The Myth of Sustainability and the Quadrillion Dollar Economy: Why Must the Economy Grow? By Richard H. Robbins Department of Anthropology State University of New York at Plattsburgh Paper Prepared for the Montreal International Conference on De-­‐Growth in the Americas Montreal, Quebec, May 13-­‐19, 2012 The middle of the twentieth century may well turn out to have been the high point of our national existence. -­‐-­‐Tibor Scitovsky (1976) Introduction: The Quadrillion Dollar Economy In his 1967 book, The Cost of Economic Growth, British economist E. J. Mishan (1967: 10) asked whether the cost of economic growth, “the irresistible spread of steel and concrete, … the plague of motorized traffic, … the growing impatience and tenseness of people”, as he phrased it, is really worth it. His conclusion, in general, was that it is not. At that point U.S. GDP was $834 billion and global GDP was about $3 trillion. Monthly average carbon dioxide concentration was about 300 ppm. 1 In 1976, in his book The Joyless Economy, economist Tibor Scitovsky (1976:3-­‐4) wrote that there is a “Growing realization that technological and economic progress … has a dark side to it.” The evidence is increasing, he wrote, of the cumulative threat “to health, environment and future generations created by our reckless brandishing of weapons, extermination of pests, squandering of resources, popping of pills, ingesting of food additives, and use or overuse of every mechanical aid to our comfort and safety.” In spite of this so-­‐called “progress,” he concluded, we are continually less satisfied. In 1976 the U.S. GDP stood at under $1.8 trillion and global GDP was about $9 trillion. Monthly average carbon dioxide concentration was about 335 ppm By 2011 the U.S. GDP was just over $15 trillion, or 17 times greater than it was in 1967 and 8 times greater than it was in 1976. Global GDP stood at about $70 trillion, over 20 times what it was in 1967. And monthly average carbon dioxide concentration was about 385 ppm. In fact, if the U.S. economy grew at the minimum desired rate of 3% real GDP growth a year1 (close to the growth rate of Japan from 1900 to 2000), in 2100 the GDP, that is what we are spending and producing would be over $200 trillion, or 600 times what we spent and produced in 1950! And since emerging nations tend to grow at higher rates than wealthy nations, global GDP could approach or exceed a quadrillion dollars.2 And all 1
Milton Friedman put the minimum required growth at 5% per year. 2
This is “real money,” as an ex-­‐US Senator quipped. But it is difficult to conceptualize what these huge numbers mean and what the difference is between millions, billions and trillions. To illustrate, if in the year 0, you had a trillion dollars (1012 or 10E12 in U.S. scientific notation) to spend, and you spent it at the rate of one million dollars (106 or 10E6) a day, you would spend a billion (1012 or 10E12) within 3 years, but, in 2010 you would still have 700 years remaining to spend the trillion. A quadrillion is 1015th (or 10E15). At one million dollars a day, it would take 2.74 million years to spend a quadrillion. Even if you spent at the rate of a million dollars a second, it would still take almost 32 years to spend a 2 the evidence indicates is that, putting aside the increasing technological complexity we enjoy and the vast quantity of material items, larger homes, and higher salaries, the overwhelming evidence is that our social and psychological well-­‐being has declined (see e.g. Putnam 2000, Wilkenson 2009). While, as we shall see, some argue that the more growth the better, it is difficult to conceive of the effects the size of a quadrillion dollar global economy would have on our environment in climate change alone, not to mention on our social and political lives, particularly as economic growth continues to increase the gap between rich and poor for reasons we’ll explore. Furthermore, as John Magnus Speth (2008: x) points out, even if our economic output remained at its present level, the world would be virtually uninhabitable by the end of this century. The damage being done was illustrated by Will Steffen and his associates (2005) in the series of graphs detailing the environmental effects of economic growth (see Figure 1). Figure 1 about here While it is clear that economic growth exacts a toll on our environment, it is clear also that even a modest decline in growth threatens an economic crisis, such as we experienced in 2007/2008, in which millions of people lose their jobs, banks fail, and thousands of business go bankrupt. The choice between sustainability and growth is not unlike that noted by Karl Polanyi in his 1944 class, The Great Transformation, in which he posits the choice between an unregulated market, which would destroy society, and a regulated market which could destroy the market itself and the society on which it was built. As he put it: quadrillion. Even if the U.S. economy grew only at the average rate since 1870 (1.8%), by 2100, it would be 75 trillion (5 times what it is today) and the global economy would be 300 trillion or more than 4 times what it is today. 