The End of Growth: Adapting to Our New Economic Reality (8 page)

Like all thinkers, the classical economic theorists — to be properly understood — must be viewed in the context of their age. In the 17th and 18th centuries, Europe’s power structure was beginning to strain: as wealth flowed from colonies, merchants and traders were getting rich, but they increasingly felt hemmed in by the established privileges of the aristocracy and the church. While economic philosophers were mostly interested in questioning the aristocracy’s entrenched advantages, they admired the ability of physicists, biologists, and astronomers to demonstrate the fallacy of old church doctrines, and to establish new universal “laws” through inquiry and experiment.

Physical scientists set aside biblical and Aristotelian doctrines about how the world works and undertook active investigations of natural phenomena such as gravity and electromagnetism — fundamental forces of nature. Economic philosophers, for their part, could point to price as arbiter of supply and demand, acting everywhere to allocate resources far more effectively than any human manager or bureaucrat could ever possibly do. Surely this was a principle as universal and impersonal as the force of gravitation! Isaac Newton had shown there was more to the motions of the stars and planets than could be found in the book of Genesis; similarly, Adam Smith was revealing more potential in the principles and practice of trade than had ever been realized through the ancient, formal relations between princes and peasants, or among members of the medieval crafts guilds.

The classical theorists gradually adopted the math and some of the terminology of science. Unfortunately, however, they were unable to incorporate into economics the basic self-correcting methodology that is science’s defining characteristic. Economic theory required no falsifi-able hypotheses and demanded no repeatable controlled experiments (these would in most instances have been hard to organize in any case). Economists began to think of themselves as scientists, while in fact their discipline remained a branch of moral philosophy — as it largely does to this day.
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The notions of these 18th- and early 19th-century economic philosophers constituted classical economic
liberalism
— the term
liberal
in this case indicating a belief that managers of the economy should let markets act freely and openly, without outside intervention, to set prices and thereby allocate goods, services, and wealth. Hence the term
laissez-faire
(from the French “let do” or “let it be”).

In theory, the Market was a beneficent quasi-deity tirelessly working for everyone’s good by distributing the bounty of nature and the products of human labor as efficiently and fairly as possible. But in fact everybody wasn’t benefiting equally or (in many people’s minds) fairly from colonialism and industrialization. The Market worked especially to the advantage of those for whom making money was a primary interest in life (bankers, traders, industrialists, and investors), and who happened to be clever and lucky. It also worked nicely for those who were born rich and who managed not to squander their birthright. Others, who were more interested in growing crops, teaching children, or taking care of the elderly, or who were forced by circumstance to give up farming or cottage industries in favor of factory work, seemed to be getting less and less — certainly as a share of the entire economy, and often in absolute terms. Was this fair? Well, that was a moral and philosophical question. In defense of the Market, many economists said that it
was
fair: merchants and factory owners were making more because they were increasing the general level of economic activity; as a result, everyone else would also benefit...eventually. See? The Market can do no wrong. To some this sounded a bit like the circularly reasoned response of a medieval priest to doubts about the infallibility of scripture. Still, despite its blind spots, classical economics proved useful in making sense of the messy details of money and markets.

Importantly, these early philosophers had some inkling of natural limits and anticipated an eventual end to economic growth. The essential ingredients of the economy were understood to consist of
land
,
labor
, and
capital
. There was on Earth only so much land (which in these theorists’ minds stood for all natural resources), so of course at some point the expansion of the economy would cease. Both Malthus and Smith explicitly held this view. A somewhat later economic philosopher, John Stuart Mill (1806–1873), put the matter as follows: “It must always have been seen, more or less distinctly, by political economists, that the increase in wealth is not boundless: that at the end of what they term the progressive state lies the stationary state....”
⁹

But, starting with Adam Smith, the idea that continuous “improvement” in the human condition was possible came to be generally accepted. At first, the meaning of “improvement” (or
progress
) was kept vague, perhaps purposefully. Gradually, however, “improvement” and “progress” came to mean “growth” in the current economic sense of the term — abstractly, an increase in Gross Domestic Product (GDP), but in practical terms, an increase in consumption.

A key to this transformation was the gradual deletion by economists of
land
from the theoretical primary ingredients of the economy (increasingly, only labor and capital really mattered, land having been demoted to a sub-category of capital). This was one of the refinements that turned classical economic theory into
neoclassical
economics; others included the theories of utility maximization and rational choice. While this shift began in the 19th century, it reached its fruition in the 20th through the work of economists who explored models of imperfect competition, and theories of market forms and industrial organization, while emphasizing tools such as the marginal revenue curve (this is when economics came to be known as “the dismal science” — partly because its terminology was, perhaps intentionally, increasingly mind-numbing).
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Meanwhile, however, the most influential economist of the 19th century, a philosopher named Karl Marx, had thrown a metaphorical bomb through the window of the house that Adam Smith had built. In his most important book,
Das Kapital
, Marx proposed a name for the economic system that had evolved since the Middle Ages:
capitalism
. It was a system founded on capital. Many people assume that
capital
is simply another word for
money
, but that entirely misses the essential point: capital is wealth — money, land, buildings, or machinery — that has been set aside for production of more wealth. If you use your entire weekly paycheck for rent, groceries, and other necessities, you may occasionally have money but no capital. But even if you are deeply in debt, if you own stocks or bonds, or a computer that you use for a home-based business, you have capital.

Capitalism
, as Marx defined it, is a system in which productive wealth is privately owned.
Communism
(which Marx proposed as an alternative) is one in which productive wealth is owned by the community, or by the nation on behalf of the people.

