similar question. My conclusion is closest to your second and third mechanisms. That is probably because I am using the tools I am most familiar with. When all you have is a hammer, someone said, everything looks like a nail:
http://www.mydigitallife.co.za/index.php?option=com_content&task=view&id=1036375&Itemid=43
A comment on your last paragraph: wealth does not decline by an aggressor taking it, often it increases under new management. Sometimes the original owner has access to wealth in ways he never had before, but he looses control of it.
Is there a way you could explain a solution to Zeno’s paradox in layman’s terms?
Maybe seasons exist merely to curb the unsustainability of growth. Perhaps generations serve the same purpose?
- Alan Jones @ 4 May 2008Ah, the essentials of the matter:
“Is it possible to have a healthy, happy, and satisfied society without growth? And if so, is stagnation sustainable?”
Is not the second question the answer to the first? Can a ’satisfied society without growth’ exist? It would be perceived as stagnation by its youth. Is not ‘happy, healthy and satisfied’ tied to growth?
I have accepted, as a postulate, that ‘no condition is permanent’. It follows that ‘growth is not sustainable’. It follows, also, that ’stagnation is not sustainable’. Is this true? I think so.
Can we not offer myriads of examples from life where the achievement of well being goes unrecognized? Where people fail to appreciate their good fortune and thus lose it. And is there even one example of the contrary society - where people were content with what they had?
Economists reckon a recession when growth is less than, say, 0.1%/year. The significance is that, for good times to prevail, there must be growth. Economists accept about 3%/year of growth as good times.
I would turn the thought around to ask, what are the mechanisms by which attainment generates despair. Another post.
in re: Threat from without.
History is replete with merciless wanton decimation. For example, in the thirteenth century the Mongols were known for the complete destruction of anything they conquered. i.e. for the annihilation of wealth and of life.
Here is the flavor of it.
“In 1237, Batu Khan, leader of the Mongols, besieged Ryazan. … After six days of bloody battle, the capital was totally annihilated, never to be restored. … Having burnt down Kolomna and Moscow, the horde laid siege to Vladimir in 1238. The capital of Vladimir-Suzdal was taken and burnt to the ground.”
Other examples:
In the seventeenth and eighteenth centuries the conquering Spaniards simply wiped out the culture, wealth and people of many South American aboriginal nations. In the nineteenth century the U.S. simply moved the north american natives off their land and thus impoverished them. In the twentieth the Nazis simply wiped out towns in Poland not to speak of enslaving people and murdering them.
All of these were non-negotiable visitations of catastrophe from outside the social system.
Here’s a major wealth decline from without: During the fourteenth and fifteenth centuries the Bubonic Plague in Europe killed half of the population! And just a few days ago, a cyclone wiped out over a hunded thousand people in Myanmar. A cataclysmic decline from without.
in re: Zeno. Very fine discussions of Zeno’s Paradoxes of motion are to be found in these two places:
http://en.wikipedia.org/wiki/Zeno’s_paradoxes
And in section 3. The Paradoxes of Motion in
- Marvin Chester @ 6 May 2008http://plato.stanford.edu/entries/paradox-zeno/
What follows discusses out of the ball park - grossly illegal - business practices in the hundreds of trillions of dollars.
HOME OF THE WHAT? [My blog to Bill Maher’s Real Time TV show 6/14/09]
Like Johnny, Senor Wence’s puppet, Geithner and Obama know what to say. But they do the opposite. In BARRON’s April 13, 2009 “Lessons of the Savings and Loan Crisis” William Black, who was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s reports QUOTE BEGINS: “This whole bank scandal… the scale of the fraud is immense… We have failed bankers giving advice to failed regulators… Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems… It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty… The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything… mispricing toxic assets… With most of America’s biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale… We need to gear up to pursue criminal cases… Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large. There need to be major task forces set up… Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn’t happening.” QUOTE ENDS
In ROLLING STONE April 2, 2009 “The Big Takeover”, Matt Taibbi reports QUOTE BEGINS: “People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough… The crisis was the coup de grace: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve… Banks had a way to turn their shittiest mortgages and other financial waste into investment-grade paper and sell them to institutional investors like pensions and insurance companies… The banks knew they were selling crap… AIG Financial Product’s returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary’s 400 employees were paid a total of $3.5 billion…
Senator Phil Gramm… had finished engineering the most dramatic deregulation of the financial industry… In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists… The next year Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities… Once the capital requirements were gone those top five banks went hog-wild… into the then raging housing bubble… Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO… Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary… If AIG went down, there was a good chance Goldman would not be able to collect… There are plenty of people… that when they lost their homes to foreclosure… no one in the government was there to rescue them… That’s the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers’ credit card… In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize ‘toxic’ risks but keep both the profits and management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret… By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive… While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP,… these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments… No one knows whose getting that money or how much of it is disappearing through these new holes in the hull of America’s credit rating… What authority Congress has to monitor the Fed… an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include ‘deliberations, decisions and actions on monetary policy matters.’… When Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn where all the money went – only $1.2 trillion had vanished by then – Kohn gave Grayson a classic eye roll, saying he would be ‘very hesitant’ to name names because it might discourage banks from taking the money…
When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriation process, what’s happening in the Fed amounts to something truly revolutionary – a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke… It is beyond comprehension…
Geithner, Obama’s Treasury secretary, is one of the architects of the Paulson bailouts; as Chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner – himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm – picked a former Goldman lobbyist named Mark Patterson to be his top aide. In fact, most of Geithner’s early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called ‘bad bank’ that would systemically relieve private lenders of bad assets…
By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future… The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of… Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?” QUOTE ENDS
Are these crooks going to use their stolen trillions of dollars to buy out the good assets? Then along comes the inflation they caused, so that the assets they stole are worth much more than they paid. And this leaves the public taxpayers slaves to paying off $trillions of these same crooks’ illegal transaction’s debts. Their plan accomplished. Now it’s the end game; and President Obama had better end and UNDO the game he and others have created, aided and abetted. I think economics Nobel laureate Paul Krugman would make an excellent Treasury Secretary. And Madoff’s capers don’t hold a candle to the Greenspan’s and Bernanke’s Fed Oz. Show us where the money has gone; get the public off the crooks’ debtors’ hook; and get the public back the money and assets that belong to it. Finally, this can be done by prosecuting criminal and civil defendants suspected of violating these laws. President Obama and Congress get going on this! PS: The commissions and bonuses on these, traded repeatedly, illegal derivatives could be more than $60 trillion. (Ms.) Adrian Zolkover
- Adrian Zolkover @ 14 July 2010