Monday, August 29, 2016

The Growth Trap

The  Growth Trap

Every economy, every self-organizing system which is not also self-limiting within the bounds set by its environment, grows until it exceeds the ability of that environment to support and sustain it.  It then collapses.  

The collapse of a modern economy can be expected to be catastrophic.

When an economy first develops, acquiring resources is difficult and expensive. There is little surplus to be 
invested, and growth is slow.  This is despite the fact that resources are often accessible and plentiful.  The methods of extracting the resources are primitive and inefficient, and there is little surplus.  The demand for and uses for new resources are limited, and efforts at developing new resources are often desultory. 

However, as infrastructure is invested in and developed, the relative cost of acquiring and developing resources decreases.  More uses are found for extracted resources, providing motive for ever greater extraction. Since it is easier and cheaper to develop uses for resources, rather than new sources, demand, in general, outstrips supply, keeping the profit margins of producers high. For the producers, this means more resources are available to invest in expanding extraction and distribution, thus increasing the supply of these extracted resources available to be put to other uses in the economy.    

With growth, the economy is able to exploit resources at an accelerating rate.  The limiting factor is now no longer the costs of extraction, but the limitations in demand, the final uses for the resources, and the necessary distribution systems, which also must be developed.

In order to extract, distribute and employ the resources, it is necessary to develop an infrastructure, There is a cost, in resources consumed, to developing this infrastructure, There is also a cost to maintaining this infrastructure, and there is also a cost to operating this infrastructure. 

When resources are still plentiful and cheap to extract, these costs are relatively low.  The infrastructure grows robustly, both because the costs of extraction are low and because it is still new, So maintenance costs are also low.

Clearly, however, with finite resources, or even a finite average density of resources, or with a finite rate of renewal of resources, there are limits to any economy’s ability to grow. 

Indeed, as the plentiful and inexpensive resources are consumed, ever more marginal resources, resources more costly to extract and process, more distant and difficult to transport, become necessary to expand and sustain the economy.  The infrastructure must be expanded to develop these resources, and at an increasing cost.  What is more, the increasing cost of extraction must be passed on, and this increases the maintenance cost of the entire infrastructure. Less and fewer resources are available for expansion of that infrastructure, which is necessary both to supply other uses and to extract the ever more marginal and distant resources.  These costs are compounded  by the fact that the increasing cost of extraction also increases the cost of operating the infrastructure.

Eventually, as the availability of resources decreases, and their cost of extraction increases, the cost in resources necessary to develop new infrastructure, and more importantly, the cost in resources necessary to maintain and operate  the infrastructure already built, exceeds the ability of the economy to extract benefits from those resources. 

Increasingly, maintenance will be sacrificed to cover the increasing costs of operation. The result will eventually be a stage where the infrastructure can no longer be maintained, when the maintenance budget passes below a critical threshold, but will be subject to increasing catastrophic failure. This threshold is roughly when the budget is no longer able to cover both preventative maintenance and essential repairs. With inadequate preventative maintenance, essential repairs will increase, eating into the budget for preventative maintenance. As the budget for preventative maintenance decreases, the need for essential repairs will increase, in a vicious spiral. This process is sped by increasing costs of operation, which the declining quality of the infrastructure also aggravates, and by the increasing rate of extraction of money and real resources from the real economy by the financial economy. 
In the case of the modern economy, then, there are two relevant systems:  The real economy itself, and the financial economy which feeds off the real economy.  The financial economy produces nothing of substance itself. When useful is serves as a multiplier of production, by increasing the efficiency of allocation of resources. When overgrown it diverts more resources to itself than it saves the real economy by that allocation of resources.  The result is a decline in the efficiency of the real economy, and its ability to grow. 
In any case, this happens at a late stage in the development of the real economy, when the resources available to the real economy to mount opposition to the growth of the financial economy are diverted away. Part of this is the result of increasing real costs in the rest of the economy outlined above.  Part is by the increasing diversion of resources by and to the financial sector itself.  (Inter-sectoral competition for resources is seldom considered by business leaders.)  Effective regulation of the financial sector then fails. (One part of this process is that one of the consequences of the increasing concentration of wealth is that the value of non-financial rewards offered by the society declines, and become devalued, reducing the cost of corrupting other institutions.)  Once the financial economy evades the controls set on it by the real economy, it mimics the real economy:  It grows without bounds. Feeding off the real economy, it is also a non-self-limiting, self-organizing system.. It too is subject to overgrowth and collapse when it exceeds the ability of the real economy to support it . When this occurs, if  and only if it occurs before a critical point in the growth of the real economy, the real economy may yet be saved.  This is not because the real economy is self-limiting.  It is only because it has been increasingly organized to service the financial economy, and with the collapse of the financial economy, the real economy may be reorganized into a self-limiting form.  This is not guaranteed.  This may not even be likely.  And this still depends on whether or not the real economy is already too big to be reorganized into a sustainable form.  

