New column up at the Atlantic, on whether or not capitalism requires infinite resource exploitation:
When we bump up against our planet's resource limits, the story goes, capitalism goes bye-bye. But is it true? Maybe, but I have my doubts...
The simple Econ 101 theories that are used to justify free markets don't even have growth in them! In Econ 101, capitalism works because people gain from trade, not because they have more and more to trade over time. Efficiency, not growth, is the gold ring. In those simple toy economies, people just keep on cheerfully making their bargains of cattle and grain until the Sun explodes...
But who cares about economic theories, right? What does history tell us?...
[M]odern history doesn't seem to favor the "end of growth = end of capitalism" thesis. After all, middle-class incomes have been stagnating in rich countries on and off since the early 1970s. Energy and water - certainly the most important natural resources - have become scarcer and more expensive. In other words, we really have started hitting our resource limits. And yet in many ways, rich countries like the U.S., Europe, and Japan have become more capitalist since the 70s, with lower taxes, deregulation, widespread privatization, and a bigger role for financial markets (not that this has always worked out well, obviously!). Despite the increasing prices of oil and gasoline and water, people in the developed world have not clamored for capitalism's downfall...
Looking at history, we see that the biggest challenges to capitalism actually came during times of rapid growth...
Although it's less glamorous than the imagined utopias of the left or the right, the boring, pragmatic, plodding old "mixed economy" has proven to be the most robust, through times of growth and times of stagnation.Read the whole thing here!
I never bought it either. But it might be the end of capitalism as we know it (i.e. debt driven financial capitalism).
ReplyDeleteIronically perhaps, what would mean the end of capitalism as we know it is a technological singularity.
ReplyDeleteIf there is no growth but continuing productivity growth would unemployment not become a significant issue?
ReplyDeleteNo, this should result in increased consumption of leisure.
DeleteYou surely have the causation back the front (i.e. the combination of no growth and productivity growth) means that leisure is increasing either voluntarily or involuntarily. If we are at full employment then it must be voluntary.
DeleteBut I actually think this is misguided thinking here. You have to ask whose productivity is growing. It can be true that technological advance allows us to produce more with less labour, but maybe we will use the saved labour for something else at much lower productivity (i.e. we will start doing things that weren't worth it before). Productivity (as measured by what we produced before resources got short) might fall, but it might be a good thing. We may be doing things better - (recycling more, repairing machines instead of throwing them away). We may live just as well.
DeleteInteresting, I wonder that if growth is not resource constrained as you suggest, if its possible to stop growth as long as our wants are also unconstrained. If we want it, and want more of it (unconstrained), we'll find a way to supply it. Demand calls forth it's own supply, and demand keeps shifting right absorbing efficiency.
ReplyDelete"Demand calls forth it's own supply" - Say's law backwards?
DeleteIsn't this confusing "desire" with "demand".
And as was pointed out in other places the choice could be made for more leisure.
But could there be a capitalism without capital goods?
ReplyDeleteOur problem today seems to be a scarcity in safe assets. Lots of savings with nowhere to go. Real rates on safe investments are zero or negative. If this continues, there would still be a free market, but why call that capitalism?
A service economy where people only exchange hair cuts for massages or piano lessons for workout sessions could have full employment, but there would be no need for savings with no capital goods to invest in and possibly savers would have to pay young people to go into debt (permanent negative real interest rate). Free market yes, even growth (growth in human capital), but capitalism?
Hair cuts still need capital (a building, a chair, scissors, mirrors, etc.). So do piano lessons! They also need energy, whose production requires even more capital, and so on.
DeleteHair cuts need oxygen too! But it's not scarce. If we run out of enough capital goods for all the savings to invest in, capitalism is over.
DeleteKeynes called it "the euthanasia of the rentier"!
Delete"If we run out of enough capital goods for all the savings to invest in, capitalism is over."
DeleteI am not sure what you mean. You still need to invest to replace the capital lost due to wear and tear (depreciation). This is a standard model in economics (so-called Sollow model)taught to undergrads. There is no technological change so in the absence of population growth capital is fixed, yet investment is positive and capital owners still receives a positive price (unlike air). So yes, there is still capitalism!
There are three factors of production: labour, capital and land. Let's forget about land, land is not capital.
DeleteIf our hairdresser needs money to replace a scissor, the creditor (which could be the hairdresser himself in the case of selfinvesting) will make a profit only if the real interest rate is positive. There is no a priori reason for this to be the case. If the supply of credit is much higher than the demand for debt, real rates can be negative. So creditors don't make any profit, they even lose money. Assuming perfect competition, the hairdresser can calculate the cost for going into debt (to buy the scissor) into his prices, so he will get a positive price for the scissor, but there will be no profit.