3 Our thesis is that the idea of a self-­‐adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-­‐regulation of the market, disorganized industrial life, and thus endangered society in yet another way. It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it. The dilemma posed by either perpetual economic growth and/or an unregulated market, has led some to conclude (e.g Speth 2008; McKibben 2007) that capitalism (i.e. an unregulated market) must be abandoned. There are others (e.g. Lipow 2010), of course, that believe that the problem can be solved by technological fixes (e.g. new sources of sustainable energy, new modes of transportation, sustainable building practices) or by dramatically altering consumption patterns (reducing our consumption of energy, water, wood products, animal foods, etc.) The problem is that while it is possible to alter, say energy usage, through technological efficiencies, that does little to stop energy utilization. For example, the amount of primary energy needed to produce each unit of economic output has fallen almost continually in the past 4 decades so that each unit of production requires 33% less energy to produce. But energy intensity has doubled between 1980 and 2006. Thus, in spite of greater technological efficiency, fossil fuel emissions increased by 80% since 1980 and are 40% higher than in 1990. (see Jackson 2009: 75). Regarding climate change, the Nicolas Stern report estimates that to reduce carbon emissions to 450 ppm the cost to GDP growth would be 2 percent, and Price and Waterhouse estimate that to achieve a 50% reduction in global carbon emissions would require 3% of GDP, thus essentially wiping out growth. Thus we are left with the dilemma of how to address the economy’s continuing need for perpetual growth with our need to maintain natural, as well as social and political capital? (see Robbins 2011) In this paper we will argue that the problem is not with the market or with capitalism, however defined; we argue that the market, as envisioned by classic writers such as Adam Smith and John Stuart Mill has 4 been severely distorted by a financial structure that is culturally-­‐specific. We will argue that the problem is not unbridled consumption (which we view as a symptom, not a cause of the problem), but rather debt, savings and investments, that is the requirement of our financial system for continuing return on capital, or the making of money with money. Furthermore, we suggest that the structure of the modern financial system can and must be altered. But to demonstrate this, we must address the question, rarely dealt with by economists, or others for that matter, of what is it about the modern market economy that requires it to perpetually grow? Why Does the Economy Have to Grow? Classical economists rarely ask why the economy must grow. The major textbooks on economic growth (see e.g. Barro and Sala-­‐i-­‐Martin. 2004; Jones 2002) nowhere address the question of why economies must grow. Nor is the subject broached in the collection of papers in the Handbook of Economic Growth (Aghion and Durlauf 2006). Rather, the classical economist assumes that the benefits of growth are self-­‐
evident. Language use reinforces this idea: “growth,” after all, is synonymous with “development,” “progress,” “advance,” “evolution,” and “improvement,” while its antonyms include “diminishment,” “failure,” “stagnation,” and “underdevelopment.” Thus when developmental economics emerged as a field in the 1950s, economists, as well as sociologists, political scientists and anthropologists such as Walt Rostow and Ward Goodenough (see Escobar 1995) focused on the question of why traditional societies failed to grow, taking it for granted that growth was good. They composed lists purporting to show the factors that inhibited growth (e.g. traditionalism, religion, a kin-­‐
