Does Capitalism Require Endless Growth?

The modern notion that capitalism harbors the seeds of its own ecological destruction owes its provenance to a most unlikely duo of canonical economic thinkers. The Reverend Thomas Malthus claimed in the eighteenth century that a collision between the growing number of mouths to feed and the capacity to add productive agricultural land was inevitable. Karl Marx argued in the nineteenth century that technological change would bring with it falling wages, declining profits, and hence, ultimately, the collapse of capital formation.

The argument of Malthus was famously resurrected in the early 1970s in the Club of Rome report The Limits to Growth.¹ Around the same time, ecological economists Nicholas Georgescu-Rosen, Herman Daly, Robert Costanza, Robert Ayres, and others advanced the idea that all human economic activity fundamentally relies on a limited planetary endowment of what they call “natural capital.” On the other side, Marxist scholars like Paul Sweezy², Fred Magdoff, and John Foster³ have extended Marx’s insight, directing our attention to what they call the “growth imperative of capitalism,” by which they mean the indispensable necessity of capitalism to continually accumulate capital and generate a reserve of unemployed workers if it is to remain viable. Without continual economic growth, they argue, capitalism will collapse. Or, as Giorgos Kallis recently so succinctly put it, “Growth is what capitalism needs, knows, and does.”⁴

Taken together, the dilemma is evident: An economic system that requires perpetual economic growth on a spherical planet with finite resources simply cannot last.

Merging Marx and Malthus in this way has made Malthusian arguments accessible to elements of the global left that had historically rejected them. Capitalism and environmental sustainability simply could not be reconciled. Constraining the economy to keep it within a safe margin of ecological limits would only hasten capitalism’s collapse, while allowing capitalism to grow unconstrained would result in ecological collapse. Either way, the choice was clear: abandon capitalism or risk the end of the human project.

But Marx and Malthus are not so easily reconciled. Marx’s central insight was that capitalism would collapse of its own contradictions, including rising inequality and immiseration of labor that would ultimately destroy the market for the goods that capitalists produced. As it turns out, the mechanism by which this would occur, technological change driving greater economic productivity, was precisely the mechanism that Malthus failed to anticipate when he predicted that food production would fail to keep up with population growth. In Marx’s crisis lay precisely the mechanism that would prevent Malthus’ prophecy.

We see much evidence for this today. Improving technologies have driven a major expansion in food availability, along with continuing production efficiencies across the global economy more generally. The world faces no shortage of ecological challenges — species extinctions, collapsing fisheries, depleted aquifers, poisoned land, and, of course, the inexorable rise of global temperatures as atmospheric concentrations of greenhouse gases increase. And economists today concern themselves with the threat of “secular stagnation,” chronically low growth rates that threaten long-term prosperity.

But it is important to distinguish these challenges from the sweeping claims made originally by Sweezy, Magdoff, and Foster and repeated today by prominent intellectuals and activists such as Naomi Klein and Bill McKibben. In the pages that follow, I will demonstrate that both neoclassical growth theory and empirical evidence suggest that capitalist economies do not require endless growth but are rather much more likely to evolve toward a steady state once consumption demands of the global population have been satisfied. Those demands demonstrably saturate once economies achieve a certain level of affluence. For these reasons, a capitalist economy is as likely as any other to see stable and declining demands on natural resources and ecological services. Indeed, with the right policies and institutions, capitalist economies are more likely to achieve high living standards and low environmental impacts than just about any other economic system.

1.

From the window of his Manchester home in the mid-1840s, Marx’s colleague and contemporary Friedrich Engels looked out on a horrifying microcosm of what was happening in England and throughout the newly industrializing world — a stark imbalance between the luxurious wealth of capital owners and the miserable poverty of the workers they employed. Marx himself had witnessed firsthand this same imbalance, and over several decades of intense study came to propose that a core flaw of capitalism resides in excessive claims placed by privately owned capital as against labor on the economic value created by their combination.

Herein lay the fundamental contradiction, in Marx’s view, which would bring an end to capitalism. As capitalists invested in ever-newer technologies, Marx predicted that their dependence on labor would decline. As this occurred, returns to labor in the form of earned wages would decline. If there were no return to households for their labor, there would be no income with which to consume goods produced by capital owners, nor savings that households might reinvest in new capital. An economic system in which declining returns to labor due to technological change immiserated most households was a system in which the market for goods sold by capital owners could not long survive.

Notably, Marx did not dispute the necessity of capital for producing what households need, only who in society need control this resource. The problem, as Marx saw it, was that the surplus value created by labor was being unfairly conscripted by capital owners.