If investing doesn't yield profits, if the rate of return is even negative, it's right on the mark to say that capitalism is over!
If the rate of return is negative then the hairdresser will have an incentive to borrow monay and just hold them. A negative rate of return for the lender means a positive rate of return for the borrower. I think we can all agree that this is an unrealistic scenario.
DeleteHere are the basic insights from theory. Suppose that credit is high so the rate rate of return falls. This makes it cheaper for every hairdresser to borrow, and motivates them to invest in more chairs and scissors. But as the amount of capital grows so does depreciation and break-even investment (the amout of investment necessary to keep capital constant). Eventually capital stops growing because all investment is used to replace the wear and tear of the larger amount of capital. The question is, can this happen before the rate of return becomes zero? Zero return would mean that the last unit of capital bought was completely useless so producers would not want to add any more even if they can borrow for free. Such an abundance of capital where there is no productive value from adding one more scissor, computer, truck, smartboard, whatever, is hard to imagine. Moreover, it is unlikely that creditors will continue to save as much as the rate of interest declines. At some point, why forgo going to Aruba for vacation when saving the expenses does not reward you much?
CA,
Deleteyou are confusing real and nominal rates of return. The incentive to borrow and just hold money if the nominal rate is zero or negative is not so clear cut. The expected inflation may not eventualise.
And CA - think about a situation where people are expecting resource shortages or destruction (e.g. a war in the future). Then everybody will try to save. Some investments will still have a positive return. But NOT necessarily the marginal investment. Some marginal investments may just ensure an income in the future that is less than what is possible now. Think about people buying an annuity - they are swapping return for safety. Unless you consider risk as well as return you have an incomplete model.
DeleteReason,
Deletehow am I confusing them? The discussion concerns the rate of return to capital being negative because of an over-abundance of capital. You are right that the real rate of return to a particular asset can be negative if inflation exceeds the nominal rate. In fact, money holdings have a negative real return. However, these assets usually have some other redeeming quality, for example liquidity. But this is not what we are talking about here.
CA
Delete"If the rate of return is negative then the hairdresser will have an incentive to borrow monay and just hold them"
See above re real and nominal interest rates.
And I just thought of course that these discussions of the "impossibility" of negative real interest rates - there was one at A Worthwhile Canadian Initiative - are ignoring the potential assymetry between "inflation" - i.e. the cost of goods and "inflation" in wage or other income levels. If for some reason there is a significant fear of a fall in future income (and there might be good reasons for that - consider resource shortages, disturbances, ecological disaster, terms of trade changes) then people borrowing will pay back not in terms of goods - but future income. To the extent that there is diversion between the deflators for those two concepts, the calculated real interest rate might be misleading.
DeleteNot diversion - divergence.
Deletereason,
Deletebut what I said would be true in a zero or very low inflation environment. To have a meaningful negative real rate you would need a negative nominal rate. You are assuming a positive inflation environment, but this need not be the case. Moreoever, once again, the argument the anonymous is making is that physical capital can become so abundant that it is completely free or even a bad, in which case "capitalism is dead". But if the hairdresser is earning a negative return on his chairs and scissors there is not reason for him to continue to own them. He would rather keep his wealth in some other asset or reduce his wealth by consuming some of it. There is no incentive to hold capital that is expected to earn a negative return in the long run. I am not sure where your second comment fits to all that.
OK -
Delete1. Agreed what you said is true in a zero of very low inflation environment. In that case hoarding is indeed a real danger. Which is why we should avoid such an environment.
2. Yes, I do not believe that the low return to capital is a real effect. It is much more a financial effect (because the return to investment relevant to interest is the financial return).
So it seems you are arguing for NGDP targeting?
"So it seems you are arguing for NGDP targeting?"
DeleteI would if I thought the Fed has the tools to meet such a target. I am not convinved that it can.
I'm going to be that boring one that say "People during the slave economy probably thought their kind of economic system would last forever".
ReplyDeleteOn another note. If a society (think Sweden in the 70's and 80's mixed with some other society) has a government which accounts for 50 % of the country's GDP and then has an non-profit sector that stands for another 25 % and then has competitive (capitalist) companies standing for the last 25 %. Is this still a capitalist economy?
