As I listen to the background noise of pundits, prognosticators and politicians, I am struck by a distinction in language and thought that is glossed over by much of the conversation on our economy. For far too long we have used Growth and Prosperity as synonyms. Worse yet, the economic conversation has been warped to suggest that continual growth will create prosperity. This is utter nonsense. Still, you hear that the solution to our national slump is simply to get the economy “growing” again. The problem is that the kind of growth that economists and politicians are talking about is not additive, but exponential. Allow me to explain. Please note that I am deeply indebted to Chris Martenson’s Crash Course for these reflections.
Additive growth would be to say that if we begin with $1000.00 of sales then we will add $5.00 to that total each year, making $1005 in year two and $1010 in year three. It would take 200 years to double our annual sales from $1000.00 to $2000.00. At this rate, it would take another 400 years to double our annual sales again to $4000.00 In other words, by the time the sales grow fourfold, we will all be long gone.
But what if we decided to set the rate of change from the first year as a constant, i.e. $5.00 is .50% of $1000.00 so every year we increase by .50%. In the first year we would go from $1000 to $1005, but in year two we go to $1010.025, not a huge difference, but get ready, that little fraction is going to compound like crazy! In year three we’re up to $1015.075125 and in year ten we’re up to $1,051.14. What about our original 200 year timeline? In that amount of time our value is up to $2,711.52, the $2,000 mark was passed in year 140. What about the 400 year mark? Our value is up to $7,352.33, nearly double the additive total. While the rate of change may be constant, the amount of change dramatically increases the farther out the scale we go.
A further wrinkle in all of this is that .50% growth would be considered anemic and near-stagnation by most economists. “Healthy” growth is usually in the 3-4% range. China has purported to grow close to 10% annually during the course of the recent fiscal crisis. How do our $1000 sales look if we apply steady 3.5% growth? At year 10 we have sales of $1,343.92 annually. We jump the doubling mark at year 24 with $2,032.79 in sales. In year 200, our original doubling mark in the additive example, we generate a whopping $369,355.82. At year 400 we have an astounding $136,423,718.23 If my sales were in China with steady 10% growth, I’d be raking in $36,064,014,027,525,600,000.00 at year 400. That is Thirty Six Quintillion, Sixty Four Quadrillion, Fourteen Trillion, Twenty Seven Billion, Five Hundred Twenty Five Million, Six hundred thousand dollars.
What’s wrong with such an amazingly big number? Well, if we assume money is valuable in and of itself, it’s pretty spectacular. However, money cannot be eaten, drunk, lived in, or used to get around town. I suppose you could sew the notes together to make a sail for a boat, but where would you get the thread? Money is valuable only to the extent that it can be traded for real goods, like food, water, shelter, and transportation. At its core- Money is a promise of energy, i.e. I can trade it for energy sources like food and fuel, or I can give it to someone who will expend energy on my behalf, e.g. the carpenter who builds a deck for you. Growth can increase the supply of funds, but it needs a comparable growth in real world goods in order to prevent the destruction of the value of the money.
If loaf of bread is worth $1.00 when I open my business then the ratio of bread to my cash supply is 1 to 1000. I can buy 1000 loaves of bread with my revenue, provided that 1000 loaves are available. In order to maintain the $1.00 price, at the 10 year mark in our healthy growth model there need to be 1,344 loaves of bread available so that the ratios of cash and bread remain equal. This is possible as long as the baker continues to have access to a growing supply of baking ingredients. However, we live in a finite world, there are limits to land area, water availability, and essential soil nutrients. At year 200 in the 3.5% model, I need roughly 369,356 for the price to remain at $1.00 If the baker cannot produce this many loaves and hits a natural limit at say, 100,000 loaves I have a large pile of cash chasing too little bread. The price must rise. Now a loaf should price around $3.70 assuming demand is pretty consistent. When growth occurs with rising supplies of natural resources, we get more supply for the same price. When it occurs alongside a limit to natural resources, prices go up and more of our revenue is used for the same amount of the product.
My bread in China is a magnitude more challenging. At year 200 of steady 10% growth my cash supply is $189,905,276,460.46 with a supply of 100,000 loaves and assuming steady demand, I’m looking at a $1,899,052.77 loaf of bread. Get ready for some riots! The good news is that growth isn’t often sustained for such elongated periods of history. There are periods of slow and fast growth and even recessions. Furthermore, this simplistic example doesn’t take into account that the cash supply is chasing multiple goods at the same time, meaning that price discovery depends on how much of a good is essential and what portion of the cash supply is spent on it. However, none of this leads to prosperity.
Let’s think of a basic energy budget, since energy is the ultimate collateral behind all currency. You can imagine the supply as corn, oil, coal, firewood or whatever you like. The principles here are all the same, only the scale varies. Let’s say you have a basic energy budget of 100 units. That is how much can be collected and transformed each year. We can’t make energy, that would defy the laws of physics, but it can be transformed from one form to another. Let’s assume that 10 units are needed to gather next year’s energy. That leaves 90 units to work with. Now let’s assume that basic needs (heat, food, water) use up 70 units for our community. That leaves 20 units to work with. These units can be used in three ways, to enjoy prosperity, to grow or to split the difference and do both. In this first scenario, all 20 units are productively invested in making nice chairs for everyone in the community to sit on. No longer seated on the ground, the standard of living improves, but the energy needs do not change. In the second scenario, everyone still sits on the ground but ten new people are added to the community. When this happens, the basic needs level rises to say 75, meaning that next year only 15 units of surplus will be available. Finally, if the surplus is split, then five people are added to the community, and everyone gets a mat to sit on, not as nice as the chairs, but still an increase in the standard of living. The basic needs line rises to 72.5, meaning that 17.5 units are available for next year’s surplus.
As you can see, improving the standard of living does not decrease the surplus as long as the improvements don’t have their own energy needs (like a dogsled for transport, you need to feed the dogs too). However, growing, especially quickly, shrinks the surplus pretty quickly. In order to continually grow and experience prosperity, the resource base for our energy budget needs to keep pace. The system is dramatically threatened if a)our community grows to the point where there are no surpluses, b)the amount of energy available hits a natural limit, or c)the amount of energy needed to secure our supply goes up rapidly. Even with no growth, our energy surplus shrinks if it will take 20 units of energy to get energy next year. the surplus would be cut in half.
How can this little community respond to natural limits? 1)It can decide not to grow any more. 2)It can lower the standard of living intentionally (say, using the nice chairs for firewood instead of sitting on). 3)It can do nothing and create suffering as the basic needs budget provides less and less per person. Options one and two are the definition of sustainable living, wherein a conscious choice for population limits, simplicity or both promotes long term survival. Option three is the road to overshoot and systemic collapse. There will probably be violence, deprivation and struggle as people fight for the energy they need to stay alive. The next time you hear a politician, economist or a pundit claim that growth is what we need, know that they are advocating for unplanned, catastrophic collapse. If they advocate for prosperity, they are putting forward saving, conserving, and self-control.
These thoughts are not merely political, they are theological. Any system that purports to offer infinite growth is by definition a god, an infinite entity capable of giving endlessly. The only realm where unlimited growth makes sense is in the spiritual-interior life. For it is in this aspect of life where we may discover that “with God, all things are possible.”