This is a cartoon of the real situation, but…growth is synonymous with increased wealth.
Capitalism is just a system whereby the means of production are predominantly privately owned and operated for profit in the context of a market economy. Without growth, there are no positive speculations (investment opportunities) to fuel most of the economic mechanisms used by capitalist systems for the distribution and continued generation of of wealth, e.g. loans, stocks, bonds, mutual funds, etc. Further, market economies pressure producers of goods and services to seek new markets and new ideas, which result in growth. Restricting this growth through interventions would subvert a market economy and undermine capitalism, it could be argued.
There are some “green” theorists that have advocated capitalism without growth, but economists, in my experience, dismiss the notion as largely, if not completely, contradictory. Also, there are some zero growth advocates, but they are generally regarded as anti-capitalists.
I hope this addressed your question adequately.
Cheers.
It’s the other way round: capitalism produces growth. Even Marx recognized this, and actually theorized that a communist society would only be possible after a capitalist fase during which enought wealth would have been created to fuel his ideal society.
Diane Coyle writes a lot about growth in ‘economics: the soulful science’. I’m skeptical of her approach, since she talks a lot about economists’ attempts to build an archaeological version of GDP in historic periods that had no national accounting.
Growth is curious. I’ve read that many economists believe you need 2-3% growth to keep employment stable. I’d like to know how this conclusion was arrived at.
Something that just occurred to me: I think growth and change are mixed up, and we don’t really have the models to understand the difference. There’s either homeostatic, equilibrium models or there are dynamic ones. The former can’t grow, the latter can’t be stable (or maybe they can?) But, as a comparison, evolution can’t really be said to have grown, can it? But it’s entirely impossible to stop it: change is compulsory. Which is to say, if humans are still around in 10 million years’ time, we won’t look like we do now, and there’s a chance that goths and rockers may have speciated.
Here’s a hypothetical situation: a country has trained a whole heap of skilled builders: electricians, plasterers, carpenters, roofers etc. In a standard economy, they’re paid in cash, they spend it, so they’re contributing something to GDP.
But what if they all exchanged labour without cash payment? I know that’s not realistic, but it’s an interesting thought experiment. Because the result is that there’s no GDP generated because no money changes hands. Also, that means there’s no tax generated. Cash and the price mechanism are supposed to be an efficient means of exchanging things, but if we *did* come up with a better way, both GDP and tax collection would be stuffed.
So it’s possible to imagine a society that functions without price exchange. In that society, no GDP is generated (in the eyes of current accounting techniques) and no tax revenue is generated. But everyone’s fine, thank you very much. Society isn’t like this – it would be an absurd abstraction to suggest that it was, but my point is that the system we have can only discourage that kind of exchange, even though it’s entirely the best sort for promoting community and all those good social capital-type things governments say they want to see.
And also that attempts to create a historical GDP record are, on the face of it, absurd. People supplied resources for each other in ways that didn’t rely on a price mechanism. Without that mechanism, there’s no measuring it. That’s not to place a value judgement on those kinds of exchange – I’m not saying they’re better. Just that if we’re talking about growth, the first thing we need to know is what proxy we’re using to measure it and what that way of measuring might miss out.
Incidentally, growth (measured in money exchange / GDP) doesn’t have to equal ecological disaster if the next growth sector is, for example, building devices for storing carbon and paying people to bury it, or designing new shiny crops to reflect the sun, as the paper reported today. I reckon there can definitely be resource-friendly growth. But that still begs the question…
Sorry, just my rambly thoughts at the moment. I agree, though, that the concept of growth is a challenge!
Also, another thought experiment that’s worth doing: imagine if robots could do every economic task cheaper than people? What’s the most important feature of that situation? That people no longer have money to buy stuff. Capitalism requires people to buy stuff, which requires them to get money somehow.
I haven’t worked this out yet, even though I’ve now done two models of it – but someone must have done: if we all lived in Tescoland (where everyone buys from Tesco *and* works for Tesco, either directly or as a supplier) what’s the trade-off between pleasing the customer with cheap goods and making sure workers have enough money to buy those goods?
