Limits to Growth

Saral Sarkar

Current economic crisis that, roughly speaking, began in January 2008 and is, in July 2010, still going on, has shaken the world. Politicians, economists, and publicists are using superlatives to describe it. It has been described as the severest economic crisis since the Great Depression of the early 1930s. Seen superficially, similar, though not equally severe, crises have also taken place in the past few decades.

Despite several similarities, the present economic crisis differs from the previous ones in one very important respect. The present crisis developed and is continuing against a fundamentally different kind of background. Whereas the crises of the past were addressed by the powers that be with a consciousness occupied by the belief that limitless economic growth is possible, the present crisis has broken out in an intellectual atmosphere and against the background of a public discussion in which even the leading politicians of the world and government leaders are greatly worried about the ecological balance of our planet and the dwindling resource basis of industrial societies. Of course, the authors of the first report to the Club of Rome, Limits to Growth, had forecast the coming of such a situation already in 1972. But humanity could ignore this warning for a long time. Now, however, many political leaders seem to have woken up. Thus, A I Gore, the former vice-president of the USA, has made it his life's work to motivate humanity to seriously try to stop global warming. And the new president of the USA , Barak Obama, in his very first speech after winning the election, on 4th November 2008, spoke of the "planet in peril".

The planet is in peril not only because of global warming. The ecological balance of the earth is being undermined since long, e.g. through progressive deforestation, especially through the progressive destruction of the rain forests, through progressive decline of biodiversity, through increasing environmental pollution of various kinds.

The contraction of the resource base of industrial societies is most clearly manifested in the fact that oil extraction has, according to most experts, peaked or even crossed the peak. That is why the price of crude oil, by far the most important resource of modern industrial societies, had been rising continuously in the few years before the present crisis broke out. In July 2008, it reached over $140 per barrel. Also the price of other important resources—the energy resources coal, gas and uranium as well as industrial metals like copper, zinc, iron and steel, tantalum etc.—rose sharply. Even the prices of foodstuffs, for hundreds of millions of people all over the world the main source of energy for recreating their labor power, rose exorbitantly. After the recession began and deepened, the prices of these resources fell again, but they never reached the low level in which they were, say, in 2000. Today, in July 2010, despite the fact that the recovery from the recession is very slow, crude oil price is fluctuating around $80.

These price rises must not be mixed up with the usual inflations of the past, which were triggered mainly by excessively high wage demands of the working people (the so-called wage-price spiral). As people know, for quite a few years now, the real wages and incomes of most workers in all parts of the world are falling (or stagnating). These price rises are also not being caused only by rising demand from China, India, Brazil etc. If this were the only cause, a corresponding increase in supply by the corporations of the respective branches of the mining industry could stop the inflation soon. No, the main cause of the said price rises is the rise in the extraction costs of the most important raw materials. These cost rises are being caused by the fact that the raw materials in question must increasingly be extracted in geographical and geological regions and layers of the earth which are getting more and more difficult to access (think of extraction of oil from the bottom of the frozen sea at the West coast of Greenland!). For such extraction activities, necessarily, more and more energy and material input is being made. In the case of extraction of energy raw materials, what is most decisive is the energy balance, i.e. the net energy made available at the end of the process. Humans cannot change the geographical and geological conditions.

Also the environmental services provided by nature are important resources for any kind of society: its ability to absorb a certain amount of man-made pollution, its ability to regenerate the fertility of arable land, the health services provided by clean air and water etc. The costs of maintaining such resources in an industrial society have also increased along with the costs of extracting important resources like the ones mentioned above.

The rising costs of extracting or conserving these resources mean that less and less of them are available to most people. Only those fortunate few, whose real incomes are rising or are not falling despite these circumstances, can consume the same amount of these resources as before. Nobody can know exactly how much of these resources are being consumed by particular persons. But if one says that a person has lost his job or is working only part-time, if one says that a person's real income is going down, then it is tantamount to saying that this person is getting less and less resources, which include the labor power and services of other people (e.g. that of a doctor or railway workers).

