Sustainable Growth?

Can growth be sustainable?

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 mortgage packages 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: outrage against consumerism, against unrestrained self-gratification, concentrated self-interest, the permission to pursue, and even to value, ‘desire’ – in a word, against 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.