So the financial sector then grows until it exceeds the ability of the real economy to sustain it. This growth happens much more rapidly than happened in the real economy, since the financial infrastructure is much less expensive to develop than the real infrastructure. The financial economy diverts resources from the real economy to itself by making finance nominally more profitable than real investment, thus diverting money, that is demand, on resources away from the real economy. Money is taken out of the real economy faster than government spending can pump it in. This causes deflation in the real economy. Producers in the real economy are hurt two ways.  Because of lags in production, prices of final goods are reduced vis a vis the prices of the factors which went into them.  And demand for those final goods is also diminished. Even as this happens, the quantity of various forms of money in the financial economy increases without bounds.  This is accompanied by ever greater concentration of wealth, and ever more extravagant expenditure. This growth is in the demand side of the economy, which conceals decline in the extracting and manufacturing sectors.  GDP, for instance, does not distinguish between growth in these producing sectors, and growth in consuming sectors such as retail and, increasingly, finance. 

The real increasing costs of maintaining the real economy, (and in particular its infrastructure,) and the increasing real costs of its extraction of real resources from the natural environment, are hidden by the mechanisms of externalization of costs, both directly onto the environment (pollution) and onto labor, and by government subsidies, by defaulted debts, and by the deferred maintenance of the real infrastructure.  These manipulations make the cost of extraction, transport and fabrication of real resources appear cheaper than they really are.  However, while in nominal terms the costs are reduced, in real terms the costs cannot be reduced, only hidden, and must increase over time.  The real costs of these manipulations, however, transfer these costs onto other parts of the producing sector. This increases the costs of production in these other sectors, an increase greater than the reduction in apparent nominal costs.  These manipulations of the real economy, as well as the financial manipulations which enable them, enrich the financial and consuming sectors, and impoverish the actual producers of real goods and services.  The productive sectors are deprived the real resources necessary to grow, and ultimately to maintain themselves.

This financial extraction becomes ever more difficult and costly, as the real economy becomes progressively impoverished.  The concentration and availability of extractable community assets declines.  This decline in efficiency means more labor is required for the financial sector to extract wealth from the real economy. Thus, even though most labor is no longer involved in real extraction and production, there results the paradox of an increasing burden on labor in non-productive jobs. This is obscured by the fact that these financial costs are increasingly externalized onto the real economy, ie absorbed by non-financial industries and labor . However, because of the decreasing efficiency, the profit to be made off these jobs is very low, and decreasing, and the pay must be commensurate.  

Meanwhile, since the cost of all maintenance increases, the cost of maintaining the burden of the financial and consuming sectors is also increasing.   the costs required for extraction increase, the actual financial profits decline to zero and even go negative. 

The degree of financial exploitation is not reduced, but merely more resources are devoted to the process.  Even as this happens, fewer resources are available to the real economy. This is both because the financial sector externalizes its costs onto it onto the real economy, (and thus appearing artificially profitable,) and because greater real resources must be expended in acquiring resources from an increasingly impoverished natural environment.  Combined, these processes render the usual indicators of economic health and prosperity at least useless and even more likely misleading. Much growth occurs in the wrong sectors, and is indicative of impending failure, rather than success. Further, with increasing deregulation, more fraud may be expected, both in production, and in reporting on that production.

Mankind has yet to develop a modern, self-limiting economy. Hunter-gatherer societies existed in ecological equilibrium with their environment, fitting into the limits set by the rate of replenishment of renewable resources.  For pre-industrial economies, the growth trap must be considered as a possible factor in their ultimate decline. Since economies ultimately serve a population, clearly, with unrestricted population growth, no self-limiting economy is possible.  And any non-self-limiting economy will be subject to the growth trap. 

More to the present, however, there is no evidence that capitalism is self-limiting.  Only a self-limiting economy can survive the growth trap.  Only an economy which can limit its consumption of renewable resources to some rate less than the rate those resources are renewed, and its consumption of non-renewable resources to some rate less than those resources can be recycled, can be indefinitely sustained.  All other economies will fail. And a failing economy will be incapable of providing sufficient resources for the survival of most of its members.  Indeed, because of the enormous efficiencies brought about by a modern economy, if that economy fails, such a failure will be catastrophic, and only small percentage of the people who depend on that economy can be expected to survive.

There still seems a choice, however, although, judging from their antics, our political class seems incapable of confronting the issue.

Revised and expanded Sep 7,2016, Nov7, 2016, Feb 17, 2017