We don’t actually live in a world where consumer price and worker wage are directly part of the same equation, but I’ve discovered it’s rather hard to build models that reflect this!
Wow that Tescoland thing is really interesting Dan. I’d like to hear more about that.
Sorry Tom I still haven’t a clue though I’ve been thinking lots about it. But come up with these thoughts:
It is related to something that has been bugging me recently – why all the advertising? Things are obviously being overproduced if reluctant people need to be persuaded to buy them. But then it doesn’t appear that consumers wanting too much is really the problem, the problem is someone else wanting consumers to have too much. But who and why? To say that it is so someone else can make more money to consume more is just shifting the issue elsewhere. Suggestion: there is an institutional thing going on here – we are all enslaved to a system that needs us to have more and more stuff rather than anyone really wants more and more stuff ??? eg. Capitalism requiring growth. This could be bollocks of course.
What is GDP anyway? We maybe don’t know exactly what we are talking about.
Another idea: Capitalism relies on growth to redistribute because it doesn’t contain adequate redistributive methods elsewhere. To get back to the sordid interest issue, interest and other capitalist mechanisms like rent and profit will cause a constant upwards flow of wealth to the top of the tree, like sap… There are some redistributive methods with people dying (like leaves falling…although actually this is becoming slightly too nice a tree image for what is quite a grim system) and tax and so on, but they may not be enough. So growth is needed instead? (Yeah this is very similar to what I was saying when we were discussing it the other day)
Oh I’m all confused.
I’ve just realised the advertising thing I said is rubbish, obviously they are just trying to persuade people to buy their thing rather than something else.
Thanks for the link to Hazlitt, Hubert. Here’s one for you recounting the arguments why socialist economic calculation is impossible (and showing that the planners attempted to use Walrasian equilbrium to demonstrate that planning was possible: since the model requires a central auctioneer to function at all, why not call it the central planning board!) –
An important point from it: “Hayekâs central argument… was not so much that a socialist economy could not transmit the necessary data, but rather that it could not generate it to begin with. Without the competitive process of discovery and innovation, a socialist economy would have available only a small fraction of the knowledge that is utilized in a competitive economy. The task faced by proponents of market socialism is to explain exactly how spontaneous discovery is to occur within a planned economic system.”
I absolutely agree with Hayek’s critique of central planning. But it doesn’t seem to rule out all attempts at organising society. To steal one of Hayek’s own analogies, it’s like a gardener saying there’s no point in doing any gardening because the nature of plantlife and small ecosystems is too complex for them to understand. On one level that’s absolutely true – a garden certainly can’t be centrally planned! But it depends what level of interference you’re talking about, and whether the person doing the interfering is a good gardener or not. Liberal ‘gardening’ might be building the frame of law upon which the, er, vine of the economy can grow. (This metaphor is getting out of hand!) Someone like me might want to argue that the economic gardener can do a lot more to keep things in order.
I think its possible to understand how effective the price system can be, whilst also believing that it’s only one part of the evolved system of society. There are still non-price realms of human exchange, though they’re getting smaller all the time. I still don’t charge my dinner guests, for example, or pay for sex, though curiously the latter is generally more common than the former!
The price system is also variegated, like a garden. Some parts are more blunt and manipulable than others. Dell can automate supply chains to compensate for production bottlenecks for every component: if 40 gig hard-drives are in short supply, a telesale rep’s computer will automatically tell them to offer people an 80 gig one at a discount until supplies work themselves out, thus keeping sales smoothly ticking over. I think it’s possible to accept that’s ‘planning’ (in the sense of building a system to meet a goal), that there might be other ways to do the same, in more socially beneficial ways, but that there are realms where that shouldn’t be done – and that we can experiment to find out what works and what doesn’t (as we need to do with the various attempts to build carbon reduction into some price system or other.)
Again, that’s not so un-Hayekian / Burkean: trim around the edges, experiment, be cautious.
