The Growth Trap: A Significant Obstacle For Future Economic Sustainability

Thursday, May 18th, 2017

Article By: Charles St. Pierre

Every economy, every self-organizing system which is not also self-limiting properly within the bounds set by its environment, grows until it exceeds the ability of that environment to support and sustain it. Once it reaches the limits to its growth, it is doomed to collapse: It is too large to be sustained.

The collapse of our global economy can be expected to be catastrophic.

When an economy first develops, acquiring resources is difficult and expensive. Growth is slow and uncertain, often outstripped by the demands of increasing population. This is despite the fact that resources are often accessible and plentiful. The methods of extracting the resources are primitive and inefficient, and there is little surplus. The demand for and uses for new resources are limited, and efforts at developing new resources are often desultory. This state of affairs, essentially one of economic stagnation while surrounded by plenty, can often last a long time.

Note that there is a maximum benefit to any resource, and the costs of development, extraction, and conversion of that resource to useful form must be subtracted from that maximum benefit. Ideally, the remainder is what is available for use by the rest of the economy, though more often an economy is incapable of extracting the maximum benefit from any resource. There is almost always some degree of inefficiency of use of any resource by an economy and in primitive economies, this inefficiency is very high.

However, as infrastructure is invested in and developed, the relative cost of acquiring and developing resources decreases. More uses are found for extracted resources, providing a motive for ever greater extraction. Since it is easier and cheaper to develop uses for resources, rather than new sources of resources, demand, in general, outstrips supply, keeping the profit margins of producers high. For the producers, this extra profit means more resources are available to invest in expanding extraction and distribution, thus increasing the supply of these extracted resources available to be put to other uses in the economy.

With the initiation of growth, the economy is able to exploit resources at an accelerating rate. The economy grows further. At this stage, the limiting factor no longer is the costs of extraction, but the limitations in demand, which are the final uses for the resources, and the necessary distribution systems, which also must be developed.

So it is necessary to develop an infrastructure, in order to extract, distribute and employ the resources, There is a cost, in resources consumed, to developing this infrastructure, There is also a cost to maintaining this infrastructure, and finally, there is a cost to operating this infrastructure.

Since these costs are low, when resources are still plentiful and cheap to extract, the infrastructure grows robustly, This has the consequence that the early infrastructure maintenance systems will not be designed for efficient use of resources. And this has a consequence when resources later become expensive.

For clearly, however, with finite resources, or a finite average density of resources, or even with a finite rate of renewal of resources, the availability of resources limits any economy’s ability to grow. And this first shows up as resources become more expensive to find, to extract, and to distribute.

Indeed, as the plentiful and inexpensive resources are consumed, the exploitation of ever more marginal resources, resources which are more costly to extract and process, which are more distant and difficult to transport, becomes necessary to expand and even just to sustain the economy. And the infrastructure must be expanded to develop these resources, and at an increasing cost. What is more, this increasing cost of extraction must be passed on, and this increases the maintenance and operating costs of the entire infrastructure, including that already developed and designed around a low cost of resources in order to be efficiently maintained and operated. This older infrastructure becomes disproportionately costly and inefficient to operate when resources are more costly.

So less and fewer resources are available for expansion of that infrastructure.

Eventually, as the availability of resources decreases, and their cost of extraction increases, the cost in resources necessary to develop new infrastructure, and more importantly, the cost in resources necessary to maintain and operate the infrastructure already built, exceeds the ability of the economy to extract benefits from those resources.

Increasingly, maintenance will be sacrificed to cover the increasing costs of operation. The system will no longer be covering its fixed costs, but only its variable costs. The result will eventually be a stage where the infrastructure can no longer be maintained when the maintenance budget passes below a critical threshold but will be subject to increasing catastrophic failure. This threshold is roughly when the budget is no longer able to cover both preventative maintenance and essential repairs.

With inadequate preventative maintenance, essential repairs will increase, eating into the budget for preventative maintenance. As the budget for preventative maintenance decreases, the need for essential repairs will increase, in a vicious spiral. This process is sped by increasing costs of operation as a result of the increasing cost of acquiring resources, which the declining quality of the infrastructure also aggravates.

