Growth Dependence And The Structure Of The Economy
21 Dec 2023For some reason economists believe that any problem can be solved by “growth”. In reality, there are not only absolute problems but also relative problems relating to the structure of the economy.
Often the argument is being made that absolute poverty can and should be eradicated, but relative poverty cannot be and should not be tackled. The problem with this argument is that it assumes that the answer is to simply raise the floor on absolute poverty. That way any problem, including any problem relating to relative poverty, can be swept under the rug. We solve the problem by not solving it, isn’t that great?
Of course, in line with the name of the blog, the infinite growth fallacy is fueled by the conventional idea of a liquid economy, that is, every dollar is equally good and holding money occurs no direct costs, therefore we should have as much trade measured in dollars as possible. The fact that the utility function of money takes not only its quantity, but also the people having it as parameter, is ignored. If one were to integrate different money-people allocations, then one could get very different results even if the GDP stays the same. However, economists do not pay any attention to the structure of the economy and they actually cherish this ignorance. The real economy is illiquid, that means it has a structure. Liquidity is just an illusion created by the management layer we call money.
Economists then use this illusion as a baseline and build their understanding of the economy on top of it, to then later completely deny the role that money plays in an advanced economy, by defaulting back to a simplified barter economy with no money. It is as if an economics students’ first student exercise is to put on a blindfold and then never take it off until the day they die.
So, what potential structure is there, that is independent of growth and whose problems or symptoms cannot be simply compensated by more growth? Well, the most obvious one would the structure and geographical allocation of both jobs and housing. Given a certain structure of jobs and housing and the assumption that population and economic growth does not change the structure because of NIMBY resistance, then the expectation is that rental prices would simply adjust and ignore any advancements gained by economic growth, because growth cannot change the structure. The problem of high rental prices would never disappear, because it has nothing to do with the absolute level of economic activity. The only argument left is that growth still increases the absolute residual income after deducting rental expenses. In other words, someone is taking away 30% of your paycheck, but that is ok, because the remainder of your paycheck is allowing you to buy more things and these things will let you cope with the fact that you have inadequate and overly expensive housing that is completely unaffected by growth. We would have a perpetually unhappy economy, but it is ok, we can just medicate the unhappiness away if we had enough growth!
Another topic relates to the structure or the quality of the food we eat. From a growth perspective, it doesn’t matter if you exclusively derive your sustenance from carbohydrates, fat or protein. Bigger quantities are always better and being addicted to low quality food is also good for economic growth. Any reduction in your quality of life from obesity such as lack of mobility or follow up medical complications like type two diabetes or heart disease is just one more way to increase GDP.
In this sense, growth has been put on a pedestal. It is the ultimate panacea, the ultimate solution to every single problem, including problems that cannot and will not be solved by growth.
Why growth alone is not enough
We have enough food to feed everyone, we have abundance, yet somehow people are starving. The reason is the allocation and distribution of resources. In fact, given infinite resources and a poor distribution, it is possible for starvation to persist in the face of finite wants.
In an economy with a high degree of the division of labor, it is possible that the population has grown to such an extent that returning to a subsistence economy is no longer possible. It is no longer voluntary to participate in the division of labor, it is mandatory. Thus the concept of “voluntary trade” no longer exists, as one is always forced to take an option. As far as we know, money is necessary for the division of labor, except for neoclassical economists who think money does nothing and barter is still feasible at this stage. People who do not have money cannot satisfy their needs. This means money becomes a hard dependency on survival. Using money is no longer voluntary, in fact it becomes mandatory. This means that basic human needs such as need for water, food, shelter and hygiene are dependent on money and thus money itself becomes an extended human need. Not enough money and one simply cannot exist as an individual. Welfare policy is therefore not about feeding parasites as Ayn Rand would make you believe, in fact it is the exact opposite. Welfare allows the division of labor to develop to a higher extent as it means that economic activity, even if it unavoidably leads to personal enrichent at the expense of someone else, becomes possible. Even miniscule negative externalities add up over time and since it is impossible to participate in an economy without at least some negative externality, the benefits of making economic activity possible exceed the cost of welfare. As crude as it sounds, safety nets let people engage in more risky and dangerous activities and reap net benefits in aggregate at the expense of some people being on the losing side and some people being on the winning side and the winning side must pay the losing side for being lucky and priviledged. However, in practice the lucky and privileged side does not realize how they owe their luck to the unlucky side and deride it. The explanation for this most likely lies in a form of selection bias, where lucky people essentially live in an accidentially fair and just world that rewards effort, whereas the unlucky side does not get rewarded. So the lucky people assume that the unlucky people are deserving of their suffering and thus it is ok to abuse the privileged position to chastise the unlucky position and reduce their safety net, because they are just “parasites”, they could have chosen a better life for themselves. In fact, an essential difference between an illiquid economy and a liquid economy model is that in the illiquid model, there can be significant amounts of abandoned people, whereas the liquid model treats everyone as if they were identical.