based social structure, conservative values, etc.), but never asking the question of whether growth itself is beneficial. 5 Regardless, it should also be noted that, even the pioneers of economics and advocates of the market, such as Adam Smith and John Stuart Mill, and later John Maynard Keynes, never argued for the virtue of perpetual economic growth. Rather they assumed that economics, as a discipline, would aid in the growth of economies to the point that people could live “wisely, agreeably and well,” in Keynes words (see Skidelsky 2009), at which point growth would level off. But, of course, that hasn’t happened. And so we are still left with the question of why economies must grow? A more insightful perspective on the need for growth comes from Liah Greenfeld (2001), in her book The Spirit of Capitalism: Nationalism and Economic Growth. This book attempts to answer two questions: First, what was the direct cause of the emergence of modern economy; that is, what explains the sustained orientation of this economy, which distinguishes it from all others, to growth? Second, what made the economic sphere so central in the modern, and in particular, American consciousness; what persuaded millions of men and women, contrary to much of the historical experience and intimations of their own self-­‐knowledge, to put their trust in economic growth (seen as natural) as the necessary and sufficient condition of social progress and political felicity? (Greenfeld 2001: 1) Greenfeld’s answer is the emergence of nationalism; as a force, she says, nationalism pitted nation against nation and thereby stimulated international competition, and created a favorable environment for economic growth. Nationalism, she says, helped define economic achievement, competitiveness, and prosperity as positive and important national values thereby making economic growth a national priority. She argues that economic growth is not “natural,” but historically contingent. She argues that since nationalism as a product of the eighteenth century is historically contingent, so too must be the desirability of economic growth. Furthermore she says, 6 Because [economic growth] is not natural but essentially historical, the search for the universally applicable formula of economic growth is a wild goose chase; it can never be found. (Greenfeld 2002: 473-­‐474) Greenfeld makes an excellent case that nationalism, as a value, is linked to the acceptance of economic growth as a positive force. She makes an excellent case also that economic growth is both historically-­‐
and culturally-­‐specific, implying, therefore, that it is not “natural,” and is not intrinsically linked to “progress,” however defined. That is, as perpetual growth emerged as a requirement of the modern economy, a value orientation emerged to sustain it. But it still doesn’t answer the question of why economies must grow and why, if they don’t bad things happen. Can We Slow Growth? In his book, Prosperity without Growth (2009), the report of the UK government’s Sustainable Development Commission, Tim Jackson tackles the problem directly, by recognizing that perpetual growth is a requirement of the modern economy and that perpetual growth is environmentally unsustainable. As he puts it (2009: 128),. Taking a step back for a moment, there are only two ways out of the [dilemma of growth]. One is to make growth sustainable, the other is to make de-­‐growth stable. Anything else invites either economic or ecological collapse. We have a good idea of what will happen to the world’s physical environment with continuing perpetual growth. However, as he puts it (2009: 127), we have no model for how common macro-­‐economic 'aggregates' (production, consumption, investment, trade, capital stock, public spending, labor, money supply and 7 so on) behave when capital doesn't accumulate. And we have no models to account systematically for our economic dependency on ecological variables such as resource use and ecological services. One of the factors about the modern economy linked to environmental decline that Jackson identifies is debt; that the growth of consumption between 1990 and 2007 was caused by a massive expansion of debt and credit. It was debt, itself, he says, that was largely responsible for the economic collapse of 2007/2008. By trying to maintain growth, debt was extended. Thus, he says, the market was not undone by the isolated practices of rogue individuals or an unregulated market, as many claim, but by the policies enacted to maintain growth; “The market,” he concludes, “was undone by growth itself.” (2009: 30) Jackson’s approach to the dilemma is in many ways unique and his conclusions are valuable. First, he identifies the financial system and its need to be structured in such a way as to allow continual increases in consumption, and hence in perpetual growth. But he also continues to identify consumption as the primary cause of our problems and hence controlling consumption as one of the solutions. However, as we will try to demonstrate, the problem is not consumption, but rather a combination of debt, savings and investment, and the continued requirement of the financial system for ever increasing returns on capital. The Nature of Money and Debt