The real increasing costs of maintaining the real economy, (and in particular its infrastructure,) and the increasing real costs of its extraction of real resources from the natural environment, are hidden by the mechanisms of externalization of costs.

Externalities: Prices Do Not Capture All Costs

In an economy, there are many mechanisms for externalizing costs, but they fall into the two broad classes of externalizing real costs, and of externalizing financial costs. Externalizing financial costs does not alter the real costs of extraction and distribution. By financial manipulation, these real costs are not reduced, but merely redistributed throughout the rest of the economy, the point is that the extractive industry will appear to be making more of a monetary profit than it really is.

The industry may actually be losing money. But the appearance of profit leads to the real economy appearing to be gaining greater benefit from the extractive process than it really is. Real costs appear lower because financial costs appear lower. But the financial costs to some of the other sectors of the economy become higher, though, because they must absorb some of the real costs of extraction. Somebody must pay, and if not the extractive industries themselves, then it must be somebody else. And all together, the real cost is greater, because resources are consumed in the economically empty endeavor of externalizing costs.

On the other hand, the externalization of real costs does permit the current extraction of resources at a present day lower real cost.

So two ways of externalizing real costs are pollution and the over-exploitation of renewable resources. Deferred maintenance is another. So where externalizing financial costs distributes real costs throughout a present economy, we see that the direct externalization of real costs distributes those costs into the future economy. Externalized costs distributed over the future also tend to be greater than costs which are internalized in the present. For one example: The Newfoundland cod fishery: It collapsed in 1992 due to over fishing, and has yet (2017) to recover.

These manipulations of the real economy, as well as the financial manipulations which enable them, enrich the financial and consuming sectors and impoverish the actual producers of real goods and services. At this late stage, many productive sectors are deprived of the real resources necessary for them to grow, and ultimately to maintain themselves.

For in the case of the modern economy, there are two relevant systems: The real economy itself, and the financial economy which feeds off the real economy. The financial economy produces nothing of the substance itself. When useful it serves as a multiplier of production, by increasing the efficiency of allocation of resources. If feeds itself, first, however, before the real economy, and when overgrown it diverts more resources to itself than it saves the real economy by that allocation of resources. The result is a decline in the efficiency of the real economy, and its ability to grow.

In any case, this happens at a late stage in the development of the real economy, when the resources available to the real economy to mount opposition to the growth of the financial economy are diverted away. Part of this is the result of increasing real costs in the rest of the economy outlined above. Part is the increasing diversion of resources by and to the financial sector itself. (Inter-sectoral competition for resources is seldom considered by business leaders.) A point is reached when effective regulation of the financial sector fails. (One part of this process is that one of the consequences of the increasing concentration of wealth is that the value of non-financial rewards offered by the society declines, and become devalued, reducing the cost of corrupting other institutions.)

Once the financial economy evades the controls set on it by the real economy, it grows without effective bounds. The financial sector then out-competes the real economy for money. The financial sector is designed around the acquiring of money, and, unregulated, is simply more efficient at this than any sector of the real economy.

Feeding off the real economy, finance is also a non-self-limiting, self-organizing system.. It too is subject to overgrowth and collapse. This happens when it exceeds the ability of the real economy to support it. When this occurs, if and only if it occurs before a critical point in the growth of the real economy, the real economy may yet be saved. This is not because the real economy is self-limiting. It is only because it has been increasingly organized to service the financial economy, and with the collapse of the financial economy, the real economy may be reorganized into a self-limiting form. This is not guaranteed. This may not even be likely. In 2008, the opportunity for such reorganization arose and was missed. And whether or not the real economy can still be saved still depends on whether or not it is already too big to be reorganized into a sustainable form. (It should be mentioned that capitalism, per se, is organized around efficiency, not sustainability.)

With the financial economy in the ascendant, money is pumped out of the real economy almost as fast as government spending can pump it in. This severely reduces the profit margins of productive industries. Producers in the real economy would be hurt two ways. Because of lags in production, prices of final goods are reduced vis a vis the prices of the factors which went into them. And because of the money diverted into finance, prices for those final goods are also diminished.