Economists talk about infinite wants and limited resources, because it makes their job easy. Infinite wants mean unemployment or precarious work is impossible, for instance. It also means that questionable practices to create artificial demand or even addictive practices like gambling become acceptable. If the pope was an economist, he would say, “assuming heaven exists, it would be rational to buy my indulgences”. It would be “rational” indeed. It would be “rational”, because he said so…
After all, infinite demand means the situation where one has too many resources does not arise. This in turn means there can never be too many workers. There can never be precarious working conditions. Employers are fighting over employees. Unions become redundant. Rich people are the most morally good people on the planet and poor people are morally corrupt. “Capitalism” is the best system.
However, once one removes the infinite growth assumption, it becomes possible to criticise capitalism even from a purely theoretical position. One could say that neoclassical models and theories are not powerful enough to see flaws in real world practiced capitalism, because they make too many assumptions that automatically make “capitalism” optimal in every studied situation. In fact, devoid from the real world, neoclassical fawning over capitalism becomes nothing more than an indirect approval for the status quo and survivorship bias.
The status quo is “optimal”, therefore any change, even if there are intentions to improve the real world experiences of people, must be resisted as it is throwing us off the “true” and “optimal” growth path. There is no room for human emotions. No room for humans as social creatures. As I said, there is no way this reflects the real world. A model that tells us no improvement is possible would only be representative of an utopia, which is not a correct description of our world.
Growth has been worshipped, but yet there is so little of it
One of the most surprising results of following neoliberal policies (the political philosophy equivalent of neoclassical economics) is that the policies are satisfying neoclassical demands, and yet countries that actively ignored neoliberal capitalism, such as China, which has engaged in extensive capital controls, interest rate and exchange rate manipulations and extensive state planning and meddling in the economy, has been one of the fastest growing economies for the last 50 years. “Statism” apears to work, at least the Chinese kind. Economists still predict the failure of the Chinese economy, but the only ticking time bomb in China is its aging demographics, which are purely the result of its one child policy and western economies are not immune to aging demographics either. Meanwhile India is today where China was 25 years ago on a GDP per capita basis, despite being the more capitalist country. Over this time period, China has grown its per capita GDP five fold, but India only grew three fold from a much lower base. The absolute per capita growth in China over the last 5 years exceeds the total per capita GDP of India today. There is a great misconception on popular internet forums that China grew the moment it became “capitalist”. Not a single developing country economy that followed the neoliberal model that capitalist realists believe in, has become a developed country. The exceptions are specifically countries that bend the rules, ignore the IMF and their straight jacket policy recommendations and play “dirty”. I.e. they got richer because they didn’t play by the capitalist rules that keep developing countries poor.
Neoliberal policies did not result in more growth, as the obvious problem is a lack of the development of the division of labor. In neoclassical economics, the macro economy is modeled with one large representative agent, as if the economy was made up of millions of smaller representative agents that can be added up i.e. a micro economic agent is equivalent to a macro economic agent with a representative income. This is the equivalent of building the statue of liberty, by building millions of smaller statues of liberty, which then just have to be combined somehow. The division of labor relates to the structure of the economy. A neoclassical economist does not have enough modeling power to suggest that some form of initial government organization, loose credit or protectionism may be necessary during the “infancy” phase of a new industrial sector. Worse, if these policies are useful, the neoclassical economist can make no suggestion on how to structure them, so he is just a useful fool to justify the status quo. The favorite recommendation of the neoclassical economist is to “do nothing”.
In fact, we may end up in a paradoxical situation. Neoliberal policy might stifle growth and thus an economic policy that does not assume automatic infinite growth may end up resulting in more growth, simply because it is not taken for granted. Thus, the anti growth position may be a pro finite growth position in disguise! This in turn could make it difficult to criticise anti-growth, because the pro endless growth position results in poorer outcomes.
Demographics and population growth
Demographics are a good example to illustrate the concept of the structure of the economy. In a structureless economy, there would be a representative agent consisting of the average age of every actor in the economy. There is an obvious problem with this actor. Since it is purely representative, it does not behave like a microeconomic actor. In the microeconomy, every actor ages by one year every year as one would expect. Unfortunately, that luxury does not exist for the representative agent. The representative agent represents a fictional average and since the average age of an economy can go both up and down, it is possible for this actor then to experience reverse aging or slowed aging or no aging at all. Accelerated aging however, is only possible if young people die at a disproportionate rate with no replacements. Such an economy would soon meet its end. The representative actor has the problem that it ultimately needs a model of the average age of the economy. The neoclassical economist will make his life easy by simply declaring that the average age of the economy is derived from some form of preference and thus there is no demographic crisis of any sort, except in market communist China where the one child policy violated its citizen’s demographic preferences. The homogenisation of the agents leads to it being impossible to think of anything except aggregate statistics such as population count and GDP per capita. As these statistics are represented by rational numbers, the unboundedness of rational numbers implies these metrics can grow endlessly with no consequence.