This exactly is happening today in most parts of the world. Even in Germany, one of the richest and economically most successful countries of the world, the real income of the average working person is falling for several years now. In 2006, just a year before the present crisis began in the USA, German official statistics confirmed that since a few years earlier, real standard wages in Germany had been falling (Frankfurter Rundschau, 29.07.2006). Moreover, a large and growing number of workers are finding only temporary and part-time jobs. On the situation in the USA in 2006 it was said by three authors that also there, the real wages of the majority of the workers had fallen despite satisfactory economic growth (cf. Krugman 2006; Luce and Guha 2006). The middle class felt this national-economic growth personally as a descent down the social ladder. A trade union leader described the material situation of workers as a "race to the bottom"—more work for less pay, bad health care etc. But what roused his ire more was the fact that the good jobs were being slashed and that highly qualified technicians were being compelled to take up lowly jobs in Burger King, Wal Mart etc.(CNN, 3.09.2006; the author’s personal notes.)

It should not, therefore, surprise anybody that in 2007, in the USA, the housing boom came to an end and home-owners began defaulting. It began with the subprime mortgagors, but soon also the established working class and then the middle class started losing their ownership homes.

Trade-unionists and all kinds of leftists may blame the current misery of the working people on brutal capitalist exploitation, on the weakness of the working class, on speculators without any conscience, on greedy bankers, on globalization that has caused the relocation of many production units in cheap-wage countries etc. Of course, at first sight, all these explanations are partly correct. But on closer look one cannot but realize that when, on the whole, there are less and less resources to distribute because it is getting more and more difficult to extract them from nature (think of oil exploration at the west coast of Greenland!), then, even in a better capitalist world with a strong working class, at best a fairer distribution could be achieved, not more prosperity for all. It is now necessary to think in totally new terms; a paradigm shift is necessary, a shift from the former growth paradigm to what this writer calls the limits-to-growth paradigm.

One can further explain the matter in the following way: Workers in the broadest sense produce goods and services by using resources (including energy resources), tools, and machines, which are also produced by using resources. If due to diminishing availability of affordable resources a growing number of workers lose their job or are forced to work only part-time, then they are producing no goods and services or less of them than before. Now, since most goods and services are, in the ultimate analysis, paid for by (exchanged with) goods and services, it is unavoidable that these workers can get less goods and services from other people.

Today because of a higher level of automation and rationalization, less (or less full-time) workers are necessary to produce a given quantity of goods and services from a given quantity of resources than, say, twenty years ago. It is possible to employ more part-time workers for the same amount of production. That would ensure a fairer distribution of the required quantity of paid labor among those who can and want to work. But the capitalist system of production may constitute an obstacle to this idea.

In his article referred to above, Krugman (2006) speaks of a "disconnect" between wage stagnation, even fall in real wages, on the one hand, and satisfactory national economic growth on the other. The term "disconnect" seems to suggest that it is inexplicable, or that the trade unions are too weak to take advantage of the national economic growth. The hard fact is that the limits to growth have been reached. This is certainly confusing.

Just as it is possible that real wages are falling while nominal wages are rising, so it is also possible that real national income is falling while real GDP is growing. Real GDP is generally understood as a measure of a nation's prosperity. But, strictly speaking, it neither measures a nation's real income, nor does it indicate a nation's level of prosperity. What it measures is only the real value (i.e. value after correcting the distortion caused by inflation) of all, and all kinds; of, goods and services produced in a country in one year. Of course, goods and services produced but not exchanged through the market—for instance, the services of a housewife given to her family—are not included in GDP because they are not sold for a price. But they can be included, if one wishes to do so. Statisticians could impute some reasonable value to them, estimate the total, and add it to the official GDP. Then the same GDP will be expressed through a higher figure. That's all. But that is not the point here.