In the first decades of the twenty-first century, a number of prominent analyses have suggested that Marx’s prophecy is perhaps coming true. MIT economists Erik Brynjolfsson and Andrew McAfee⁵ in recent years have suggested that continuing automation and rising labor productivity threaten mass unemployment, a problem foreseen by Keynes in 1930.⁶ Thomas Piketty, in his much-lauded book Capital in the Twenty-first Century⁷, finds that returns to capital have exceeded real economic growth in the industrialized world in recent decades, attributing that shift to ever-increasing concentration of limited capital in the hands of the few.

The economist Robert Gordon^8,9 finds that growth rates slow dramatically as societies become wealthier. The growth associated with the enormous rise in economic productivity and output associated with the transition from agrarian to industrial societies cannot be sustained as societies shift from industrial to post-industrial economies. Meanwhile, Paul Mason and others in the “post capitalism" movement contend that “an economy based on the full utilization of information cannot tolerate the free market.”¹⁰ His argument is that capitalist corporations will not prove capable of capturing value from the technology they deliver, value adequate to sustain them over time.

Before considering whether these various challenges to advanced capitalist economies portend their collapse, it is important to note what none of these analyses suggest, which is that capitalism’s unquenchable demand for growth has run up against fundamental biophysical limits. If anything, these analyses suggest the opposite: that the limits to continuing growth in capitalist economies are social or technological, not biophysical. Brynjolfsson and McAfee, and Piketty, through technically different mechanisms, ultimately raise concerns that center around the immiseration of labor. Whether due to technological change, growing returns to capital, or both, all three centrally focus on declining wages and employment as the central challenge that threatens robust and equitable growth in capitalist economies.

Mason, conversely, projects that technological change threatens returns to capital. The commodification of everything — material goods, knowledge, and information — ultimately brings with it an end to profits and hence both capital accumulation and capital reinvestment.¹¹ Gordon, meanwhile, observes that there is simply no further techno-economic revolution that can replicate the one-time boost in economic productivity that comes with the shift from agrarian to industrial economies.¹² If there is a common theme in these challenges to capitalist economies it is that all find their way, to one degree or another, back to Marx, not Malthus. The long-term challenge for capitalist economies, these analyses suggest, is too little growth, not too much.

2.

The headwinds facing advanced industrial economies — stagnant growth and rising inequality — tell us something about the prospects for low- or zero-growth capitalist economies. Gordon’s analysis suggests that industrialized economies in relatively short order achieve a “satisficing” level of household consumption. Once that level is achieved, and once societies have built out the basic infrastructure of modernity — cities, roads, electrical grids, water and sewage systems, and the like — the growth rates characterized by the early stages of industrialization cannot be sustained by the knowledge and service sectors that increasingly dominate post-industrial societies.

World Bank data clearly show this. Economic growth rates decline as countries become richer. Growth in GDP per capita in OECD countries slowed from an average of about 3 percent per year in the period 1961–1985 to about half of that in the period 1986–2014.¹³ Gordon’s analysis is supported not only by the long-term slowing of growth in industrialized economies but also by saturating household consumption in those economies. According to the World Bank, OECD growth in real household consumption per capita (consumption of both goods and services) has shown steady decline each decade from around 3 percent per year in the 1970s to around 1 percent per year since 2000.¹⁴

Brynjolfsson and McAfee, and Piketty, suggest that declining returns to households from their labor will drive worsening inequality and stagnant or declining wages. But that does not imply a declining material standard of living. The same technology gains and capital mobility that have eroded the power of labor in developed world labor markets have also persistently reduced the real prices of goods and services, making them ever more affordable.

Even as nominal wage growth has slowed or stagnated in the US and other advanced developed economies, households are able to buy more with less of their incomes. This is because the cost of goods and services has grown even more anemically, inflation nearly disappearing in these countries over the same time period, meaning wages have grown in real terms. OECD data show that real wages OECD-wide have grown by about 1 percent per year between 2000 and 2014, including real growth in the United States, the United Kingdom, France, and Germany.¹⁵ Growth in the Scandinavian economies (Norway, Denmark, Sweden, and Finland) has exceeded this.¹⁶

This is true even at the bottom of the income distribution. Virtually all low-income homes in the United States today boast a refrigerator, modern heating and cooling, and electricity. Large majorities have dishwashers, washers and dryers, computers, cable television, and large-screen displays. Consumer goods and services once considered luxuries in the United States and other developed countries are today widely available and utilized by all citizens. That is mostly because home appliances and other goods today cost a small fraction, measured in the work time necessary to purchase them, of what they did thirty years ago.^17,18

Of course, rising economic inequality raises a range of concerns beyond those related to access to goods and services. Higher rates of inequality may threaten social mobility, social cohesion, and perhaps even democratic governance. Even so, inequality appears to decline as nations industrialize and become wealthier. In rich Scandinavian countries (Sweden, Denmark), inequality has essentially halved since World War II.¹⁹ Declines recently are less impressive in the United States, United Kingdom, and other parts of Europe²⁰, but, nonetheless, inequality remains reliably lower than in most developing economies²¹, where aggressive but still insufficient capital formation in the presence of large labor forces tends to result in higher levels of inequality.

