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What’s the point of growth? I’m asking about economies, companies, social security, and all types of organizations. And should GDP growth stop at some point, what are the unintended consequences if such a thing happened?
Malthusian thinking was wrong but it was sound science for the data he had. There’s probably a max carrying capacity for the Earth, unless we find incredible inventions. Another invention like the Haber process just seems unlikely. To me that looks like a future where most countries around the world will stabilize into an economy that treads water without growing nor contracting.
I’ve always heard from big wigs that you either grow or die? But if our future looks more like the countries with low fertility, then at the end of it doesn’t it mean that our our economy needs a new way of functioning.
Well everyone hears stories about Musk or Gates or Bezos or Lebron or Jordan or Kershaw, making astronomical figures. To most Americans that type of inequality is okay because the economy is growing like an amoeba trying things out, that sometimes get unicorn status. Now, if in the future that economic pie becomes nearly constrained, the only level of power left is the communists/technocrats that will divvy up the economic pie.
Income equality is no big deal as long as there’s a rising tide with opportunities for your own lottery ticket.
Too big to fail has morphed to become one of the worst ideas this century. Doesn’t mean they should do nothing, they should’ve kept the system afloat while reforming the system and exposes/charging all the financial decisions those big banks did. Instead we are again stuck in the same system trying to put bandaids on their recklessness.
Remember the movie The Big Short explaining CDOs? Reuters in 2019:
https://www.reuters.com/article/idUSL5N22B5Q2
Why can’t we make the finance industry basic again? Without all the never ending novel financial instrument inventions—There’s almost zero productive reason that brilliant quants are needed in vast numbers on Wall Street. Unless of course you just want to make as much money as possible.
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I’m sorry for how all over the place this was. I was up all night reading and had a bunch of disparate thoughts that felt quasi-connected. In the morning I’ll clean it up.
There are, broadly speaking, two types of growth:
Extensive growth is where you increase outputs by increasing inputs.
Intensive growth is where you increase outputs through process improvements that allow you to produce more or higher-quality outputs with the same inputs.
In recent decades, economic growth in wealthy countries has been heavily skewed towards intensive growth. For example, carbon emissions per capita peaked in the 70s in the US, and total emissions peaked just before the GFC. Growth is coming mainly from producing better stuff, not from producing more stuff. Computing technology is the ultimate example of this: Computers are orders of magnitude more powerful than they were in the 80s, but use the same materials in the same quantities, more or less.
The socialist claim that capitalism requires infinite growth (it doesn't, although increases in per-capita GDP are certainly desirable) and therefore requires infinite growth in resource consumption is simply false. We have had quite a lot of intensive growth, and can continue to do so indefinitely. In theory, there may be some optimal state of the economy beyond which no improvements are possible, but that's so far removed from the status quo that it's a purely theoretical concern.
The point of growth is that it increases material standards of living. That aside, there's a cognitive bias where people perceive slow growth as regression. This is how you get people like Bernie Sanders and his followers on Reddit insisting that real incomes have collapsed when all the evidence says otherwise. Living in a high-growth economy just feels better than living in a low-growth economy.
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There is no 'point' to growth, *growth is an inevitable consequence of human psychology and social dynamics *.
Social status and acceptance among peers and romantic interests is an innate human desire (and indeed among just about every species which exhibits social behaviour). Status is often afforded to those with a lot of wealth (to the point the term socio-economic status usually means just, well, economic status), wealth is a great facilitator of all sorts of things and lifestyles, which makes it attractive. However a quirk of human psychology is that we assign status in a local, relative way. The private envies the sergeant, not the general. This has implications for what any given individual considers wealthy and worth assigning status to.
We accumulate possessions over the course of our lives and when we die we bequeath our possessions to the next generation. The amount of wealth in the world increases constantly. However status is in limited supply, always. Even though I have a level of material wealth that vastly surpasses my grandparents, my wealth is only average for my time and place and so I am afforded no more status than they were because of it.
What I'm trying to convey is that there is no fixed level of wealth that is considered to be 'enough', nor will there ever be. If there was we would surely have passed it by now. People's wants and desires are limitless. As long as one person can get an edge in their choice of friends and partners and lifestyles by having more to offer than the next man then he will seek out a way to increase his rate of resource acquisition at a rate faster than those around him, i.e growth. The picture you paint of the wider economy is simply the manifestation of this dynamic.