The structure of the economy cannot be simplified to aggregate values like the average age of all agents as each agent can not only be of different ages, but also be in a different stage of his life. For the sake of simplicity I will divide the life stages of a human like agent into the child stage of physical and mental growth, the adult stage of work and family and the elderly stage of retirement. The child and elderly stages represent net consumption stages as they are dependent on the goods and services produced by the working age adults who by that definition must be net producers. What this means is that for every net consumer, there must exist a simultaneous net producer. An average age would not be able to capture this. Thus the representative agent has to be endowed with more and more independent variables such as dependency ratios and as more variables are added, these mutually dependent variables will run the risk of becoming inconsistent with one another. The model drowns in a sea of assumptions that bear less and less resemblance with the real world.
Growth dependence and the structure of the economy
Given the exponential nature of population growth, if every family has four children, then the population would double every generation. As each child represents a net consumer, the two parents need to produce enough to feed and house their children.
Therefore, whether a child represents a net addition of consumption for this household depends on when the child is born in the lifecycle of the parent. Teenage or twenty-something moms must still go to school or university, they do not produce, so in net, consumption exceeds production and by the time the child grows up, it will have had children of its own in which case consumption grows faster than production.
Thus infinite wants and limited resources can exist on a population level when they are applied to population growth, even in the presence of finite wants for each individual, but as mentioned, this situation depends on the growth of the population and for births to happen early in the life cycle of a human.
Alternatively, it requires the absence of contraception and family planning which results in high birth rates until even the net production of an adult household has been exceeded and extreme povery as seen in African countries sets in. What this means is that demand can be created in such a way as to make the problem statement of infinite wants and limited resources self fulfilling, but what is being forgotten here, is that this structure is an active choice and there is no reason for it to be always true as we can see in developed countries, where people voluntarily have less children and later in life. It would be truly weird for economics to claim to be the study of highly specific preferences. The problem statement of infinite wants and limited resources is akin to saying that economics is the study of people liking vanilla ice cream. It may be a major percentage of the population, but that does not make it less ridiculous.
Meanwhile the consumption of the elderly represents an insignificant percentage of the economy, as the economy keeps adding young people faster than working adults can become old. Demographic problems do not exist in the infinite growth scenario as the average age stays constant or is even decreasing. Future generations are bigger than past generations, so every parent in retirement has two working age children taking care of them directly or indirectly through government retirement schemes. This allows government retirement schemes to take on a pyramid or ponzi scheme nature as it requires every current recipient to have multiple future payees. This results in a growth dependent economy and the endless growth believing neoclassical economist stays quiet or resists attempts at reducing growth dependence by claiming it to be suboptimal. The moment growth stops, the pyramid scheme gets exposed and the neoclassical economists will deny the problems exist.
Given a large working age population and a smaller young generation, there will be less workers taking care of the elderly. The elderly may convince themselves that they can save their way to retirement, but this does not get around the problem of needing working age producers. Saving money, for example, does not automatically carry past production into the future. This is an illusion created by the assumption of a perfectly liquid economy. If anything, delaying decision making merely carries past obligations into the future and saving through active lending requires a young borrower in the present. If there is no young person ready to accept that obligation, then the retiree would have to act self sufficiently directly or indirectly. He or his peers would have to produce the food he will consume, the house he will live in and many other things while they were working age adults. Imagine eating thirty year old bread for the rest of your life! That is the illiquid equivalent of using money from thirty years ago. Instead of carrying past production into the future, the better idea is to produce it on demand, but as mentioned, this requires working adults exactly when the large old generation is retiring. In other words, the retirees should have had their children twenty years before retirement. Structuring the economy in this way would eliminate demographic growth dependence and thus eliminate the need for endless population growth.
