G'day and welcome

G'day and welcome. This is a journal of my journey with yin/yang polarity.

Polarity can be used to understand all natural phenomena; from the origins of the material universe and life, through the nature of consciousness and on into social forms. I hope that you will join me on this journey........

Tuesday, April 26, 2011

Global Solutions to Economic Growth

The following article is not specifically related to polarity but is rather an exploration of some of the issues that flow from by broader polar analysis of society, which can be found elsewhere. Partly because if it's length (3,750 words) it was rejected by online-opinion where I submitted it and where the previous articles here were published, so if you don't read it here there's a good chane that you'll never read it. Be warned, however, that having been working hard as a carpenter, and seeing the birth of my first child over the last few months, my writing style may be a little rusty. (I've been told it's not my best.) Let me know what you think.

Global Solutions to the Challenge of Economic Growth

It is some decades now since concerns about economic growth have come to light. There is now a wealth of literature to read, Youtube videos to watch etc, on the subject. Most specifically a couple of problems stand out.

The first of these problems relates to the way that we measure economic activity with the assumption that all activity is good. Activity within a nation’s economy is measured in terms of the gross domestic product or GDP, (sometimes known as GNP or gross national product), which adds up everything that is bought and sold within the nation. It is this GDP that apparently needs to grow in order for our society to thrive.

GDP, however, is only a measure of activity within the economy. It is not indicative of welfare outcomes resulting from that activity. It is actually quite possible for the economy to grow while the society itself is going backwards. As a simple example of this, let’s say that I go on a drunken rampage, smashing the fences, cars and other property belonging to my neighbours. As a result of my criminal behaviour, my victims will have to spend money repairing their property, installing security systems etc, thus increasing the GDP.

As another example, we could look at recent reports which suggest that the tsunami and nuclear disaster in Japan could boost that nation’s economy. ‘Great news everyone, there’s going to heaps of jobs relocating towns, burying people and rethinking our whole energy strategy!’ This sentiment actually seems quite politically incorrect to me, but in our GDP focused society, the incongruence seems to have slipped by under the radar.

Looking at the other side of the coin, welfare may be increasing while the economy is slowing down. Let us say that you and I become close friends and we start sharing the use of household resources. We only need one computer, one fridge, one tv. Because each of us is spending less, our harmonious lifestyle is causing a decline in the GDP.

Every time we use more than we need of something or use it inefficiently, it is good for the GDP. When we use resources efficiently, however, either through sharing or personal ingenuity, it is bad for the GDP. There is obviously a fundamental problem here. In short, while it is often used as such, GDP is simply not a measure of progress with our society.

The second main problem associated with economic growth is that it is not ecologically sustainable.

In principle it is possible for the economy to grow without it impacting adversely on the environment. We could for example employ people to go around planting lots of trees. In reality however, most economic activity does have some ecological impact. A growing economy therefore generally involves a growing impact on the natural environment.

The well respected ‘ecological footprint’ method of determining ecological impact tells us that in 1961 humankind were using approximately one half of what the Earth was capable of supplying on an ongoing basis. We were “…..living off the planet’s annual ecological interest, not drawing down on its principle”. (www.footprintnetwork.org) Fifty years later and we are using 1.3 times what is sustainable.

To make matters worse, economic growth is exponential. At 2.5% per annum, the economy will double in size every 29 years. At 8% per annum, it will double in 10 years. This means that even if we were to reduce the ecological impact of our economic activity to a small percentage of what it is today, with constant growth, it will only be a matter of decades before we are once again exceeding the Earth’s carrying capacity.

The renowned ecological economist, Herman Daly, has pointed out the absurdity apparent when we combine the above two problems. “Growth in GNP should cease when decreasing marginal benefits becomes equal to increasing marginal costs. But there is no statistical series that attempts to measure the cost of GNP. This is growth mania, literally not counting the costs of growth. But the situation is even worse. We take the real costs of increasing GNP as measured by the defensive expenditures incurred to protect ourselves from the unwanted side effects of production and add these expenditures to GNP rather than subtract them. We count real costs as benefits. This is hypergrowthmania.” (‘A Steady State Economy’ 2008 – Herman Daly)

In other words, in our pursuit of economic growth, we cause unwanted side effects such as air, water, and noise pollution, rising sea levels, social dissolution etc. As our economy grows, so do these side effects. We then have to work to protect ourselves against these undesirable side effects, but because this work also counts toward economic growth, it is considered as positive. It is no wonder that Daly has to invent words to describe this foolishness.