Of course, its much easier to spot when someone is an awful gardener. The question of how to pick good economic gardeners is rather more challenging: this is an argument against political interference I have some sympathy with. But none of this, it seems to me, rules out making changes – incremental and cautious to be sure – toward goals we’ve decided, as a political community, we think are worth aiming for. Hazlitt attacks people who don’t understand the price system, and he’s still right about a great many people, particularly on the left, who refuse to accept some basic economic truths. (Economics = capitalism = gonna be superceded by some future socialist utopia…) But there’s much more scope for other kinds of planning / mechanism design / whatever-you-want-to-call-it than the black and white ‘planning vs spontaneous order’ argument suggests.
There was a point in all that wittering somewhere, and I need to think up a good example of what I’m going on about, but sadly I must go and do some marking I’ve been putting off for a week…
I think you overinterpret (does that word exist in English ?) the argument. Or course, some activities are not really economical, e.g. inviting your friends over for dinner (unless you are a mad utilitarian striving to prove that you actually gain a material advantage by inviting your friends) Of course you do not need to have a doctorate in biology to be a good gardener – you do need to know however the information relevant to gardening. Of course, planning is possible and necessary, but the point is that it becomes more and more difficult and finally impossible as you need to collegate and compute more and more information.
Hayek’s argument is not that planning is impossible, it is that planning must be as decentralised as possible to be as efficient as possible, i.e. left to the individual economical actors.
The function of a price is that it gives you all the economical information you need about what you intend to buy without having to sieve through a shitload of information. You don’t need to know that miners in South-Africa are on strike and that there will probably be a shortage of gold and that you’d be well advised to replace the gold in the watches you are making with platina. The higher price of gold tells you that it might be intelligent to look for a substitue. A price is actually a triumph of economic cooperation. It is the most efficient instrument to divide the labour of collecting economical information. Now of course you could also barter, but that would make the system much more difficult and thus less “democratic”.
Actually, I think that if you accept that resources are finite and scarce – which should be the case of most people who care for the environment – you have to defend a free market because prices do not only convey the information that a resource is getting scarcer, they are also a way to diminish the consumption of that resource. If prices adequately reflected on the scarcity of some natural resources (we had a conversation here once about the “tragedy of the commons”, remember ?) people wouldn’t be able to buy them anymore.
9 replies on “capitalism and growth”
This is a cartoon of the real situation, but…growth is synonymous with increased wealth.
Capitalism is just a system whereby the means of production are predominantly privately owned and operated for profit in the context of a market economy. Without growth, there are no positive speculations (investment opportunities) to fuel most of the economic mechanisms used by capitalist systems for the distribution and continued generation of of wealth, e.g. loans, stocks, bonds, mutual funds, etc. Further, market economies pressure producers of goods and services to seek new markets and new ideas, which result in growth. Restricting this growth through interventions would subvert a market economy and undermine capitalism, it could be argued.
There are some “green” theorists that have advocated capitalism without growth, but economists, in my experience, dismiss the notion as largely, if not completely, contradictory. Also, there are some zero growth advocates, but they are generally regarded as anti-capitalists.
I hope this addressed your question adequately.
Cheers.
It’s the other way round: capitalism produces growth. Even Marx recognized this, and actually theorized that a communist society would only be possible after a capitalist fase during which enought wealth would have been created to fuel his ideal society.
Diane Coyle writes a lot about growth in ‘economics: the soulful science’. I’m skeptical of her approach, since she talks a lot about economists’ attempts to build an archaeological version of GDP in historic periods that had no national accounting.
Growth is curious. I’ve read that many economists believe you need 2-3% growth to keep employment stable. I’d like to know how this conclusion was arrived at.
Something that just occurred to me: I think growth and change are mixed up, and we don’t really have the models to understand the difference. There’s either homeostatic, equilibrium models or there are dynamic ones. The former can’t grow, the latter can’t be stable (or maybe they can?) But, as a comparison, evolution can’t really be said to have grown, can it? But it’s entirely impossible to stop it: change is compulsory. Which is to say, if humans are still around in 10 million years’ time, we won’t look like we do now, and there’s a chance that goths and rockers may have speciated.
Here’s a hypothetical situation: a country has trained a whole heap of skilled builders: electricians, plasterers, carpenters, roofers etc. In a standard economy, they’re paid in cash, they spend it, so they’re contributing something to GDP.