In any case, Marx said, capital tends to grow. If capital is privately held, it
must
grow: as capitalists compete with one another, those who increase their capital fastest are inclined to absorb the capital of others who lag behind, so the system as a whole has a built-in expansionist imperative. Marx also wrote that capitalism is inherently unsustainable, in that when the workers become sufficiently impoverished by the capitalists, they will rise up and overthrow their bosses and establish a communist state (or, eventually, a stateless workers’ paradise).

The ruthless capitalism of the 19th century resulted in booms and busts, and a great increase in inequality of wealth — and therefore an increase in social unrest. With the depression of 1873 and the crash of 1907, and finally the Great Depression of the 1930s, it appeared to many social commentators of the time that capitalism was indeed failing, and that Marx-inspired uprisings were inevitable; the Bolshevik revolt in 1917 served as a stark confirmation of those hopes or fears (depending on one’s point of view).

20th-Century Economics

Beginning in the late 19th century, social liberalism emerged as a moderate response to both naked capitalism and Marxism. Pioneered by sociologist Lester F. Ward (1841–1913), psychologist William James (1842–1910), philosopher John Dewey (1859–1952), and physician-essayist Oliver Wendell Holmes (1809–1894), social liberalism argued that government has a legitimate economic role in addressing social issues such as unemployment, healthcare, and education. Social liberals decried the unbridled concentration of wealth within society and the conditions suffered by factory workers, while expressing sympathy for labor unions. Their general goal was to retain the dynamism of private capital while curbing its excesses.

Non-Marxian economists channeled social liberalism into economic reforms such as the progressive income tax and restraints on monopolies. The most influential of the early 20th-century economists of this school was John Maynard Keynes (1883–1946), who advised that when the economy falls into a recession government should spend lavishly in order to restart growth. Franklin Roosevelt’s New Deal programs of the 1930s constituted a laboratory for Keynesian economics, and the enormous scale of government borrowing and spending during World War II was generally credited with ending the Depression and setting the US on a path of economic expansion.

The next few decades saw a three-way contest between Keynesian social liberals, the followers of Marx, and temporarily marginalized neoclassical or neoliberal economists who insisted that social reforms and government borrowing or meddling with interest rates merely impeded the ultimate efficiency of the free Market.

With the fall of the Soviet Union at the end of the 1980s, Marxism ceased to have much of a credible voice in economics. Its virtual disappearance from the discussion created space for the rapid rise of the neoliberals, who for some time had been drawing energy from widespread reactions against the repression and inefficiencies of state-run economies. Margaret Thatcher and Ronald Reagan both relied heavily on advice from neoliberal thinkers like monetarist Milton Friedman (1912–2006) and followers of the Austrian School economist Friedrich von Hayek (1899–1992).

There is a saying now in Russia: Marx was wrong in everything he said about communism, but he was right in everything he wrote about capitalism. Since the 1980s, the nearly worldwide re-embrace of classical economic philosophy has predictably led to increasing inequalities of wealth within the US and other nations, and to more frequent and severe economic bubbles and crashes.

Which brings us to the global crisis that began in 2007–2008. By this time the two remaining mainstream economics camps — the Keynesians and the neoliberals — had come to assume that perpetual growth is the rational and achievable goal of national economies. The discussion was only about how to maintain it: through government intervention or a laissez-faire approach that assumes the Market always knows best.

But in 2008 economic growth ceased in many nations, and there has as yet been limited success in restarting it. Indeed, by some measures the US economy is slipping further behind, or at best treading water. This dire reality constitutes a conundrum for both economic camps. It is clearly a challenge to the neoliberals, whose deregulatory policies were largely responsible for creating the shadow banking system, the implosion of which is generally credited with stoking the current economic crisis. But it is a problem also for the Keynesians, whose stimulus packages have failed in their aim of increasing employment and general economic activity. What we have, then, is a crisis not just of the economy, but also of economic theory and philosophy.

The ideological clash between Keynesians and neoliberals (represented to a certain degree in the escalating all-out warfare between the US Democratic and Republican political parties) will no doubt continue and even intensify. But the ensuing heat of battle will yield little light if both philosophies conceal the same fundamental errors. One such error is the belief that economies can and should perpetually grow.

But that error rests on another that is deeper and subtler. The subsuming of
land
within the category of
capital
by nearly all post-classical economists had amounted to a declaration that Nature is merely a subset of the human economy — an endless pile of resources to be transformed into wealth. It also meant that natural resources could always be substituted with some other form of capital — money or technology.
¹¹
The reality, of course, is that the human economy exists within and entirely depends upon Nature, and many natural resources have no realistic substitutes. This fundamental logical and philosophical mistake, embedded at the very core of modern mainstream economic philosophies, set society directly on a course toward the current era of climate change and resource depletion, and its persistence makes conventional economic theories — of both Keynesian and neoliberal varieties — utterly incapable of dealing with the economic and environmental survival threats to civilization in the 21st century.

For help we can look to the ecological and biophysical economists — whose ideas we will discuss in Chapter 6, and who have been thoroughly marginalized by the high priests and gatekeepers of mainstream economics — and, to a certain extent, to the likewise marginalized Austrian and Post-Keynesian schools, whose standard bearers have been particularly good at forecasting and diagnosing the purely financial aspects of the current global crisis. But that help will not come in the form that many would wish: as advice that can return our economy to a “normal” state of “healthy” growth. One way or the other — whether through planning and methodical reform, or through collapse and failure — our economy is destined to shrink, not grow.