22 November 2011

Glossary: Economic growth

The upshot of the argument I’m developing here, but still haven’t actually laid out fully, is that the crisis of neoliberalism is fundamentally a crisis of growth. There are all kinds of mediating factors like the operations of the financial industry or the nature of the eurozone monetary system, but the deeper trigger of serious dysfunction in these realms and in the economy in general is the collapse of the neoliberal growth system. Before I complete this argument, we first have to understand what produces growth.

Economic growth is the expansion of the total value of the saleable commodities in the economy. That seems pretty straightforward – more goods and services being produced and purchased. It’s actually quite a bit more complicated than that, because the concept of value is not as self-evident as it appears. But let’s leave that aside for now, because I don’t think we need to get into the intricacies of different theories of value to nail down the main determinants of economic growth.

There are two basic variables here, which correspond to production and purchase: investment and demand. One driver of growth is investment in new productive facilities or more productive technologies. The distinction must be made between productive investment and other vernacular uses of the word investment: not “investment” in a house or a car, which is a form of consumption, and not investment in financial assets if these are actually part of a speculative bubble. Speculative investment produces the appearance of growth, but not the reality.

Investment can be undertaken by the government or by private business. If the government does it, investment is funded out of taxes or other revenue; if business, it’s funded by profits. But both government revenue and profits are routinely devoted to unproductive ends, like military spending, healthcare, luxury consumption, or pyramid schemes. Some non-productive spending is socially desirable and some is not. That distinction doesn’t matter to capitalism as a system or to economic growth. What does matter is whether government revenues and profits are invested in expanding production or not.

The other side of the equation is demand. Expanded production will not contribute to economic growth if the products can’t find a market, so the other possibility for increasing growth is to increase demand. This can be done either by convincing people who already have money to spend more of it, or by increasing the incomes of people whose existing demand is blocked by inadequate income. The former method relies on innovation: new product lines like the iPhone, new kinds of advertising to instill desires that did not exist before, new technologies so that producers will purchase new equipment. Increasing incomes is a more difficult proposition. It can be achieved either through the redistribution of existing incomes (but will only increase growth if those who on average lose income would not have spent as much of it as those who gain) or by redistributing a part of revenues from producers to consumers (but this will only increase growth if it does not cripple the all-important productive investment that producers might otherwise have pursued).

A final possibility for increasing growth in addition to strengthening investment (expanding value) and demand (realizing value) is to increase the efficiency of the circulation of value. This can be done by making it easier to move goods around (container shipping has been a huge advance in recent decades) or by improving methods of communication to make economic coordination more efficient. As the movement of value increases in speed, part of it is freed for reinvestment in new production, which can indirectly increase growth. But if this newly freed value is not invested productively, if instead it is put to strictly speculative uses, then real economic growth will not follow.

The complex tradeoffs in pursuing these approaches should already be apparent. For example, one way to increase demand is to divert money from profits to workers’ consumption (either individually by raising wages or through the government by increasing taxes on business and then spending the revenue on social programs). But this will reduce the funds available for productive investment. To avoid this kind of conflict, a careful analysis of the imbalances and dysfunctions of the economy is necessary to settle on measures that don't simply cancel out their growth effects.

Growth has stagnated in the United States, Japan, and Europe, and the eurozone crisis threatens to turn stagnation into collapse. Growth in China, India, Brasil, Turkey, Indonesia, and other “emerging markets” is proceeding for the moment, but there is a very real possibility that a large part of this growth is founded in speculative bubbles and vulnerable to abrupt deflation. Moreover, because these economies rely on exports to the rich countries, any further slowdown in the US, Europe, and Japan could cripple growth elsewhere. It seems clear that beneath the everyday distractions of bond market fluctuations and deficit deals, the paralysis of the growth process is what structures this crisis.

One additional method of renewing growth should be mentioned, because historically it has been both effective and common. If you destroy massive amounts of existing value, then both investment and demand can be restored through the process of rebuilding from the devastation. There are many forms that the wholesale destruction of value has taken, all of them catastrophic: inflation, deflation, war. If the current impasse is not broken in some other way, this is the prospect we face.

1 comment:

  1. Apropos of the last point, Roger Cohen goes for gallows humor and blunders into some real insight:

    "Still, folks, there’s hope out there. Japan, whose economy went dead for a decade, is enjoying a spurt. All it took was a tsunami to notch up a quarter of growth. Perhaps what Europe and the United States need is a major natural disaster — it would make a change from the man-made ones — or a good little war."