But what if they all exchanged labour without cash payment? I know that’s not realistic, but it’s an interesting thought experiment. Because the result is that there’s no GDP generated because no money changes hands. Also, that means there’s no tax generated. Cash and the price mechanism are supposed to be an efficient means of exchanging things, but if we *did* come up with a better way, both GDP and tax collection would be stuffed.
So it’s possible to imagine a society that functions without price exchange. In that society, no GDP is generated (in the eyes of current accounting techniques) and no tax revenue is generated. But everyone’s fine, thank you very much. Society isn’t like this – it would be an absurd abstraction to suggest that it was, but my point is that the system we have can only discourage that kind of exchange, even though it’s entirely the best sort for promoting community and all those good social capital-type things governments say they want to see.
And also that attempts to create a historical GDP record are, on the face of it, absurd. People supplied resources for each other in ways that didn’t rely on a price mechanism. Without that mechanism, there’s no measuring it. That’s not to place a value judgement on those kinds of exchange – I’m not saying they’re better. Just that if we’re talking about growth, the first thing we need to know is what proxy we’re using to measure it and what that way of measuring might miss out.
Incidentally, growth (measured in money exchange / GDP) doesn’t have to equal ecological disaster if the next growth sector is, for example, building devices for storing carbon and paying people to bury it, or designing new shiny crops to reflect the sun, as the paper reported today. I reckon there can definitely be resource-friendly growth. But that still begs the question…
Sorry, just my rambly thoughts at the moment. I agree, though, that the concept of growth is a challenge!
Also, another thought experiment that’s worth doing: imagine if robots could do every economic task cheaper than people? What’s the most important feature of that situation? That people no longer have money to buy stuff. Capitalism requires people to buy stuff, which requires them to get money somehow.
I haven’t worked this out yet, even though I’ve now done two models of it – but someone must have done: if we all lived in Tescoland (where everyone buys from Tesco *and* works for Tesco, either directly or as a supplier) what’s the trade-off between pleasing the customer with cheap goods and making sure workers have enough money to buy those goods?
We don’t actually live in a world where consumer price and worker wage are directly part of the same equation, but I’ve discovered it’s rather hard to build models that reflect this!
Wow that Tescoland thing is really interesting Dan. I’d like to hear more about that.
Sorry Tom I still haven’t a clue though I’ve been thinking lots about it. But come up with these thoughts:
It is related to something that has been bugging me recently – why all the advertising? Things are obviously being overproduced if reluctant people need to be persuaded to buy them. But then it doesn’t appear that consumers wanting too much is really the problem, the problem is someone else wanting consumers to have too much. But who and why? To say that it is so someone else can make more money to consume more is just shifting the issue elsewhere. Suggestion: there is an institutional thing going on here – we are all enslaved to a system that needs us to have more and more stuff rather than anyone really wants more and more stuff ??? eg. Capitalism requiring growth. This could be bollocks of course.
What is GDP anyway? We maybe don’t know exactly what we are talking about.
Another idea: Capitalism relies on growth to redistribute because it doesn’t contain adequate redistributive methods elsewhere. To get back to the sordid interest issue, interest and other capitalist mechanisms like rent and profit will cause a constant upwards flow of wealth to the top of the tree, like sap… There are some redistributive methods with people dying (like leaves falling…although actually this is becoming slightly too nice a tree image for what is quite a grim system) and tax and so on, but they may not be enough. So growth is needed instead? (Yeah this is very similar to what I was saying when we were discussing it the other day)
Oh I’m all confused.
I’ve just realised the advertising thing I said is rubbish, obviously they are just trying to persuade people to buy their thing rather than something else.
Dan, on the function of prices : http://jim.com/econ/chap15p2.html
Thanks for the link to Hazlitt, Hubert. Here’s one for you recounting the arguments why socialist economic calculation is impossible (and showing that the planners attempted to use Walrasian equilbrium to demonstrate that planning was possible: since the model requires a central auctioneer to function at all, why not call it the central planning board!) –
http://jim.com/econ/chap15p2.html
An important point from it: “Hayekâs central argument… was not so much that a socialist economy could not transmit the necessary data, but rather that it could not generate it to begin with. Without the competitive process of discovery and innovation, a socialist economy would have available only a small fraction of the knowledge that is utilized in a competitive economy. The task faced by proponents of market socialism is to explain exactly how spontaneous discovery is to occur within a planned economic system.”