When one wants to think of real income, prosperity, wealth, wellbeing or welfare of a nation, and not just of the formal GDP, one has to examine the nature of the goods and services produced. A large part of them do not add anything to the income or wealth of a nation, in contrast to those of an individual or individual firm. For instance, the work of a soldier, who is getting paid although there is no war, the work of thousands of people who are producing weapons, the work of doctors who are treating patients, the work of those who are rescuing flood victims—such elements of the GDP are, for the nation (in contrast to the individuals involved, i.e. the soldiers, doctors, rescue workers etc.) actually expenditures, not incomes or additional wealth. They are costs. They are called "defensive costs" by economists who do not want to be victims of an illusion.

When a house that has been destroyed by a flood is replaced by a newly built one, then that is no addition to the national wealth. Only the loss has now been compensated for. The energy, materials and labor involved in this process are really costs. The same has to be said of all repairs. They are called "compensatory costs". All defensive and compensatory costs are included in the GDP. The 32 billion dollar, that are estimated to be the cost of repairing the pollution-damages caused by BP's oil spill in the Gulf of Mexico, will also be added to America's and Britain's GDP in 2010. The GDP thus loses some of its value as an indicator of prosperity.

In this context, the damages caused by ecological degradation are more relevant, because they happen mostly as a consequence of the same process that is supposed to be generating prosperity, i.e. industrial production. In China, officials of the national Bureau of Statistics estimated that in 2004 the costs arising from ecological damages in their country amounted to 3% of the GDP of that year. They estimated that it would cost the country 106 billion euro to remove (or repair) the environmental damage. This sum amounted to 7% of the GDP of 2004 (Financial Times, 8.09.2006). The report is a bit unclear. 7% of the GDP of 2004 may have been necessary to remove the environmental damage accumulated over past years and not only that caused in 2004. All the glorious growth percentages are not really growth in real income.

The huge damages that have been caused in China this year (2010) by the extreme weather events—prolonged drought, incessant heavy rain causing devastating floods and landslides—are most probably results of global warming. How much it has cost China will be estimated by statisticians only later. But it is safe to say now that these and other similar costs would reduce the real national income substantially.

But costs arising from single events or in one particular year are not so important for the present enquiry. More important is the trend. In 1971, K William Kapp, the first scholar to study this phenomenon, thought that it is necessary to enlarge the concept by adding to it the costs of damages inflicted by industrial production on the social environment: costs arising from occupational diseases, death, damage to health, physical and psychological suffering etc. due to bad work conditions, all of which, like ecological damages, can also be irreversible. Kapp came to the conclusion that "in spite of the problems that ...render estimating social costs difficult, it is justified to say that the dangers to environment and the costs arising to society from that show, both in absolute and relative terms, a rising trend parallel to growth in production and consumption" (Kapp 1979: XIII: retranslated).

Krugman (2006) wrote in his article that in the USA, wage stagnation and falling real wages in spite of satisfactory GDP growth began already in the 1970s. That was roughly also the time when Kapp came to his above-quoted conclusion. Costs arising to society at large must be borne by members of society. Since in capitalism the rich are powerful and the workers are poor and weak, it is unavoidable that the workers and the poor have to bear the greater part of such costs. Krugman wrote further that the allowances paid by employers to their workers began to be reduced already in the 1980s. The correlation between growing social costs and stagnating or falling real wages is obvious.

In Germany, a similar phenomenon can be observed today. To take just one example, health care costs are rising continuously (a growing part of such costs arise from mental and psychical sufferings). While, on the one hand, employers are refusing to increase their contribution to the statutory health insurance system, pharmaceutical companies are refusing to reduce the prices of medicaments, and doctors are regularly demanding and getting higher remunerations, workers' contributions, on the other hand, are being increased by law. That is part of the explanation for the falling real income of the workers and the poor.

