Could capitalism without growth build a more stable economy?

The New York Stock Exchange. Image: Getty.

On a finite planet, endless economic growth is impossible. There is also plenty of evidence that in the developed world, a continued increase of GDP does not increase happiness.

Back in 1930 the economist John Maynard Keynes predicted that growth would end within a century – but he was unclear whether a post-growth capitalism was really possible. Today, mainstream economic thinking still considers growth to be a vital policy objective – essential to the health of a capitalist economy. There remains a concern that ultimately, a capitalist economy will collapse without growth.

I recently published new research that suggests a different view – that a post-growth economy could actually be more stable and even bring higher wages. It begins with an acceptance that capitalism is unstable and prone to crisis even during a period of strong and stable growth – as the great financial crash of 2007-08 demonstrated.

Previous studies on “post-growth economics” have tended to search for an elusive sweet spot where the economy would be steady and robust enough to cope with all shocks. But theorising along those lines fails to address the question of whether an end to growth would, in general, make an economy more or less stable.

For this study, I developed a novel mathematical macroeconomic model, making use of American economist Hyman Minsky’s theory of financial instability. He argued that financial crises are to be expected in capitalist systems because periods of economic prosperity encourage borrowers and lenders to be progressively more reckless. Minsky’s work was rather overlooked prior to the 2008 crash, but has received increased attention since.

The model included a banking sector that charges businesses interest on loans. That way, it could address the concern that this key feature of capitalism might in itself create a need for growth. (While other aspects of finance could be reformed for a post-growth economy, it is hard to imagine a capitalism without debt and interest.) The model also included a basic labour market, with dynamic wages.

The analysis was based on a “complex systems dynamics” approach. Simple assumptions combine to create a “non-linear” model of an economy whose behaviour is diverse and unpredictable. This approach is essential for a full understanding of the fluctuations, cycles – and occasional crises – that real economies go through.

In looking at results, I was interested in whether or not there was “runaway explosive behaviour”. In a stable scenario, growth of output (GDP) fluctuated around the growth in productivity. But in an unstable scenario, the fluctuations would get bigger and bigger, until a collapse occurred.


I ran some scenarios in which productivity is forever growing (at 2 per cent per year), and some in which productivity stops growing. The results showed that, if anything, zero growth scenarios are more likely to remain stable.

Far more important for stability was debt behaviour. In line with Minsky’s theory, the more rapidly businesses try to change their level of debt in response to fluctuations, the more likely there is to be a crisis.

The results showed that businesses should not take on extra debt when there is an economic upswing, nor should they engage in any panic-induced debt payoff during a temporary downswing. The results even suggested that low debt volatility was more important for stability than the overall level of debt.

Crisis, what crisis?

From looking at gradual and sudden transitions to a post-growth economy, I found that neither would trigger a crisis. The results also showed that an end to growth would not cause rising inequality. Instead, the share of profit going to workers would actually increase.

Ultimately, my experiment suggests that a move to a stable post-growth economy could be achieved without dismantling our entire banking system, and while maintaining a positive interest rate on loans.

There are of course reforms that would have to be made to the global financial system. I found that an end to growth reduces profits for business owners. Therefore, if it remains relatively easy for money to flow across borders, then investors might abandon a post-growth country for a fast-growing developing country. Also, businesses are beholden to shareholders keen on growth as a means to rapid profit accumulation.

The ConversationIt may be that environmentalists trying to protect the Earth’s resources do not have the power themselves to curb the excesses of capitalism. However, growth has slowed in advanced countries, and some mainstream commentators and economists are now predicting a transition to a post-growth era, whatever our environmental policy – which means the study of post-growth economics is a field which itself will grow.

Adam Barrett, EPSRC Research Fellow in Complexity Science, University of Sussex.

This article was originally published on The Conversation. Read the original article.

 
 
 
 

What's actually in the UK government’s bailout package for Transport for London?

Wood Green Underground station, north London. Image: Getty.

On 14 May, hours before London’s transport authority ran out of money, the British government agreed to a financial rescue package. Many details of that bailout – its size, the fact it was roughly two-thirds cash and one-third loan, many conditions attached – have been known about for weeks. 

But the information was filtered through spokespeople, because the exact terms of the deal had not been published. This was clearly a source of frustration for London’s mayor Sadiq Khan, who stood to take the political heat for some of the ensuing cuts (to free travel for the old or young, say), but had no way of backing up his contention that the British government made him do it.

That changed Tuesday when Transport for London published this month's board papers, which include a copy of the letter in which transport secretary Grant Shapps sets out the exact terms of the bailout deal. You can read the whole thing here, if you’re so minded, but here are the three big things revealed in the new disclosure.

Firstly, there’s some flexibility in the size of the deal. The bailout was reported to be worth £1.6 billion, significantly less than the £1.9 billion that TfL wanted. In his letter, Shapps spells it out: “To the extent that the actual funding shortfall is greater or lesser than £1.6bn then the amount of Extraordinary Grant and TfL borrowing will increase pro rata, up to a maximum of £1.9bn in aggregate or reduce pro rata accordingly”. 

To put that in English, London’s transport network will not be grinding to a halt because the government didn’t believe TfL about how much money it would need. Up to a point, the money will be available without further negotiations.

The second big takeaway from these board papers is that negotiations will be going on anyway. This bail out is meant to keep TfL rolling until 17 October; but because the agency gets around three-quarters of its revenues from fares, and because the pandemic means fares are likely to be depressed for the foreseeable future, it’s not clear what is meant to happen after that. Social distancing, the board papers note, means that the network will only be able to handle 13 to 20% of normal passenger numbers, even when every service is running.


Shapps’ letter doesn’t answer this question, but it does at least give a sense of when an answer may be forthcoming. It promises “an immediate and broad ranging government-led review of TfL’s future financial position and future financial structure”, which will publish detailed recommendations by the end of August. That will take in fares, operating efficiencies, capital expenditure, “the current fiscal devolution arrangements” – basically, everything. 

The third thing we leaned from that letter is that, to the first approximation, every change to London’s transport policy that is now being rushed through was an explicit condition of this deal. Segregated cycle lanes, pavement extensions and road closures? All in there. So are the suspension of free travel for people under 18, or free peak-hours travel for those over 60. So are increases in the level of the congestion charge.

Many of these changes may be unpopular, but we now know they are not being embraced by London’s mayor entirely on their own merit: They’re being pushed by the Department of Transport as a condition of receiving the bailout. No wonder Khan was miffed that the latter hadn’t been published.

Jonn Elledge was founding editor of CityMetric. He is on Twitter as @jonnelledge and on Facebook as JonnElledgeWrites.