Growth doesn't just mean producing things at an ever faster rate either. Improvements in efficiency and the reduction of waste are also forms of economic growth. Switching from fossil fuels to green energy is economic growth, faster internet speeds are economic growth, new medical breakthroughs are economic growth.
Consider for a moment what it would mean if there was no growth. There would be no innovation and no improvement in our day-to-day lives, you could not reasonably hope for a better standard of living for your children. You would live stuck in the same era of technology in perpetuity. Would you prefer that economic growth had stopped in 2000? 1500? 1000 BC? 1 million BC? Do you not think tomorrow will be brighter than today?
I think people who advocate 'degrowth' are rallying against mindless consumerism (honestly from those I've talked to, who are uniformly upper-middle class, this seems to derive from a sense of moral superiority to those who don't share their beliefs, in their eyes consumerism is a kind of lower-class vulgarity) and have a concern that unrestricted growth threatens the Earth in an irresponsible pollution-of-the-commons way, which is a valid concern. But I fear they are deeply misguided in their assessment of the situation and push for policies that are not compatible with human psychology on a fundamental level. Our only hope is that responsible stewardship from our governments (lol) can curb the worst excesses of humanity's insatiable desire for status before it poses an extensional threat.
I've heard a few people suggest that perhaps if we were to adopt a kind of ascetic lifestyle we could circumvent issues surrounding growth. I think this is a trap though. Part of what makes an ascetic lifestyle tolerable is that, ironically, it affords its practitioners a degree of status. The problem is that once everyone is an ascetic hermit its no longer impressive, status is relative remember, and we circle back around again to where we were.
I kind of went on a bit of a ramble with this post but I hope I got myself across, even if I didn't connect specifically with everything you described about too-big-to-fail and CDO's and so forth. Ultimately it is status, the whole way down.
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I've been seeing the claim "capitalism requires perpetual growth" online, particularly over the past year or so, and in contexts such that I can't help but take that to imply "so the [latest] reason for overthrowing capitalism is to stop that rapacious all-consuming monster."
Which in turn seems like sour grapes to me, or a grudge in search of a grievance, because I recall that when it seemed credible that the U.S.S.R. could (always thirty years in the future) economically overtake America, there wasn't really any question about economic growth being good. It seems like a thought process going "communism is better than capitalism, therefore communism must economically outperform capitalism - but if capitalism economically outperforms communism, then, from the starting premise, greater economic performance must be bad."
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Economic growth just means "continuous improvement". Sometimes that's by making the pie bigger, other times it's from increasing efficiency. Hearing people strawman capitalism as "it requires infinite growth", then equating it to a cancer cell, is one of those braindead arguments on par with "if you don't like gun control, why don't you just move to Somalia???"
Some financial innovations have been good like ETFs, while others have been bad. Careful regulation is better than becoming a Luddite and trying to stop all financial advancements entirely.
Canada's financial regulation seems to be "see what America does and wait a few years to see if it is fucking stupid. If not, allow it." It is pretty good but I do not see how America can find someone bigger to watch.
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I understand natural growth like your population is increasing (be it by new births or immigration) so spending is going up as more people buy more things, there are more workers, there are new products and new businesses, they create new markets and expand into existing ones, and so on.
But there does seem to be an expectation for perpetual growth that seems difficult to reconcile with reality. Company F reported gains in this quarter, but they weren't as much as last quarter and not as much as the market expected, so company F's shares reduce in price even though they still made a profit and are not in danger of going bust. Is it reasonable to expect company F to grow 2% this quarter, 3% next quarter, 4% the quarter after that and so on to infinity? What happens when company F drives all its competitors out of business and is the only remaining business with 100% of the market? And after it expands globally to take over 100% of the entire market for left-handed grape peelers in every nation of the earth, what then? How can it continue to grow?
The stock market prices in expectations, so if a company misses its earnings prediction then its price declines relative to the profitability that market participants presumed the company had. It doesn't crash to zero. A stock price that declines for a week is not a death sentence. Furthermore, blue chip stocks (the ones that have grown very large and bought out many competitors) are not expected to grow exponentially ad infinitum; people buy blue chip stocks for steady rates of return, typically either from dividends or stock buybacks. So no, this "companies expect infinite growth in a non-infinite universe" argument really doesn't hold up.