Here is a statement of the government of Great Britain, in which it presents a perspective on the future and gives an example of defensive costs. It says that Britain must reduce its emission of green house gases by 80% in the coming 40 years and that it must therefore use more nuclear, solar and wind power. But then citizens must be prepared to pay 300 pound Sterling more per head per year so that the lights remain on (The Daily Telegraph, 28-07-2010)

Obsolete Profound Crisis Theories
If the argumentation presented above gives a deeper explanation for the present-day crisis and for the fact that the world economy is having great difficulty in coming out of it, then readers must also realize that all the other crisis theories that were formerly regarded as profound, namely those of Marx, Keynes and Schumpeter, are now no longer relevant, however illuminating they might have been in the past. Those theories were indeed profound, although in parts wrong. But they were all conceived within what is called the growth paradigm. As long as this paradigm was seen as an axiom, a self-evident truth, these theories were valuable. But today the growth paradigm has become only a very dubious belief, just as the Ptolemaic geocentric paradigm of astronomy became obsolete after Copernicus convincingly presented his heliocentric theory of planetary movements.

The earliest of these profound theories, those of Marx and his followers, were propagated with strong conviction by generations of socialists, communists and trade- unionists. Yet, even before anybody spoke of the limits to growth, many doubts were raised about the valdity of the Marxist crisis theories—not only by establishment theorists, but also by a few Marxists, Paul Sweezy, for example (see Sweezy 1942).

The more important among the Marxist crisis theories consists of two interconnected statements: (1) that economic crises regularly plague capitalism because the average rate of profit has a tendency to fall and (2) that this is caused by the rising tendency of the organic composition of capital. Marx and the Marxists thought that all new value is created by labor (variable capital) only, and that machines and raw materials (constant capital) do not create any new value. In this short essay it is not possible to go into the details of the complex arguments. Suffice it to say that this thought led to the failure to realize the importance of availability of easily accessible, and hence cheap, natural resources, especially energy resources, for the creation of wealth.

Both Marx and Engels could observe the ecological devastations caused by the industrial mode of production. But in a famous passage in Capital, Vol.1, Marx, attributed this to "capitalist production", which saps "the original sources of all wealth—the soil and the labourer" (Marx 1954: 506f; emphasis added). One could conclude from this that once capitalism is overcome, the problem would be solved. Faith in the immense power of scientific and technological development caused one to generally think that all material problems could be solved sooner or later. That is why also Marx and Engels were not overly worried. Engels, who even spoke of the "revenge" of nature, also wrote:
"... after the mighty advances made by the natural sciences in the present century, we are more than ever in a position to realize and hence to control even the more remote natural consequences of at least our day-to-day production activities." (Marx & Engels 1976, Vol. 3: 74f.)

So far as the resource problem is concerned, in Marx's days, and also until a few decades ago, a shortage of important natural resources was no serious topic of discussion. Nobody even thought of such a possibility. So Marx and his followers had no reason whatsoever to question the growth paradigm.

But people are today observing the massive oil spills in the Gulf of Mexico and the Yellow Sea near Dalian, and the ravages of droughts, forest fires, and deluge-like floods in America, Russia, China and Pakistan, all caused by global warming, and those who have experienced the catastrophic blow-out of the nuclear power plant in Chernobyl and the pesticides plant in Bhopal, can only shake their head in disbelief. But Marx and Engels lived in the 19th century. One cannot criticize them for not knowing things people know today. However, one cannot forgive those Marxists, communists and socialists of modern times who have not understood yet that there are limits to growth and that there are limits to the power of science and technology.

Another failure of Marx, Engels and their followers was their refusal to accept the basic truth of the assertions of Malthus on the population question. Marx considered Malthus's essay to be a "libel on the human race". Engels wrote that "economic laws are ... [only] historic laws which arise and disappear". Engels and Lenin declared that the limitless advance of science and technology nullified the law of diminishing returns, on which one part of Malthus's theory was based. (This summary of the views of Marx, Engels and Lenin is based on quotations contained in Meek 1971). That population growth and falling or stagnating per capita resource availability, the most important of which is food and water availability, are contributing to all aspects of the present-day crisis of mankind have today become obvious. If the peoples of the world have to spend more of their income on food and water—that is again the case in August 2010 -, then no wonder that demand for other, less important goods cannot rise, and then also the present economic crisis cannot end.

