Credit and Growth

I suppose Stoat will tell us why he doesn’t believe it, but until that happens let me bask in the happy glow of this article by Charles Eisenstein, suggesting a way to have a zero growth economy without shutting down the systems we have in place.

Quoting from Deep Thought, though, “You’re really not going to like it.”

Here’s the crux of the problem:

The reason is that our present money system can only function in a growing economy. Money is created as interest-bearing debt: it only comes into being when someone promises to pay back even more of it. Therefore, there is always more debt than there is money. In a growth economy that is not a problem, because new money (and new debt) is constantly lent into existence so that existing debt can be repaid. But when growth slows, good lending opportunities become scarce. Indebtedness rises faster than income, debt service becomes more difficult, bankruptcies and layoffs rise.

I think that’s clearer than I’ve seen before. Put that way, finding a solution actually doesn’t require all that much creativity. (That in itself tends to be a sign that the problem is formulated correctly.) But it will be a hard sell.


  1. Debt does not require growth for long term stability; what it requires is that spending (consumption, taxes, etc.) by creditors eventually rises to match what they make in interest. A liquidity tax on bank reserves, as suggested in the article, might be one way to guarantee that (though it would need to apply to more than just banks).

  2. But no growth is not achievable in a democratic world. People aren't going to vote for a government (or President) who does not promise to make them richer, especially if the rivals are making those promises.

    War all doomed 🙁

    Cheers, Alastair.

  3. I'm always dubious about people making simple or simplistic comments about monetary stuff, because its rarely so simple. In this case, if I understand correctly, the complaint is that the very method of creation of money makes an expanding economy necessary, due to interest: "Money is created as interest-bearing debt: it only comes into being when someone promises to pay back even more of it". This sounds cutesy, but is it true? [Disclaimer: I don't really know, these are guesses]: consider periods of hyperinflation, say the pre-Nazi one: these can be caused by the central bank "printing money": essentially what QE is now, no? That money is created without debt, no? In our case, the Bank of England is buying up bonds - debt - with newly created money. So at the very least you need to be more careful with the argument. Perhaps it is that "usually" money is created as debt, hence the problem. But if so it needs more careful statement. I think it also probably needs to deal with the issue of inflation.

    Also, I think the Epstein piece suffers from the usual problems: it points out the obvious (that some non-monetised activities, like caring for your kids or your friends) are Good, and then somehow elides that into increasing prosperity is Bad.

    There is a tension between having enough, and wanting more. I entirely agree that we "want more" too much, and that this is encouraged by our societies structure. But you can't wish it away, nor (important) is this a recent product of our consumerist society. Here is a nice quote from Hobbes, Leviathan:

    "Felicity, therefore, by which we mean continual delight, consisteth not in having prospered, but in prospering. "


    Personally, I love the internet. Digital cameras are a great step forward from film-based. Progress, and enhanced prosperity.

  4. "Money is created as interest-bearing debt: it only comes into being when someone promises to pay back even more of it. Therefore, there is always more debt than there is money."

    Lots of things are money. Debt is money as well. I think he might have said that himself, so I might be reading that unfairly.

    But the basic point is, I think, mixing up stocks and flows. There is no reason why debt should automatically grow larger than the underlying money stock – it depends entirely on the flow rate of repayments. You need to consider the whole system, not just a few instances of lending. And anyway, what is "the underlying money stock" exactly (see previous link)? How does it relate to the velocity_of_money? What's happening to the loan principal as it gets spent and percolates through the economy versus the loan repayments? Also, growth in the money supply doesn’t mean economic growth (cf money neutrality).

    I think William picks up on the common steady-state argument: (a) growth itself must cease and we need to transfer to a steady state economy; (b) interest and the money system as a whole forces growth on us, thus (c) we have to do away with the money system in its current form and replace it with something that doesn’t involve interest (or allows negative interest). It's a little hard to tell if Charles Eisenstein is making that argument – I don't think so, but it's opaque. He certainly suggests negative interest as an option (which, in real terms, as Krugman's pointed out, is already happening in the US – or would, if the US govt would actually take people's money.)

    Key point for me has always been: interest is just the price of renting money, no different in most respects to renting a car. It could be done by an organisation seeking shareholder dividends or by a credit union just covering their costs. The same principle holds. I might want a loan to have a computer now rather than in three or four years: I'm paying to enjoy the good earlier than I would otherwise be able to. That may or may not imply growth, but it certainly isn't a sufficient condition to claim growth is taking place, compared to where else that money may have gone.

    Some sectors of society are indeed pushing for the sort of resource-demand-increasing expansion that we’re unlikely to manage for many more decades, and demand for capital is an essential part of that. Also, the social function (and dysfunction) of renting is relevant (e.g. massive supply of buy-to-let loans in UK versus access to buy-to-actually-live-in-a-house loans). But I feel a long way from really understanding the nuts and bolts of how the system operates as a whole, and my gut feeling is this kind of article trotting out those tropes of "we're not getting any happier / we're all prozac'd econo-monkeys on an eco-suidical treadmill of doom" doesn't really help shed any light.

    This is one of those areas where I dream if I had a clone or two, I'd have time to make some up-to-date web version of the Phillips/Newlyn Hydraulic model. (Also original PDF paper here, built in 1950 at my current university.)

  5. There's loads of room for growth in things having little or no corporeal existence. Drama, music and poetry are all retreating from the world tangible to us, whether by shrinking Coulomb figures or diminishing sizes of physical features on various storage media.

    Unfortunately we consumers can't eat electrons.

    Perhaps it's safe to adopt the nuanced position that the portion of our economy based on things larger than a few microns in size can't grow forever. That seems to include the numerical count of us.

    The future lies in arbitrarily large amounts of poetry and music, looks like. Better get to work on that in our schools.

  6. Pingback: Another Week of GW News, September 9, 2012 – A Few Things Ill Considered

  7. "Unfortunately we consumers can’t eat electrons. "

    This may be technically true, but not in principle. Things like computer games, search software, improved communication technologies, etc. can support "growth" in a practical sense: people work to improve them, and the improvements, as rolled out, improve the quality of life for their customers without (necessarily) needing anything new in the way of hardware. (And people will pay for them, allowing "growth" in the sense money depends on.)

    This generalizes to an important point: "growth" can have many meanings and it's important not to confuse different ones. General improvement to quality of life worldwide could conceivably occur without increasing use of natural resources. Equally important, increasing use of energy could occur without increasing the human footprint on the planet, or even while decreasing it.

    MT, you made an interesting suggestion a while back, of using greenhouses for staple crops (I'm summarizing here). Such greenhouses could conceivably reuse most of their water, reducing the impact of large-scale agriculture on water resources. Light collection could be limited to ecosystems that could spare part of their light, through careful placement and scattered collectors. This might be an example of how to support substantial agricultural increases while at the same time substantially reducing the footprint on the global ecosystem(s).

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