Urban sprawl
As growth dependence is a general concept that arises from suboptimal structures, it can be applied to almost any context, I will illustrate it with a few more examples to get the point across. Urban sprawl is a suboptimal structure where it is considered better to develop the edge of town than to redensify the city center. This leads to an increase in the size of the road network, whose costs were partially covered by the developers looking to profit off newly zoned land, and long term maintenance burdens with very little value added in relation to that infrastructure. However, if the net tax revenue increase is offset by long term maintenance burdens, i.e. the infrastructure becomes unprofitable to the city, then the city will decline and become unattractive. To offset the long maintenance burden, the process is repeated to get the initial cash flow from developers. The city must continue to grow as otherwise the maintenance costs will catch up with the lackluster tax revenue. The solution to this form of growth dependence is to focus on redevelopment and densification of the city center as most maintenance costs do not scale significantly with capacity, but the distances that need to be crossed. Indeed, a skyscraper will require more sewer capacity for instance, but the area of sewage pipes scales quadratically, while the circumference scales linearly, which favors large pipes over small pipes when talking about units of sewage. The installation costs primarily depend on the cost of excavation and the cost of the pipe, which as mentioned gets more expensive with distance and the number of pipes, rather than their size.
Inequality
In an economy with permanently rising inequality, economic growth offsets the increase in inequality. Therefore, it is of utmost importance to keep the economy growing. Any resistance to economic growth will be condemned as trying to make everyone poorer. In such an economy, nobody is asking why growth is mandatory. If no growth and no shrinking of the economy occurs, then it just means that the economic conditions haven’t gotten worse. Thomas Piketty’s famous book mentions the concept that if the return on capital exceeds the growth rate in the economy, then this is a sign that the economy is becoming more unequal. Politicians and economists then see growth as a quick fix for what amounts to be a long term problem. Of course, Thomas Piketty has to explain why exactly capital would have an edge. In fact, what he has to do is not explain capital returns, but rentier returns i.e. returns above and beyond what is fair.
Examples of structure defined utility
Location
Location is a structural property of economic agents and physical products that does not exist in liquid models. Transporation services cost money, therefore arranging production and consumption in such a way as to be as close as possible, will reduce transportation costs. Thus, even if the value of the infrastructure is identical, the value of the relative positions, that is the ensemble of the residential, commercial and industrial buildings has value in it itself, even if all other things are equal. Thus the owner of a location, by its nature of being a monopoly, is capable of extracting the benefit of a more optimal ensemble by renting his location out. Thus it will appear as if the landlord is providing a useful service, as the location is going to the highest bidder, but it is the tenant, that is doing all the work in making the ensemble useful. The suggested solution is to perform coasian bargaining and buy the location from the owner. This results in significant inefficiencies in the short term, as the initial allocation of location has to be undone. However, in the long run, the problem disappears. This is problematic for Marxists, as they claim exploitation grows over time. The fast solution is either a land value tax or public ownership of land.
Manufacturing
In CNC machining, the input material is a so called blank that is larger than the final product. As CNC machining is a subtractive manufacturing process, material is removed and the product therefore contains less material. How then is it possible to argue that the product was worth producing in the first place? The valuable material was turned into small flakes and the actual part got smaller. The obvious reason is that the shape, the structure of the part, serves a function. Drilling a hole into a part is done so that it can be bolted on another part to build a bigger object. Multiple parts are combined into a final product to be used by the end user. Money creates the illusion that the structure doesn’t matter. We can simply compress everything down to a single dimensional number.
Money utility by person
For the sake of the argument, let us assume that there is a random allocation of money among n agents. Neoclassicals are often quick to dismiss thought experiments like this, because suboptimal states through mistakes simply don’t happen. What is truly infuriating then, is that since bad things don’t happen, thinking about how to get from a suboptimal state to an optimal state is a waste of time. Neoclassical economics devolves into a pure approval of the status quo. You aren’t allowed to escape suboptimality, since suboptimality is unthinkable. We are already optimal, what more optimality do you want?!? Meanwhile in the real world we build emergency exits, instead of assuming that all precautions to prevent fires are taken (with the argument that letting a house burn down is such a dumb thing, that it could never possibly happen to smart people).
Each agent has a utility function for money \(u_a(x)\).
The goal is to maximize \(\sum_{i=1}^{n} u_i(x_i)\) with the constraint of \(\sum_{i=1}^{n} x_i \leq X\).
Unsurprisingly, if we start with a suboptimal allocation x and calculate the optimal allocation y, then the total utility grows in the optimal allocation. Water is wet. Except, we are talking about money here. Money is not consumed when it is used.
In fact, we could play god, and simply take away all the money and then hand it over in the most optimal way and the economy would chug along. It would be incredibly unfair, but it would be highly optimal.
Now here is the kicker. If we do not have actor dependent money utility. I.e. the utility of money for the entire economy, then the utility of money would be defined by its optimal allocation \(u(x) = max_{(x_1, ... , x_n) \in \mathbb{R}^n} \sum_{i=1}^{n} u_i(x_i)\) subject to \(x = \sum_{i=1}^{n} x_i\).
The liquid function \(u(x)\) obscures the details of the illiquid economy defined by \(u_i(x_i)\).