Another Marxist theory of crisis in capitalism is the underconsumption theory, which can also be seen as an overproduction theory. Keynes's crisis theory is similar to this. He too sees the cause of recession, depression and, more importantly, secular stagnation essentially in deficient aggregate demand. According to Keynes, the more people in industrial societies become richer, the smaller is the proportion of their income they spend on consumption, which consequently discourages investment by entrepreneurs. His witty phrase "paradox of thrift" is a call on the state and the people of rich industrialized societies to consume more and save less. They can make debts and consume more and pay off the debts later from future income that is then expected to rise. Unfortunately, Keynesians of today still adhere to this policy recommendation. But how can more income be generated in future if resources are declining and becoming ever costlier?

Today, Keynes's theory as well as the Marxist underconsumption (or overproduction) theory must be rejected on two grounds. Firstly, they are not convincing as an explanation of the present crisis. It is, since long, simply not true that the people in the rich industrialized countries are consuming too little and saving too much. In the USA, before the present crisis broke out, the savings rate had fallen to below 1 percent, and even workers and poor people had been, since long, indulging in high consumption with borrowed money. They were even buying on credit showy houses they could not really afford. The same had been the case in all rich industrialized countries, although the savings rate had nowhere been as low as in the USA. The crisis in the US housing market (2006/2007) did not arise from overproduction of houses. All houses produced were also sold to eager buyers.

Secondly, standard Keynesians as well as standard Marxists have not realized even today that it is the high consumption level of the peoples of the rich countries that is the main cause of global warming and other ecological degradations and damages. Fortunately for mankind, if it is not already too late, the resource crunch and the resulting long stagnation in the world economy will mitigate the ecological crisis a little. When, in the first half of the 1990s, industrial production almost totally broke down in the former Soviet Union and the East European countries, their emission of green house gases and other pollutants also went down. There indeed is a contradiction between the industrial mode of production and the health of the earth's environment.

Schumpeter had accepted economic crises and depressions as an integral part of the process of economic development. Unlike Keynes, he did not recommend any policy for preventing economic crises. On the contrary, he even thought they had a positive function, namely that of "creative destruction", without which economic development and growth of prosperity would not be possible. Present-day Schumpeterians, therefore, see in the current crisis a great opportunity. They hope that the "destructions" would start off a wave of creativity, a wave of innovations pioneered by visionary and dynamic "entrepreneurs", as Schumpeter had defined them. And that, they hope, would be the beginning of a new "long wave", the first phase of which would be one of high growth rates and rising prosperity.

They particularly address the twofold problem with fossil fuels serving as the main energy basis of industrial economies: the problem of their exhaustion (peak oil, rising prices) and the problem of CO2 emissions as the main cause of global warming. They believe that soon, thanks to further research and development as well as to initiatives of dynamic entrepreneurs, renewable sources of energy—solar, wind, biomass, geothermal etc.- would rapidly replace the conventional sources. There is already much talk about the coming green industrial revolution.

In one concrete case of the current crisis, when, about a year ago, the three great US car companies, particularly General Motors, were in danger of going bankrupt, Schumpeterians with their credo of creative destruction advised the US government to let them go bankrupt. A German publicist, Thomas Steinfeld, wrote:

"Schumpeter helped us realize that crises belong to capitalism just like wheels belong to a car. ... In the past, hundreds of great companies have perished, often with very bad consequences for their employees. But then, till now, again and again, new companies have taken their place. Then why should now a few companies get an existence guaranty? And why particularly these ones, and why now?"

At the end of his article, referring to the greatest worry of the car industry, namely the supply and price of oil, Steinfeld wrote:
"Whole sectors of the economy will now have to reinvent themselves. Politicians should not hinder them in that process. ... capitalism does not need any particular resource. It needs just resources. Maybe it would not even need oil, but would be ready, without any problem, to switch over, with the money earned in oil business, to alternative energies if only the profit is satisfactory. In this complete indifference of capitalism towards the materials enterpreneurs deal in lies a lot of hope". (Steinfeld 2008) ooo
[Excerpted from a longish piece–Understanding The Present-Day World Economic Crisis–An Eco-Socialist Approach–written by the author in July-August 2010]

Frontier
Vol. 46, No. 38, Ma r30 - Apr 5, 2014