Part of a series of “reading memos” that offer a brief summary of interesting academic content along with my personal reflections. This one covers Chapter 1 and 3 of The End of Growth by Richard Heinberg.
The author begins by walking through a brief history of economies and economic theory, starting with hunter-gatherers and their nascent gift economies. In a world where people had few possessions, people treated those in their community the same as we treat our close family members today – that is, all belongings were shared freely with no expectations of reciprocation. The concepts of trade and money were eventually established to facilitate exchanges with strangers, but the physical stockpiles of money people needed to hold became easy targets for thieves. Thus, banking and storage receipts were invented, along with the idea to create loans from those receipts for bankers to profit -first considered a sin called usury, but eventually legitimized as interest. Once bankers started writing receipts for more money than was on deposit, fractional reserve banking was born – enabling the creation of new wealth and facilitating investment and economic growth ever since.
Classical theorists wanted to build economics as a science like physics, even though it was always more of a philosophy. Over the decades, three primary schools of thought emerged and competed for mind share: Adam Smith believed in the infallible efficiency of the Market to allocate resources (promoting laissez-faire capitalism), Karl Marx decried capitalism as inherently expansionist and unsustainable (predicting oppressed labor would eventually overthrow the system and establish a communist state), and John Maynard Keynes espoused government intervention to curb the excesses of capitalism while stimulating the economy when necessary (social liberalism). While Marxism faded with the fall of the USSR, the author argues the two remaining philosophies are still inherently unsustainable because they insist perpetual growth is possible – an idea shattered after the global financial crisis in 2008.
The author highlights increasing global instability due to the rise of speculative instruments (e.g., derivatives like options, futures, and swaps) and the unpredictable nature of business cycles (bubbles and recessions) driven by debt demand manipulation by the Federal Reserve. Globalization (leading to the decline of manufacturing in the US and hence the growing need to devise new, purely financial means of making money) and the decoupling of money from precious metals has resulted in an unprecedented expansion of debt for growth’s sake, which the author worries will inevitably come to a collapse.
The author argues that the treatment of “land” (natural resources more generally) as capital to be consumed, leveraged, and exploited for growth is an inherently flawed approach. Resources like oil, fresh water, phosphate for agriculture, seafood, and minerals for electronics are all becoming harder and more costly to extract – which increases the cost of production to the point where growth will stall or collapse. The author argues that these problems can’t be fixed with government spending or innovation, partially because crises are typically covered up until the tipping point and partially because there will be a significant time lag before solutions implemented would have a significant effect.
This was a highly enlightening take on how the modern global economy came to be designed and an interesting perspective on its flaws and limitations. I can see how the creation of fractional reserve banking set the stage for the domination of debt as a growth mechanism, though I would disagree with the author’s implied stance that the growth of debt is something to be avoided at all costs. While the act of institutions taking on too much debt and speculation on debt has certainly caused some economic instability, we cannot deny that the investments and new wealth creation facilitated by debt has greatly improved lives across the globe in many ways – including but not limited to infrastructure improvements, the incentivization of innovation, and the lifting of billions of people out of poverty in developing countries. That said, while this manifestation of capitalism has raised the floor for many people, it has also inequitably distributed most wealth gains towards the top of societies – so the model can and should be further refined. I am reminded of the recent push towards the novel concept of “stakeholder capitalism” – a more holistic approach to capitalism than simply optimizing for shareholder profits.
The author makes a good point that growth would be stunted as essential but limited natural resources become more and more expensive to extract. However, I am not yet convinced that humanity cannot innovate or adapt to the changing situation before all economic growth collapses. Fracking is an example that was only mentioned briefly (though I believe it may have been a relatively recent innovation at the time of writing). While the effects of fracking on the natural environment are questionable, it did considerably extend the world’s lease on oil – to the point where oil prices have stayed (unfortunately) low for more than a decade. This makes the author’s arguments seem a bit alarmist in retrospect, though I do ultimately agree that the world needs to strive to use less of all these resources over time – both to avoid the negative consequences of environmental degradation and to reduce our dependency on rare, breakthrough innovations.