Moreover, increased capital mobility has driven declining inequality between countries, even as it may be worsening inequality within them. Thanks to global trade and international supply chains, firms have become increasingly able to locate production facilities in the developing world, where labor with the requisite skills can be employed at lower wages.

As might be expected, labor in industrialized countries is not happy with this turn of events. But the result has been a long-term convergence of wages between producing and consuming countries, declining inequality globally, and a dramatic decline in absolute levels of poverty. The ILO reports that between 2000 and 2011, real average wages approximately doubled in Asia.²² In Latin America, the Caribbean, and Africa they also rose substantially, well above the developed world average²³, while in developed economies they increased by only about 5 percent, far below the world average²⁴, leading to what leading ILO observer Patrick Belser has dubbed “the great convergence”²⁵ — a dynamic that was incidentally predicted many decades ago on theoretical grounds by famed economist Paul Samuelson.²⁶ Meanwhile, according to the World Bank, the global share of people living on less than $1.90 per day (the World Bank definition of extreme poverty) fell from 44 percent in 1981 to 13 percent in 2012.²⁷

Taken together, then, the dynamics transforming the global economy, while not without challenges, paint an interesting picture of slowing growth, converging global incomes, falling cost, and saturating demand for goods and services. Should these dynamics hold, it is not hard to imagine a future in which the global economy gravitates toward a prosperous and equitable zero-growth economy placing relatively modest demands on the biocapacity of the planet. But getting from here to there will require a number of further conditions.

3.

For a capitalist economy to flourish without economic growth, population stabilization is a necessary condition. This condition is, of course, not limited to the capitalist model. It is implausible that any alternative to the capitalist model could deliver zero economic growth with a persistently growing global population.

The second critical precondition for a steady state capitalist economy is that everyone must achieve a satisfactory level of consumption. This second precondition, in contrast to the first, is arguably unique to the capitalist model. The fundamental characteristic of capitalist economies, that which sets them apart from centrally managed socialist economies, is that capitalism, formally defined, is the economic system where the means of production resides in the hands of households.

By households, of course, I mean private individuals. Some households own more capital than others, but most households in capitalist economies own some capital, whether as shareholders in public corporations, owners or investors in privately held businesses, beneficiaries of pension funds, or holders of corporate bonds. Irrespective of which particular households own it, all capital formation in a capitalist economy originates from households, be it directly or indirectly. In a capitalist economy, households run the show, both as producers and — as we shall see next — consumers. All else being equal, households decide how much they spend and how much they save, how much they work, and how much leisure time they wish to have.

So long as there remains significant pent-up demand for work and consumption, those choices are limited. Households that don’t earn enough to consume all the goods they need don’t have a choice of whether or not to save or whether or not to work. But once those needs are met, work, consumption, savings, and leisure become a matter of choice. Households will work as much as they need to consume and save as much as they need or want.

In an economy wherein households have globally realized a level of physical consumption they deem “satisficing,” aggregate consumption will precisely match individual household preferences among consumption, savings, and leisure time. For this reason, a steady state economy cannot be achieved in a capitalist economy until such time as households in the aggregate have deemed themselves to have achieved sufficient goods and services consumption.

This is an outcome that in many parts of the world may not be so far away. In the rich Scandinavian countries, households today already forfeit significant added earnings in favor of increased leisure time. According to the OECD, the number of annual hours worked per employed worker has declined substantially in the 14-year period from 1999 to 2013 (0.2%–0.3%/year in Norway, Denmark, Sweden, the UK, and the US; 0.5%/year in Germany) while real wages in these countries have increased by about 1.3%/year over the same period.²⁹

So long as consumption is unsaturated, labor is in surplus, and capital is scarce globally, growth will be required to meet pent-up demand for goods and services. Once that demand is met, however, either because wages have risen sufficiently to achieve satisficing levels of consumption, or the cost of goods and services has declined sufficiently to achieve the same outcome, continuing aggregate growth is no longer required, or likely.

4.