Understanding the necessity in our economic system of the need for perpetual growth requires the implications of our monetary creation schemes. To economists, money has three functions: it provides a standardized means of exchange, a unit of account and a store of value (see Graeber 2012: 22). Within this framework, some questions about money are rarely, if ever, asked: for example, how is 8 money created, how is it stored and how do those things make a difference in the nature of the economy, and indeed the entire society? In the western financial system, money is lent into existence and it is stored in such a way that it must accumulate interest and/or dividends. Money, as it is created and used in our financial system, simply cannot stop growing. (see Garson 2001) Our major premise is this: modern market economies must grow because of the complementary financial operation of debt, interest and return on capital. “The very mechanisms of our money system,” says Chris Martenson (2011:49) “promote and even demand the exponential growth of money and debt.” ((see also El Diwany 1997; Brown 2010; Hallsmith and Lietaer 2011) The structure of our financial system requires, as a condition of its existence, monetary and economic growth in order to honor expected return on loans and investments. Furthermore, while most discussions about sustainability focus on spending and consumption, we argue that the roots of perpetual growth and the negative externalities that it produces (e.g. environmental degradation, social inequality, and decline of democratic institutions, etc.) lie in the acts of saving and investment and the payment of interest on debt and the expectation of dividends or profits on investment. We assume also that such an economy and such a financial structure is culturally and historically contingent, and that it is possible to design a financial system to move money where it is to where it is needed that does not require perpetual growth. Understanding the relationship between growth and debt allows us to better understand why, when economies fail to grow, bad things happen—debt goes unpaid, banks collapse, investors stop investing, people lose jobs, and so on. Furthermore, factoring in the relationship of debt and capital accumulation allows us to calculate the relationship of debt to required rates of capital accumulation. 9 Let me illustrate. Start with a household that is earning $150,000 a year. The household receives a $600,000 bank loan at 7% interest for ten years to buy a home. Monthly payments come to $6965. The total interest paid over the course of the loan is $235,981. The $600,000 (that is the value of the house) has been created by the bank by extending the loan, and that remains in the form of an asset (the house). The remaining $235,981, that is the interest payment, represents new money that does not yet exist. The household must produce that, and to do so, it must produce, on average, an additional $23,598 a year, or 15.7 percent a year of its total initial income to pay off the debt.i There are many other details to completely account for the ability to repay the debt and its ultimate worth, but the example should suffice to illustrate that making money with money requires a perpetual growth in the money supply and in the overall economy. We can better illustrate the relationship between debt and growth with a real case by examining the entire debt load of the United States (see Table I) [Table I about here] Government debt, it is apparent, is only a portion of the total, and in spite of the political rhetoric concerning the size of government debt, is probably the least worrisome.ii But the question that never gets addressed is what is the rate of economic growth required to honor all of these debt obligations? That is, how much growth is necessary before the rates of default impact financial institutions to the extent that credit dries up, businesses fail, asset values decline, unemployment rises, more defaults ensue, and so on? The numbers chosen for the household debt example above were not arbitrary. The $600,000 represents the approximately $60 trillion debt held by all sectors of the U.S. economy, and the $150,000 income represents the approximately $15 trillion U.S. GDP, that is the total value of goods and services produced each year, or, as it is sometimes called, the national income. Thus, if the average interest on all of these debts, which range from 1% on U.S. Treasury notes to 20% or more 10 on credit card debts, is, say 7% and the average term of the debt or investment is 10 years, the economy must produce at least $20 trillion in new money during that period to meet debt obligations, or for banks and investors to realize a return on capital. That