Because of the diversion of money to the financial economy, the quantity of various forms of money in the financial economy increases. This is accompanied by an ever greater concentration of wealth. While all assets become overvalued, consuming assets, in particular, the assets of producers of toys for the wealthy, gain the highest profit margins, and so gain the highest valuation. At the same time, the assets of more basic industries, caught between rising costs and more limited demand, have lower profits, and thus a lower increase in value.

This growth is in the demand or consuming side of the economy, which conceals a relative decline in the extracting and manufacturing sectors. GDP, for instance, does not distinguish between growth in basic industries, whose value added is underpriced, and growth in consuming sectors such as retail (High and low-end retail. Retail oriented toward the middle and working classes, as these are the classes from which the wealthy can most efficiently extract money, does not do as well.) and, increasingly, finance. The economy becomes increasingly skewed, away from production and towards consumption.

This financial extraction becomes ever more difficult and costly, as the real economy becomes progressively impoverished and less productive. The concentration and availability of extractable community assets also decline. These assets, historically, because of their low potential for profits, were unattractive to private enterprise, and the government was virtually compelled to assume these responsibilities. Public services become attractive to private monies only due to the combination of being cheaply acquirable capital, the dearth of alternative investment opportunities, and, because of the increasing inability of the undercapitalized public sector to defend itself, opportunities for graft.

This decline in efficiency of financial extraction means more labor is required for the financial sector to extract wealth from the real economy. Thus, even though most labor is no longer involved in real extraction and production, there results from the paradox of an increasing burden on labor in non-productive jobs. This is obscured by the fact that these financial costs are increasingly externalized onto the real economy, ie absorbed by non-financial industries and labor. However, because of the decreasing efficiency, the profit to be made off these jobs is very low and decreasing, and the pay must be commensurate.

Meanwhile, since the cost of all maintenance increases, the cost of maintaining the burden of the financial and consuming sectors is also increasing; the costs required for extraction increase, the actual financial profits decline to zero and even go negative.

The degree of financial exploitation is not reduced, but more resources are devoted to the process. Even as this happens, fewer resources are available to the real economy. This is both because the financial sector externalizes its costs onto it onto the real economy, (and thus appearing artificially profitable,) and because greater real resources must be expended in acquiring resources from an increasingly impoverished natural environment.

Combined, these processes render the usual indicators of economic health and prosperity at least useless and even more likely misleading. Much growth occurs in the wrong sectors and is indicative of impending failure, rather than success. Further, with increasing deregulation, more fraud may be expected, both in production and in reporting on that production, further corrupting indicators.

Current Economic Models Fail To Answer The Question Of Sustainability

Mankind has yet to develop a modern, self-limiting economy. Hunter-gatherer societies existed in ecological equilibrium with their environment, fitting into the limits set by the rate of replenishment of renewable resources. For pre-industrial economies, the growth trap must be considered as a possible factor in their ultimate decline. Since economies ultimately serve a population, clearly, with unrestricted population growth, no self-limiting economy is possible. And any non-self-limiting economy will be subject to the growth trap.

More to the present, however, there is no evidence that capitalism is self-limiting. Indeed, the virtue of Capitalism is efficiency, not sustainability. Because of its inherent drive for efficiency, it is able to out-compete any sustainable system and destroy it. It even out-competes those sustainable systems it depends on and destroys those.

Only a self-limiting economy can survive the growth trap. Only an economy which can limit its consumption of renewable resources to some rate less than the rate those resources are renewed, and its consumption of non-renewable resources to some rate less than those resources can be recycled, can be indefinitely sustained. All other economies will fail. Once an economy reaches the limits to its growth, it is doomed to collapse. And a failing economy will be incapable of providing sufficient resources for the survival of most of its members. Indeed, because of the enormous efficiencies brought about by a modern economy, if that economy fails, such a failure will be catastrophic, and only small percentage of the people who depend on that economy can be expected to survive.

There still seems a choice, however, although, judging from their antics, our political class seems either incapable of or uninterested in confronting the issue.