The (Bad) Economics of Perpetual GrowthJune 18, 2012 at 12:23 pm | Posted in Decentralism, History, Political theory | 1 Comment
The Permaculture Research Institute has an article on the myth (presumption) of perpetual growth that has been built into the modern world’s mainstream economic system. It is an important point to recognize this error. It is one that Chris Martenson focuses on extensively in his Crash Course, but I want to add some commentary.
They use the date of 1776 as a start date of this myth, but the birth of the USA, is not specific or informative enough. Instead we should use the date of 1694, which was the founding of the Bank of England, the world’s second central bank.
Why that event? England lost a war with France and wanted to regain/retain its position as dominant global power. To do so it needed much more money to finance its military, navy, and government expansion. It did not want to be limited to what credit it could obtain through the natural markets…so it nationalized the credit market.
In natural society, money is the most marketable commodity, and credit is loaning money at a rate (interest) determined by the supply and demand for credit. A central bank, such as the Bank of England (or Federal Reserve in the USA), maybe “capitalist” in some definitions of capitalism, but it is the opposite of a free market.
Money is like language. It is naturally created by societies without and before government. Governments (via central banks) replace natural money with fiat money only for their own benefit, so they can expand their power, by expanding fiat money, faster than they could expand natural money. Ah, in there is the mainstream economic profession’s origin of the myth of perpetual growth…unnatural expansion.
Fiat money is just pieces of paper that have no value apart from the weapons of government pointing to the heads of citizens saying it must be accepted as money. However, it cannot perfectly control the degree of value, and that is where “respectable central banks”, unlike that of Zimbabwe or Weimar Germany, exercise just enough self control to stop hyperinflation.
So what are central banks doing with money? Instead of a natural market determined rate of interest, they dictate a rate. This explains how we should define “actually existing capitalism” instead of theoretical capitalism. Such capitalism is when the foundational layers of money and credit are controlled by a central bank, but most other layers on top of that are open/free markets. However, since that fundamental layer is not free, all apparent freedoms that are built above it are not nearly as free as they may seem. It is like in George Orwell’s 1984 where the government has altered language with Newspeak. Language is fundamental, just as money is the language of economics.
In order to stop hyperinflation, while still transferring wealth to capitalist government, a central bank perpetually inflates the money supply, but exercises a degree of conscious self-control, just like the victor who refrains from killing his enemies so he can enslave them.
In Colonial America, tobacco was often the medium of exchange, i.e. money. Sometimes it was wheat, or even whiskey.## So if the “money supply” increased, it did so because people went to the effort to create the valued items to increase it. In contrast, when central banks increase fiat money, that does not increase goods of value. A 10% increase in the fiat money supply means that the previous owners have had their money decrease in value by 10%.
So when economists from Milton Friedman to Paul Krugman say they want a stable increase in the money supply of about 3% per year, that is a 3% transfer of wealth per year to Wall Street and government. Why 3%? Because they can get away with that without causing hyperinflation.
But mainstream economists don’t want to focus on money supply as inflation, instead they prefer to leave that to “the man behind the curtain” and focus on prices as indicator of inflation. So in the 1920s, productivity was increasing such prices should have been falling due to increased efficiency. Instead, the Federal Reserve increased the money supply to keep prices stable. The father of mainstream economics, Irving Fisher, thought such fine and said there was no bubble in 1929, and proceeded to lose his family fortune in the crash to prove he believed it.
But there is another layer of the perpetual growth myth. Without perpetual growth, then all that government “sovereign” debt cannot be repaid short of a hyper-inflationary crack-up bust in the market. Market value would become less than book value…much, much less, like in Greece. Ah, but as you’ve discovered…it isn’t likely to happen with perpetual growth either, because that is impossible as it pushes against natural limits.
Finally, here is why there are no mainstream economist exceptions: The Federal Reserve pays major stipends to economists all over the world to buy their allegiance and cement the Federal Reserve’s legitimacy among economists as a guild. As Gary North points out, economics textbooks will go from a chapter on the dangers and inefficiencies of cartels, to a chapter on the Federal Reserve, without a hint of contradiction or acknowledgement of it as a cartel.
What about economist professors who are exceptions like Prof. Hayek? Even though he won a Nobel Prize in economics, the University of Chicago where he taught refused to even let him teach in the Economics department! So he was not mainstream. Such difficulty getting a tenured professorship in economics has been the case of economists all over the USA if they question the propriety of the Federal Reserve.