amounts to an initial growth rate of over 15% annually, a rate that has been achieved in the U.S. only briefly during WW II. In addition each incremental expansion of the level of debt is an explicit assumption that the economic future will be greater than the present. And not just a little bit larger-­‐-­‐the future will need to be exponentially larger than the present for the debts to be fully repaid. Debt, in effect, is a claim on future wealth. Consequently creditors, such as banks, pension funds, insurance companies, and governments have an enormous stake in the perpetual expansion of the economy. Without growth, debt makes no sense, for without growth where would the interest or dividends come from? And without the continued expansion of debt, the whole financial system would collapse. Most economists assume that growth represents an increase in individual wealth. This is misleading. Growth is a necessity, not a choice. In order to maintain the necessary rate of capital accumulation that allows creditors to receive their necessary return on capital, citizens must increase their rate of consumption, labor, production and profit or face the consequences of unemployment, bankruptcy, poverty, and social unrest. The quest for the endless accumulation of capital that debt requires rules, not only our economy, but our lives. We must do everything that we can to ensure perpetual growth, even if it requires the sacrifice of our environment, as well as our family and social life, political freedoms, health, happiness and well-­‐being. Clearly money has become more important than a clean environment, a rewarding social life, and individual political freedoms. 11 The question, then, is it possible to construct an economy in which continued and accelerated environmental exploitation does not make perfect sense? 5. Conclusions Given the imperative of economic growth and the damage that it has already done and will continue to do at ever-­‐accelerating rates, is there a way to be sustainable? Given the dilemma posed by Tim Jackson, and assuming that growth and sustainability are incompatible, we are left with the task of making de-­‐growth stable. How can we do that? Since growth is made necessity for investors to realize a constant return on capital, clearly the only solution is reform of our financial system. At one time it may have been reasonable to issue money as debt. Theoretically such an arrangement reduces the possibility of excessive issues of currency and the monetary inflation that might ensue. Debt-­‐based money is also a means of disciplining people to labor. Debt, transforms our society into the equivalent of the company town, in which townspeople labor to repay debt to the company, which itself struggles to return capital to its owners/investors. However, debt-­‐based money does not foster long-­‐range thinking, does not motivate people to contribute to the common good, and is certainly not conducive to solving our environmental, social and political problems. Consequently, there is a need for fresh thinking about the economy and a new approach to economic policy deliberations. Anthropology and history, with their comparative approaches and inventory of alternative economic systems are uniquely situated to fill this policy gap. (see e.g. Graeber 2001, 2011) To reclaim financial rights and protect a true market economy, governments must themselves issue currency, rather than leaving that right solely to banks. This is not a radical request. This was done by some American colonies and is done by countries today. While a modest interest could be charged, 12 most issues of currency should be through grants. Existing debts must be modified; the current debt level of countries, governments, businesses, and financial institutions is unsustainable and must be renegotiated. Student loan obligations, which have grown 511% since 1999 (Indiviglio 2011) specifically, must be modified. Limits on interest rates must be lowered, laws regarding bankruptcy must be loosened, and the debts of developing countries must be renegotiated or, in some cases, eliminated. In a world not ruled by capital, we would have recognized that most of these countries are owed more by developed countries than they owe to multilateral institutions and global financial institutions. (see Klein 2010) Local communities should be encouraged to develop their own currencies and economies. (see Hallsmith and Lietaer 2011) There are, of course, financial systems not founded on debt, most notably Islamic finance, and these, while imperfect, can serve as model for others. (see e.g. El Diwany 1997) 13 References Cited Barro, Robert J. And Xavier Sala-­‐i-­‐Martin. 2004. Economic Growth (Second Edition). Cambridge: The MIT Press Brown, Ellen Hodgson. 