The End of Growth Wouldn't Be the End of Capitalism

With the U.S., Japan, and Europe facing lost decades and hundreds of millions of frustrated middle-class workers, it's worth asking: How much does capitalism need growth to survive?

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Everywhere we look, economic stagnation is staring us in the face. The United States seems headed for a "lost decade" (some would say our second in a row), Europe and Japan are doing arguably even worse, and economists like Robert Gordon are proclaiming the "end of growth."

David Graeber, the anthropologist sometimes described as the "anti-leader" of Occupy Wall Street, wrote in August 2011, "There is very good reason to believe that, in a generation or so, capitalism itself will no longer exist -- most obviously, as ecologists keep reminding us, because it's impossible to maintain an engine of perpetual growth forever on a finite planet."

This is a common refrain. 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.

First off, it's just false that growth requires infinite resources. Economic growth comes in two flavors: (1) "extensive," where we use more inputs; (2) "intensive," where we use inputs in a more clever way to do more interesting stuff. The former must eventually hit a wall. The limits of the latter are completely unknown. Deride the "information economy" all you want, but it makes people happy and it sucks up a lot less energy than what came before it.

But this is a side point. The real question is: If growth does end, does our economic system go with it?


Ask any economist of the free-market persuasion to justify capitalism, and the word "growth" probably won't even be part of his spiel. 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.

In fact, some of the earliest challenges to the free-market orthodoxy came from adding growth to the models. Back in the 1950s, Paul Samuelson showed that growth provides a rationale for Social Security. Later, "endogenous growth" theories called for a government role in supporting research and development.

But who cares about economic theories, right? What does history tell us?

Using the past as a guide to the future has always been the most daunting of challenges. But that said, modern 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.

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.

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Noah Smith is an assistant professor of finance at Stony Brook University. He writes regularly at Noahpinion.

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