1 Nov 2012

Capitalism, growth, steady state and prosperity

AC asks:
I assume you're familiar with the zero-growth movement, which advocates for ending our reliance on economic growth as the be-all and end-all of human achievement. In a way, it demonizes the market-as-god concept and tries to instead put human and environmental health/sustainability as the ultimate goals of society.

So, my question for you is this: how would market-based water pricing and private water companies operate in this new type of zero (or negative) growth economy/society? Or, do you think anti-growth types are all head-in-the-cloud idealists? Or something else?
First of all, capitalism is compatible with growing, shrinking or "steady-state" versions of the economy (in aggregate or per capita) because capitalism and markets deliver value in exchange for profits. If people want to eat meat, then capitalists will deliver. If they want to eat carrots, then markets will deliver. Will we see profits and employment grow? Not if productivity outpaces demand. Is that a problem? Only if you worry about the physical economy and per capita consumption (on a value-added basis) is falling.

Since neither of these is likely, I'd predict that capitalism will deliver when people are consuming fewer goods (perhaps of greater value) and/or shifting to services. Also note that capitalism is compatible with improving the provision of non-private goods (e.g., parks, roads, etc.)

Just as a side-note, remember that "steady state" is really a myth in both biological and cultural terms. Evolution and history only run in one direction, so it's really impossible to "stay steady" (unless you're dead). I'd suggest that we use the terms "evolution" to refer to the changes we prefer in natural and human processes and "crash" or "revolution" to refer to the uncomfortable, costly and abrupt changes that we'd prefer to avoid, but that may be worthwhile when the path is unsustainable.

Bottom Line: Humans should pursue economic growth only when it's compatible with increasing human welfare, not as a bureaucratic fetish or outcome of processes that privatize gains and socialize losses. The capitalism that is compatible with both can be abused by political actors who do not serve the common interest.


  1. The idea that capitalism depends on continuing gowth is one of the most common misunderstandings in economics. Capitalism surely allows more growth than any other system that has been tried from time to time, but as David points out it is compatable with poitive, negative and zero growth conditions.

    Because most governments have mortgaged their country's futures and have large unfunded liabilities I think governments value gdp growth more than most individuals. Macroeconomics seems committed to figuring out how to grow our way out of politically expedient decisions of offering benefits today while deferring costs.

    A drop in the in the growth rate means a drop in current and future tax revenues, which leads to larger than budgetted deficits, which may lead to cuts in popular government programs, which may lead to elected officials not being re-elected.

    While happiness is a matter of direction and enjoying improving future conditions is an important motivator for most people, different people define improving conditions differently and increasing consumption is not everyones idea of progress. Some value leisure highly, or perhaps they value universal equality and the extension of basic human rights to everyone.

    Bottom Line: I expect most people can think of something they value highly and want more of that is not tied to economic growth.

  2. Re: David’s bottom line— How is growth distinguished from an economic bubble? Could it be that the pursuit of economic growth to “increase human welfare” ends up only widening the swing of business cycle fluctuations—bigger booms and harder crashes? As Schumpeter wrote, “A system—any system, economic or other—that at every given point of time utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter's failure to do so may be a condition of the level or speed of long-run performance.”

    Jay is astute in his observation that it is a consistent political propensity to opt for better short-term outcomes at the expense of better long-term outcomes. (Social Security, Medicare, for example) Politicians must deliver the good times, and quickly. But the desirability and range of policy options at each successive decision point along a problem’s timeline progressively deteriorate as the long-term consequences inevitably emerge.

    Bottom line: slow, steady, sustainable growth may be a good outcome but not perceived as such. Good long-term policy is unpopular in the short term.


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