So why the focus on economic growth? Why, when it has these obvious problems have the powerbrokers of the world been so consistently focused on economic growth?

The answer is that we are addicts. We have allowed our economic institutions and processes to become dependent on growth and now we cannot do without it. Economic growth is like a nasty drug that, while it might be killing us in the longer term, is keeping us sane in the short term. If we don’t get our hit, we get a big headache, get depressed, fall down and start shaking uncontrollably.

Within our compromised, growth addicted economic system, declining economic growth means decreasing profit margins and business confidence, investment slowing down, unemployment increasing, and people becoming scared so they stop buying stuff. It is a nasty, self-perpetuating cycle.

These are genuinely painful outcomes and our politicians are right to be wary of them. We cannot simply stop growing and hope for a positive outcome. We do need to break our addiction, but in doing so, we also need to make sure that we have the systems in place that enable us to live in a post-growth economy. It is constitutional or structural flaws within our economic system that have led to our addiction to economic growth, and in order to reduce this dependency, it is on fixing these structural weaknesses that we need to concentrate.

I do not want you to lose hope, and I myself believe that we are quite capable of the undertaking, but please do not think that dealing with these structural problems within our economic system will be a small issue.

The problems that we are talking about here are quite multifaceted, involving a number of the mechanisms and patterns that we take for granted in the modern capitalist economy. As well as being responsible for our addiction to economic growth and contributing to our thoughtless rush toward ecological devastation, these same structural flaws can also be understood to be responsible for the ever increasing gap between the rich and the poor, as well as the fickle, boom/bust nature of our economy among other things.

Just as the problem is multifaceted, likewise is the solution, involving significant change throughout both our economic system as well as the broader patterns of our global society. Let’s take a look at some of the changes that we might want to be making. As you will see, some of these changes are more mundane while others will involve deep structural shifts within the economic system.

Measuring our progress – I mentioned above the absurdity of using GDP as a measure of progress within our society. Perhaps the Holy Grail therefore of ecological economics, (or whatever it is that we want to call post-growth economics), is the creation, with wide acceptance, of what has come to be know as a ‘genuine progress indicator’ or GPI, that can be used instead of the GDP.

The development of such a GPI is a complex problem. It will have to be useful for analyzing our activities on the small scale and the large, and will involve qualitative judgements as well as quantitative measurements. In its application, the GPI will need to look at a range of issues and weight them for their relative importance in each circumstance. These issues include:

• Is the gap between the rich and poor reducing or increasing?
• Is ecological sustainability being reinforced or compromised?
• Is the cohesiveness of our communities being adversely or positively affected?
• Are our activities supporting or eroding democracy within our social institutions?
• Are we or are we not supporting a healthy work/life balance?
• Are we gaining or losing efficiency in our processes of production?
• Are we wasting or conserving resources?

Consumerism – Without doubt, one of the drivers behind our continually growing economy is our continually expanding appetite for ‘stuff’. We all want to live in large houses filled with fancy fittings, drive flash cars, take luxury holidays, etc. Not only is this a drain on natural resources, in order to pay for it all, we are going into more debt and working harder than our parents or grandparents ever did, thereby sacrificing our family and social lives.

In trying to reverse this consumerism, while it is true that many of us could learn to relax, and make do with a little less, we do need to recognize that as well as being a driver within the system, consumerism is a product of the flawed economic system just as surely as are environmental damage and a big rich/poor divide.

The structure of the modern economy, with its free-trade and high levels of private ownership, combined with the onset of the ‘age of oil’, which has allowed us to travel and transport goods great distances, mechanize food production etc, has led to the situation whereby as individuals or small families, we have become very independent.

We drive to work to earn money, and drive to the supermarket when we need something. There is little interaction of any kind between neighbours, let alone any common ownership of assets, sharing of resources or working together for common goals. If we want something, we buy it ourselves.

The isolated individual simply needs more stuff than does an individual living within an interactive community. Added to this we have the psychology. Clive Hamilton and Richard Denniss allude to some part of that: “It is necessary to judge someone by the type of car in their driveway only if you have never actually met them.” (Affluenza 2005)

Privatization, centralized production, free-trade, true value and profit taking – Competition between self-interested parties is the engine of a healthy economy! That’s right isn’t it? That is what Adam Smith told us in 1776, and it is certainly the direction that our regulators have been pushing us. The modern economy is heavily privatized, and cooperation is pretty much forgotten in economic analysis and modeling.