I mean, isn't it possible that we still have capitalism in 100 years, but that there is some other form that represent the majority of the economic system. Just like we in 14th century Europe had a "farmer" or "guild"-economy, but with some (financial) capitalism.
Im not sure how growth fits into all this. Resources are a constraint on GDP, not GDP growth. Those growth-less toy economies we played with in micro don't work if there's no income at all.
ReplyDeleteTo put it differently, a lot of economists have pointed out that GDP is basically just a measure of how fast we turn resources into waste. A binding resource constraint, absent some significant improvement in efficiency, will cause GDP to collapse.
I don't know what the socialists plan to do about that though.
On the time value of money, could you unpack your argument a little more? You proposed that debt wouldn't go away if there is no growth, recalling examples from past stagnation periods. But I think that in these periods of stagnation, lenders were willing invest only because their behavior was driven by expectations: that the stagnation will end and growth will enable the borrowers to pay back with interest. Surely, if lenders were truly rational predictors of the future (in which they see no growth), they wouldn't lend somebody money, knowing fully they would not be compensated for the time value of money. So for me it is hard to see how a debt-financed economy can continue to exist with no growth.
ReplyDeleteInasmuch as economics is about the allocation of given resources among alternatives, it is not about capitalism. Thus, it cannot answer the question Noah poses.
ReplyDelete(I like Luigi Pasinetti on this theme.)
The great paradigm shift is underway as we come to the reality that the "perpetually rising tide" has come to an end and a new tide is underway. But it has taken the realities of the collapse of the financial system and the in your face signs of Global warning for Americans to come to this point of being able to have an intelligence discussion about the new paradigms of capitalism we are entering.
ReplyDeleteThis discussion must included destructive creation which comes in many forms. Starting in the 70s we had the destruction of the public sector into privatization and the destruction of banking institution and into a system of financial engineering. Today the public sector is in the business of signing contracts and writing checks and the banks are bundling loans to sell as MBS. We know what shapes the public sector and banks are in today.
Today Wall Street is hoping for mergers and acquisitions to lift the market. Mergers and acquisitions is another form of destructive creation when one entity comes to an end in hopes that another entity will grow. As the end of growth as we know it comes to end and destruction creation continues the anxiety in our nation builds because Americans know that there chances of them being on the destructive side are increasing.
"This discussion must included (SIC) destructive creation which comes in many forms."
DeleteThis is interesting. In the early post war period (up to the 1970s) growth was so rapid and labour so scarce, that there was hardly any "destruction" necessary. There was some (as old technologies were replaced), but not much. But when growth starts to plateau - some sectors will be in stagnant or in decline. People who have invested their human capital in knowledge (and location) specific to those industries may have face jolting changes. A resource constrained world, would suffer even more from this. Specialisation is the goose that laid the golden egg. But it has a downside.
In fact, Occupy Wall Street itself - a movement made up mostly of economically successful, educated people - turned out to be mostly just a protest against the excesses of the finance industry and the pro-rich policies of the GOP, not the beginning of a global anti-capitalist revolution. Graeber may have given the movement its moniker, but OWS was also known as "Krugman's army." Krugman is no anti-capitalist.
ReplyDeleteA few nitpicks:
Were the protestors actually economically successful? Educated, yes, but my impression is it was mostly debt-ridden unemployed students.
It certainly didn't kick off a global anti-capitalist revolution, but it's a false dichotomy to suggest that it was then only about the financial industry and the GOP economic policies. It's biggest success, IMO, was bringing the problem of inequality into acceptable discourse (which you might not consider as intrinsically capitalist, but the free market's most dogmatic defenders probably do).
I'd never heard the term Krugman's Army, and I only get about 1000 hits on Google. I get 3 million for "Occupy Wall Street" paired with "Anti-Capitalist".
Looking at history, we see that the biggest challenges to capitalism actually came during times of rapid growth. The early 20th Century was the heyday of communism, anarchism, and socialism. But this was a time of immense growth, technological progress, and increased material standards of living. It seems possible that those alternatives to capitalism gained popularity precisely because rapid growth disrupted the stable social systems that had been in place before the Industrial Revolution.
A bigger problem:
How could you write this paragraph and not even mention the Great fucking Depression? I'm honestly a little stunned.
Lars
How could you write this paragraph and not even mention the Great fucking Depression? I'm honestly a little stunned.
DeleteThe communist revolution in Russia, and most of the strongest communist and anarchists movements in Europe happened before the Great Depression. The biggest beneficiary of the Great Depression was fascism, not communism...