I absolutely agree with Hayek’s critique of central planning. But it doesn’t seem to rule out all attempts at organising society. To steal one of Hayek’s own analogies, it’s like a gardener saying there’s no point in doing any gardening because the nature of plantlife and small ecosystems is too complex for them to understand. On one level that’s absolutely true – a garden certainly can’t be centrally planned! But it depends what level of interference you’re talking about, and whether the person doing the interfering is a good gardener or not. Liberal ‘gardening’ might be building the frame of law upon which the, er, vine of the economy can grow. (This metaphor is getting out of hand!) Someone like me might want to argue that the economic gardener can do a lot more to keep things in order.
I think its possible to understand how effective the price system can be, whilst also believing that it’s only one part of the evolved system of society. There are still non-price realms of human exchange, though they’re getting smaller all the time. I still don’t charge my dinner guests, for example, or pay for sex, though curiously the latter is generally more common than the former!
The price system is also variegated, like a garden. Some parts are more blunt and manipulable than others. Dell can automate supply chains to compensate for production bottlenecks for every component: if 40 gig hard-drives are in short supply, a telesale rep’s computer will automatically tell them to offer people an 80 gig one at a discount until supplies work themselves out, thus keeping sales smoothly ticking over. I think it’s possible to accept that’s ‘planning’ (in the sense of building a system to meet a goal), that there might be other ways to do the same, in more socially beneficial ways, but that there are realms where that shouldn’t be done – and that we can experiment to find out what works and what doesn’t (as we need to do with the various attempts to build carbon reduction into some price system or other.)
Again, that’s not so un-Hayekian / Burkean: trim around the edges, experiment, be cautious.
Of course, its much easier to spot when someone is an awful gardener. The question of how to pick good economic gardeners is rather more challenging: this is an argument against political interference I have some sympathy with. But none of this, it seems to me, rules out making changes – incremental and cautious to be sure – toward goals we’ve decided, as a political community, we think are worth aiming for. Hazlitt attacks people who don’t understand the price system, and he’s still right about a great many people, particularly on the left, who refuse to accept some basic economic truths. (Economics = capitalism = gonna be superceded by some future socialist utopia…) But there’s much more scope for other kinds of planning / mechanism design / whatever-you-want-to-call-it than the black and white ‘planning vs spontaneous order’ argument suggests.
There was a point in all that wittering somewhere, and I need to think up a good example of what I’m going on about, but sadly I must go and do some marking I’ve been putting off for a week…
I think you overinterpret (does that word exist in English ?) the argument. Or course, some activities are not really economical, e.g. inviting your friends over for dinner (unless you are a mad utilitarian striving to prove that you actually gain a material advantage by inviting your friends) Of course you do not need to have a doctorate in biology to be a good gardener – you do need to know however the information relevant to gardening. Of course, planning is possible and necessary, but the point is that it becomes more and more difficult and finally impossible as you need to collegate and compute more and more information.
Hayek’s argument is not that planning is impossible, it is that planning must be as decentralised as possible to be as efficient as possible, i.e. left to the individual economical actors.
The function of a price is that it gives you all the economical information you need about what you intend to buy without having to sieve through a shitload of information. You don’t need to know that miners in South-Africa are on strike and that there will probably be a shortage of gold and that you’d be well advised to replace the gold in the watches you are making with platina. The higher price of gold tells you that it might be intelligent to look for a substitue. A price is actually a triumph of economic cooperation. It is the most efficient instrument to divide the labour of collecting economical information. Now of course you could also barter, but that would make the system much more difficult and thus less “democratic”.
Actually, I think that if you accept that resources are finite and scarce – which should be the case of most people who care for the environment – you have to defend a free market because prices do not only convey the information that a resource is getting scarcer, they are also a way to diminish the consumption of that resource. If prices adequately reflected on the scarcity of some natural resources (we had a conversation here once about the “tragedy of the commons”, remember ?) people wouldn’t be able to buy them anymore.