Having forgotten cooperation, we have allowed our neighbourhoods to become economic (and social) vacuums. Likewise our governments are reduced to administering roads, schools, hospitals, pensions, the military etc. The vast majority of the productive aspect of our economy is performed by the private sector, and productive assets are held in private hands.

Part of the problem here lies in the continuing concentration of wealth in already wealthy hands. Small farms either sell out to larger ones or work like slaves for ‘megacorp distributions’, smaller shops are undercut by larger ones and forced out of business, etc. The steadily increasing gap between the haves and the have-nots is the result.

In terms of growth, we have the ubiquitous drive for profit, with each company trying to make more money through whatever legal means. With the widespread taking of profit, we also have a situation whereby each of us is paying a little bit more for each thing we buy than it costs to produce it. This means that we have to work a little bit harder or make more profit ourselves, in order to keep up. We are in effect chasing our tail, with the growing economy as the side effect.

Cooperatively produced items on the other hand, are produced and distributed at cost.
Having a strong cooperative aspect to the economy could therefore provide price signals against which items sold in the competitive aspect of the economy could be measured. This would mean that profit taking would tend to be restricted to those that can bring something new to the market or provide genuine improvements in efficiency. A functional cooperative aspect to the economy would therefore both positively restrict economic growth, and through providing price benchmarks, provide a strong disincentive against inflation.

Our systems of production have also become very specialized and centralized. For example, one region may grow wheat, and that is pretty much all that that region will produce. Most of the farms in the region will be either owned or controlled by one distribution company which then ships the wheat all around the world. Eggs are produced in huge factories, as are the pens we write with and the fans that blow wind at us.

Ever heard of putting all your eggs in one basket? What happens to that wheat growing region if the bottom drops out of the market or to the construction industry if the housing market collapses? What’s more, disruption in one sector of the economy can have implications far beyond a particular region or industry. The global economic system is deeply interconnected, and if one sector of the economy suffers, say the housing bubble bursts or the oil price spikes, the rest of the economic dominoes begin to fall: The share markets fall, consumer confidence drops, unemployment rises etc.

Having much more decentralized processes of production, whereby economic diversity and relatively high levels of local and regional self-reliance are the norm, on the other hand, would provide the system with much more resilience. In this context we find that free-trade has become our enemy: The most obvious and effective mechanism that we could look at to stimulate change toward economic diversity and local self-reliance is to provide financial incentives for people to source the goods and services that they buy from as close to home as possible.

Along with this decentralization, promoting a much stronger cooperative aspect to the economy than exists currently would also provide an important buffer against economic hardship, enabling people to shuffle from one job to another within government or neighbourhood businesses, thereby spreading the burden of any economic downturn.

Banking, Money, interest, inflation and land ownership – The widespread existence of interest bearing loans is another part of the pattern that has led us to ‘hypergrowthmania’. Interest works in a similar way to profit in the way that it makes us chase our tail. Not only do we pay interest on our own debts, businesses often finance their operations through borrowing, so the cost of this borrowing – the interest – becomes built into the price of much of what we buy.

So here we are once again paying more than what things are really worth, each year needing that little bit extra to cover the interest on last years loans. The economy grows as we expand our own businesses and work a little bit harder in order to pay for it.

Linked to the interest that is payable on money, we also see the constant growth in the value of other assets such as property and shares. People expect their assets to grow in value. Unfortunately, under this scenario of constantly increasing asset value, it is those with the most assets that benefit the most while those without assets find their lifestyles increasingly unaffordable. Poor people work harder, rich people get richer, whoops there goes the environment!

The problem is also compounded by our system of currency. Some of you may be surprised to learn that all of the money within our economic system comes to us via interest bearing loans. With the ‘fractional reserve’ banking system, banks only have to hold in deposit a small percentage of the money that they are able to loan out.

What happens in effect is that when a bank wishes to loan us money, they borrow that money themselves at a relatively low interest rate from the Reserve Bank. This money has not previously existed. The bank then loans it to us at a higher interest rate. The difference between what we repay to the bank and what the bank repays to the Reserve Bank represents new money that has entered our system. In other words, all of the money that banks receive in income from making loans is money that is added permanently to the currency supply.