That said, there are arguments to be made that many companies have time-horizons that are too short. Everybody wants to get rich quick, which has led to stuff like companies underfunding R&D budgets and taking on massive amounts of debt in order to finance stock buybacks.
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Why should investment be directed towards businesses that don't grow? What would be the point in investing money into a business that isn't going to use that money to hire more staff, buy more equipment, open new locations etc.?
Why invest in them when you could invest in a company that is growing and improving?
But do they? Are the FAANG companies opening new locations? They may hire on new staff, but that seems to be running to stand still.
A fresh new company that has nothing to do but grow and improve and expand, I can understand investing in that. But Jones Bones is well-established, makes a tidy profit each year, has generally had good growth, and because this quarter they 'only' grew by 2.6% instead of 3.2%, you decide to pull out your money and invest in banana trees for dog kennels (that's a growth opportunity right there!)
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As GP said:
Company F figures out how to manufacture left-handed grape peelers more cheaply, or makes them last longer, or makes them work better, or invents a machine that peels grapes that both left- and right-handed people can use. Or someone else invents a better grape, so the value of grape peelers to people goes up, and more people buy them on the margin. Markets aren't static.
No, I understand that, but neither are they infinite. You can only sell 100% of grape peelers, even if you develop AI that builds robots so you fire all your human staff and your factories run on a cost of fresh air churning out the world's cheapest and most technologically advanced grape peelers. You can't grow from 100% to 110% next year. Well, ignoring that if the global population was 9 billion this year and will be 12 billion next year so you sell 3 billion more grape peelers, but suppose we are all now uploaded into cyberspace and no more new babies are going to be born ever again. You are selling all the grape peelers you can possibly sell, there is no market to sell more. Every single entity on planet Earth has a drawer full of your grape peelers.
I do see that there is room for company F to improve its market share while there is competition from companies G, H, I and J in the cut-throat world of grape peelers, but there surely can't be infinite room for growth forever?
Growth isn't gross production for a reason.
If the market can't support companies F, G, H, I, and J all in the cut-throat world of grape peelers, but only four of them, then company F might expand the market by executing the sub-market of grape-peeler production, and support it's growth instead via the grape-peeler advertisement market to increase the market efficiency of one of the remainers, or the grape-peeler delivery market to expand the size of the consumer market who can be sold to, or offer grape-peeler-throat-cutting-protection services to protect corporate secrets (and throats) against cut-throat competition.
In many cases, growth isn't about gross production increasing at all, but efficiency increasing or upkeep reduction. Say you do have a maximally-saturated equilibrium where everyone who could possibly want a grape peeler has one, and no more should be made. At this point, market growth can come from cutting costs- whether the application of a material science for cheaper handles, or international trade deal market access for cheaper peeling-blades, or removing the now-excess grape-peeler production-expansion parts of your business, so that the freed up capital can go into the next great thing, pear-peelers.
At which point, the market continues to grow again, as having maximized profit in the current equilibrium in one area, capital can be invested to grow in another. But as we do that, things may (will) change in the old equilibrium. Maybe the market capacity for grape peelers grows again, because we uplifted our fellow primates and now monkeys are consumers. Maybe the market capacity shrunk more, and now we need to dismantle existing market infrastructure to re-allocate capital.
Well, that deconstruction is going to require capital, which markets will compete over to offer, and re-allocate the dismantled capital, which market actors will seek to repurpose, and that will feed other markets and submarkets as the entire ecosystem of managing this transition supports expertise and industrial specialists who can do the task more efficiently than the competition, who will be consuming tools and systems developed for that purpose, which-
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And why shouldn't it be? Investors are the ultimate reality-based community, and economies have in reality grown basically forever. Where and in what form this growth happens changes, though. It can change a lot, which is why companies that fail to grow get capital removed and companies that do grow get capital applied.
This is not a moral judgment, though. Investors are not morally shunning companies that fail to grow. It's just that by all appearances, those resources would be more useful elsewhere. It's like selling a guitar you rarely play any more to finance a bicycle that you would ride often. This is not a judgment on the quality of the guitar, or its inherent moral worth, or driven by an unreasonable expectation that the guitar be more useful to you. It's purely an optimization.