2010. The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Third Millenium Press El Diwany, Tarek 1997. The Problem with Interest. London: TA-­‐HA Publishers Escobar, A. 1995. Encountering Development: The Making and Unmaking of the Third World (Princeton University Press Garson, Barbara. 2001. Money Makes the World Go Around: One Investor Tracks Her Cash Through the Global Economy. Penguin Gellner, Ernest. 1983. Nations and Nationalism. Ithaca: Cornell University Press. Graeber, David. 2001. Toward An Anthropological Theory of Value: The False Coin of Our Own Dreams. Palgrave Macmillan Graeber, David. 2011. Debt: The First 5000 Years. Brooklyn, NY: Melville House Greenfeld, Liah. 2001. The Spirit of Capitalism: Nationalism and Economic Growth. Cambridge: Harvard University Press Hallsmith, Gwendolyn and Bernard Lietaer. 2011. Creating Wealth: Growing Local Economies with Local Currencies. New Society Publishers 14 Hartwick Elaine, Richard Peet. 2003. Neoliberalism and Nature: The Case of the WTO. Annals of the American Academy of Political and Social Science. Vol. 590: 188-­‐211 Howard, James L. 2007. U.S. Timber Production, Trade, Consumption and Price Statistics 1965 to 2005. Research Paper FPL-­‐RP-­‐637. United States Department of Agriculture. http://postcom.org/eco/sls.docs/USFS-­‐US%20Timber%20Prod,%20Trade,%20Consumption.pdf (accessed March 24, 2012) Indiviglio, Daniel. 2011. Chart of the Day: Student Loans Have Grown 511% Since 1999. The Atlantic, August 18. http://www.theatlantic.com/business/archive/2011/08/chart-­‐of-­‐the-­‐day-­‐student-­‐loans-­‐
have-­‐grown-­‐511-­‐since-­‐1999/243821/ (last accessed on 4/1/2012) Jackson, Tim. 2009. Prosperity Without Growth: Economics for a Finite Planet. Earthscan Jones, Charles. 2002. Introduction to Economic Growth. New York: W.W. Norton & Company Klein, Naomi. 2010. Haiti: A Creditor, Not a Debtor. http://www.naomiklein.org/articles/2010/02/haiti-­‐
creditor-­‐not-­‐debtor (last accessed on 4/1/2012) Maddison, Angus. 2003. The World Economy: A Millennial Perspective. Development Centre of the Organization for Economic Co-­‐operation and Development. Paris Martenson, Chris. 2011. The Crash Course: The Unsustainable Future of Our Economy, Energy, and Environment. John Wiley & Sons McKibben, Bill. 2007. Deep Economy: The Wealth of Communities and the Durable Future. New York: Times Books Mishan, E. J. 1967. The Costs of Economic Growth. Staples Press 15 Polanyi, Karl 1957 [1944]. The Great Transformation. Beacon Press: Boston Reinhart, Carmen M. and Keneth S. Rogoff. 2009. This Time is Different: Eight Centuries of Financial Folly. Princeton University Press Robbins, Richard. 2009. Introduction: Globalization and the Environment: A Primer. In Worlds in Motion: The Globalization and Environment Reader. AltaMira Press Robbins, Richard. 2011. Global Problems and the Culture of Capitalism (5th Edition). Pearson Publishing Scitovsky, Tibor. 1976. The Joyless Economy: The Psychology of Human Satisfaction. Oxford University Press Skidelsky, Robert. 2009. Keynes: The Return of the Master. New York: Public Affairs Speth, James Gustave. 2008. The Bridge at the End of the World: Capitalism, the Environment and Crossing from Crisis to Sustainability. New Haven: Yale University Press Steffen, Will, et al. 2004. Global Change and the Earth System: A Planet Under Pressure. Soringer Victor, Peter A. 2008. Managing Without Growth: Slower by Design, Not Disaster. Edward Elgar. World Commission on Environment and Development. 1987. Our Common Future. Oxford: Oxford University Press. 16 Figure 1 Resource Depletion and Economic Growth 17 Figure 1. (Graphs from W. Steffen et al, Global Change and the Earth System, 2005) 18 Table I: U.S. Total Debt by Sector—January 1, 2012[1] Debt Type Debt Amount Debt per Person Federal Government Sector $15.22 Trillion $49,097 State and Local Government Sector $3.01 Trillion $9,677 Household Sector $13.22 Trillion $42,445 Business Sector $11.63 Trillion $37.516 Financial Sector $13.6 Trillion $43,871 Other $2.24 Trillion $7,226 Sum of all government and private $58.9 Trillion $190,000 sector debt [1]
(Data from Grandfather Economic Report: http://grandfather-­‐economic-­‐report.com/debt-­‐
summary-­‐table.htm) 19 i
There are other factors, such as inflation rates, that need to be factored in to estimate the ability to repay the loan
and its total worth, so this is a greatly simplified scenario. The illustration also doesn’t consider my ability to rollover portions of the debt in the event that it can’t be fully paid.
ii
While municipalities, corporations, businesses, and consumers have and do default on their debts, the U.S.
government has never defaulted (see Reinhart and Rogoff 2009)
20