This new money that is constantly added to the system is of course the primary driver behind inflation: With more money in the system, each dollar becomes worth a little bit less. Inflation, reducing the value of cash while other assets continue to grow, affects the poor to a greater degree than the rich. Along with profit and interest therefore, inflation also has us chasing our tails, effectively transferring more real wealth into the hands of the already rich, while the rest of us have to work ever harder to keep up.

Ongoing inflation also means that wage earners are forced into a continuing struggle, both against regulators (the more conservative of which believe that the labour market should be entirely ‘flexible’ and that things like minimum wage legislation should be removed) and the owners of productive capital, (who wish to minimize costs/maximize profits), in order to keep their wages rising in line with the cost of living.

So we can see that a complex, tangled web has been created, with a flawed currency system, interest, asset growth and inflation all tied in together. How do we fix this mess? The answer lies with major changes to our systems of banking and currency.

Perhaps we could begin with ending the fractional reserve system, and force banks to lend out only as much as they are able to back with hard assets. This may be a step in the right direction, but personally I do not think that it goes far enough. We would still be chasing our tails in several directions. What’s more, at the risk of employing an overused metaphor, a partial backtracking from the mess we are currently in may turn out to be a bit like rearranging deckchairs on the Titanic. While remembering to remain calm, what is needed is a more radical change of direction.

In my view, the ideal solution would be to move toward an interest free, global credit/debit system, whereby the sum of all credits and debits always adds up to zero. If one account is positive, another account will be equally negative. (This is like a steroid infused version of the LETSystem - Local Exchange Trading System - developed by Michael Linton as an alternative local currency in the 1980’s.)

For such a system to work most effectively and democratically, accounts for the system would be administered centrally on a global level, but each account within this system, whether a government, a community, an individual or a business, would have a credit and debit limit that would be determined locally. This would mean that communities down to the most local levels of society would have to be organized within themselves, and would have some kind of supervisory role over businesses operating within their bounds.

Running parallel with this global credit/debit system, localized cash currencies would simplify transactions close to home. Continuing with the concept of decentralization and encouraging local economic diversity, these cash currencies would in my view be best restricted in their circulation to about the level of the small city (so that a city the size of Brisbane would have 4, 5 or more of such currencies). These cash currencies could be administered at the local level and backed by a store of debit points in the local ‘bank’.

Such system would be non-inflationary, would not be subtly transferring wealth into the hands of the already wealthy, would be able to grow or shrink without disruption depending on people’s requirements, and would support the democratic institutions of society from the most local to the global level.

Along with these changes to banking and currency, substantial changes to the system of land ownership would also be important. In short, the concept of using property as an investment needs to be abandoned. Owning a home as part of our asset base? Great, but constantly increasing land value!? What bozo thought of that? The increasing unaffordability of land, and along with it the price of rent, is perhaps the least egalitarian aspect of the current growth economy.

Instead of this, mechanisms need to be found whereby the price of land can be stabilized in relation to the (hopefully non-inflating) value of the currency, and everyone is enabled to own a home.

This could be achieved quite readily if governments were to simply set a price at which they will guarantee basic access to land for everyone. Just as cooperative production processes have the ability to set relatively stable price benchmarks within the productive processes of the society, this would provide a benchmark against which the price of other land that is bought and sold could be measured.

Taking things a step further, perhaps we could also look at some sort of ongoing cost associated with the private control of large areas of valuable land. Such a circumstance would mean that rather than being a pathway to further wealth, control of such assets would instead represent an ongoing financial burden. Such a mechanism would therefore be working to reduce the rich/poor divide, and over time would result in land being more and more fairly distributed.


Herman Daly has suggested that rather than pursue endless economic growth, we should move toward something that he calls a ‘steady state economy’. I couldn’t agree more, but the devil is definitely in the detail. A vague direction is not enough. The questions to be answered are: ‘What does a post-growth economy look like?’ and ‘How do we get there?’

Also, it is not enough for any one individual to have strong opinions on the matter. Neither Barack Obama nor Julia Gillard would be able to drive dramatic change on their own. What is needed before serious change will take place is not far short of a global consensus. Let us therefore bring on the public debate and discussion.

Warnings against unfettered economic growth have been growing in intensity for at least the last thirty years. It is a complex problem, but not one that we can afford to ignore. What do you think?