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.

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.


Alright, you might say, but doesn't our financial system require perpetual growth in order to operate? Isn't debt based on the belief that people will be richer in the future? Don't stocks make their returns from capital gains, which require economic growth?

Well...again, not really. Debt pays interest in part because of the "time value of money" - "consumption now" matters more to us than "consumption in the future. That is as it should be, because tomorrow we might get run over by a truck. Also, debt is a way for young people to "smooth their consumption" over their lifetimes - borrowing when young (e.g. to buy a house or get an education), and then saving during the middle of their lives. These forces aren't going to go away if growth stops. There was plenty of borrowing and lending in the zero-growth periods of the Ming Dynasty, and the Ottoman Empire, and any other long period of economic stagnation.

As for stocks, it's true that they've paid mostly by capital gains in the last few decades. But in a stagnant world, stocks would still make returns for their owners through dividends.

There is no obvious reason why capitalism will end when growth ends. But here's a less obvious reason why I might be wrong. Perhaps advanced societies have only tolerated inequality because they were mollified by the promise of a perpetually rising tide. When growth stops altogether, their (currently well-hidden) rage will come boiling to the surface, and the capitalists and the 1% and the creditors and the stockholders will be up against the wall.

Maybe. I doubt it. Most people do realize that every country that has ever deliberately set out to create an "alternative to capitalism" has failed to create anything remotely resembling a good place to live. In the end, after decades of grinding poverty and political oppression (which was invariably deemed necessary to preserve the anti-capitalist experiment), they all went back to capitalism, usually of a more unrestrained, unequal, exploitative form than their rivals in the developed world.

Meanwhile, the countries that have nominally stayed "capitalist" through the last century - the U.S., West and Central Europe, and much of East Asia - have learned how to quietly restrain capitalism's excesses, with generally strong social safety nets, well-functioning bureaucracies, prudent regulation, and generous provision of public goods. 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. If you want to make a safe prediction about what economic system we'll have in 30, or 60, or 100 years' time ... well, as they used to say on Wall Street, "no one ever got fired for buying IBM."