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No, but literally no one expects that of any company. If you want illumination, not straw manning the beliefs you have trouble understanding is a good place to start.
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This is a basic question. Most people, most economists, etc promote growth because they consider growth to be - improvements in technology, standards of living, growing the power of individuals and nations (although most people won't say that nowadays, they'll just say "making everyone happier and better off").
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Without growth, there is a fixed pie. Anyone else's gain is your loss. It becomes extremely important that you protect what you got, because once someone else has it, they are going to fight like a cornered rat to keep it.
A society without growth might be possible, in the sense that it would not violate the law of gravity. But anyone who thinks they can pull it off and be in charge is already too dumb to actually achieve it, and they will start destroying people about 5 minutes in.
Just want to throw out that this is effectively what existed for almost all of human history. Otherwise, I agree with your comment.
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People gambling money on various esoteric financial instruments do not contribute to growth.
Capitol allocation is important to growth, and all investment activity, even derivatives, are capital allocation.
Yes, but adding extra several layers of gambling doesn't help and destabilises everything. Did we learn nothing from the financial crisis ?
Did the elaborate financial products whose risks were not properly understood help in any way, or were they merely helping to set up the system for a failure ?
Investments involve risk, and the point of derivatives is to allocate that risk to the investors most willing and able to accept that risk. They exist for the same reason insurance exists.
If the instruments that are supposed to help allocate risk instead create extra risk because they're employed in an irresponsible way, what then ?
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"Extra layers of gambling" seems rather arbitrary. Are calls and puts extra included in this? They're contracts that grant the right to sell or buy securities at a certain price. They also help to check prices that are either too high or too low. If there's a buying or selling panic you can contradict the crowd, help to nudge the price, and make money if you turn out to be right.
A credit default swap is just insurance.
The financial instrument is easy to point to and say "it's too complicated," but no one is forced to trade any particular instrument. The people that traded them almost certainly understood what they were, they just had little incentive to care about the risk they were exposing their institutions to.
They didn't. Nobody understood the risks of the pooled mortgages failing.
Or rather the relevant credit rating agencies lied / didn't care, the banks who were making them didn't want to and the customers were too stupid.
They convinced themselves that the odds of a large package of mortgages failing were minimal because not enough of them could go into nonpayment at once, so even a financial instrument made out of a lot of dogshit mortgages was actually not risky because odds of mortgages failing were independent, or some BS like that.
You guys don't remember any of this ?
Yeah, sure. But if you're buying insurance on stuff you don't own, in a completely disproportionate amount, because you see the CDS's as being just free money, and then it blows up, you could argue that it was just stupid gambling.
Nothing wrong with that. But why is the derivatives market apparently something like an order of magnitude bigger than planetary GDP ?
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Good thing that’s a separate argument no one is here discussing
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But doesn't that happen in cycles? The national economy starts to grow, then it revs up and year upon year everyone is getting richer, and it looks like the good times will never stop.
Until they do, and you are plunged into a recession. The Great Depression was like that, and so was Celtic Tiger Ireland where we were being assured that this time for sure, we had broken the old cycles, and Ireland was now going to be modern and self-sufficient and not at the mercy of outside forces anymore, and it would never stop. Then 2008 happened, and the housing bubble burst (exploded, more like) and suddenly people were taking the emigration boat and planes once more as the national economy stagnated.
The recession does not undo all the growth since the last recession. Even the Great Depression, the very rough picture was that each year of it wiped out 1 year of normal growth.
No, but recessions knock out "our economy is going to grow forever and ever and never again will there be a crash".
There is always a crash. There is always a boom.
I am not sure who in this conversation said "there will never be a down year" but anyone who said that was wrong.
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Because being able to collectively grease every palm in society with rising wages and living standards is the easiest way to buy a lack of major unrest or civil conflict.
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Growth is how we measure incomes collectively increasing. So all growth means people in your nation getting richer.
The big impact if it stops is highly leveraged (lots of debt) lose everything. Which is probably their just reward, but when debtors fail it can have pretty severe effects on people who were prudent.
Does GDP get adjusted for inflation?
Real GDP does Nominal GDP doesn't, normally real GDP is the important, widely cited figure.
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Yes, but then it's called "Real GDP".
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