If there is a problem with this picture, it is the issue raised by Mason and the post-capitalists. Why would anyone continue to invest in capital when returns have fallen to zero? The answer brings us back to the central role of households in capitalist economies. Given the means to do so, most households in capitalist economies forgo some consumption in order to save, allowing some of the economy’s production to be directed toward the creation of new physical capital to replace or grow the existing capital in place instead of consuming all production in the present period.

Savings behavior by households, it turns out, is not driven by the returns that households expect, but rather by their desire to save for retirement. As demonstrated by Franco Modigliani and colleagues³⁰ (work, not incidentally, that won Modigliani a Nobel Prize), households working toward retirement want made available to them financial resources to carry them through their post-retirement life without working, so they save for this. Even if they receive no positive return on the savings they have set aside, they will nonetheless be able to draw on them.

Why invest rather than just stuffing savings under a mattress? Because even in a zero-growth economy, returns to capital are not always zero. When the supply of physical capital supported by household savings declines, returns to capital rise, inducing households to raid their mattresses and invest their savings in the hope of getting more back for retirement than they put in. Eventually, the system adjusts itself and capital returns again fall to zero (on average, economy wide).

The result, then, is that in a zero-growth economy, households provide all the new capital needed for producers to replace capital stock that has deteriorated (depreciated) out of the system, but no more. There is no need to grow the capital stock in a zero-growth economy, just to sustain and refresh it. Household savings for retirement accomplish exactly this.

But what about producers? Why continue to build replacement capital if the expected returns are zero? Again, because expected returns to replacement capital will not always be zero, even when average returns are. When investment in new capital falls, capital stock in the production economy falls as well, and with that employment falls, because the productive capacity of the economy shrinks. Lower output and lower wages in turn create new opportunities for profitable investment in new capital stock and increased employment. In a zero-growth economy, household savings invested match replacement capital needs, economy-wide capital returns on average approach zero, and production and consumption continue apace, neither growing nor declining.

Theoretically, then, there is no particular reason that capitalist economies must collapse without growth. Empirically, a range of trends suggest that growth rates slow as societies become wealthier, not because labor becomes immiserated but rather for the opposite reason, because demand for goods and services saturates.

5.

There remains, however, the problem of Malthus. A zero-growth steady state economy is not necessarily a sustainable one. Writing in the eighteenth century, at the dawn of the industrial revolution when even the British economy was still overwhelmingly agrarian, Malthus viewed the natural capital of deepest concern as being productive agricultural land. Today, Malthus’ argument is commonly cast more broadly in terms of our inattention to our planetary endowment (and the legacy we leave) in general.

There are clear constraints on planetary endowment. The economic system resides within, and draws upon, the munificence of the planet’s natural ecosystems and depends on it for its functioning. There is growing recognition that these natural capital “services” are coming under increased strain as population grows and carbon emissions and other pollutants from economic activity challenge the capacity of natural capital to absorb economic waste and replenish the supply of natural capital services taken from it.

To be truly sustainable, the natural capital of the planet must carry the economy indefinitely without suffering irreversible or catastrophic damage. Sustainability requires that natural capital have the capacity to absorb all waste products from human activities and to replenish itself sufficiently over time to maintain its stock, including, notably, its capacity to produce food. This requirement is as true of a steady state economy as of any other and applies to alternative economic systems as it does to capitalism.

Human societies today consume prodigious quantities of natural capital. With much of the global population still living in deep poverty, that level of consumption is likely to grow dramatically in the coming century. But even if consumption did not grow, steady state consumption over time might still deplete reserves of natural capital sufficiently that it would be no longer able to support prevailing levels of consumption.

For this reason, some have called³¹ not only for an end to economic growth but also for the even more radical step of “degrowing” the global economy. Degrowth of the economy can be achieved in one of two ways, reducing population or reducing per-capita consumption. These two levers are not unrelated.

Malthus imagined that humans, like bacteria in a petri dish, reproduced geometrically in relation to resource availability. In fact, the opposite is the case. As human populations move from subsistence agrarian economies to modern industrial economies, and become more affluent in the process, fecundity levels decline. The human population over the past century has risen dramatically, but not because people were having more children. Rather, thanks to better public health and medical care, more children are surviving to adulthood, and adults are living much longer.

The distinction is an important one. Fertility rates in virtually all developed economies are at or near replacement levels, meaning that native-born population levels are either stable or falling. Many emerging economies are at or near replacement levels of fertility as well, largely due to rising societal wealth and incomes. Indeed, differences among demographic models as to when and at what level global population will stabilize are almost entirely attributable to different assumptions about economic growth rates in Africa and Developing Asia. Accordingly, efforts to stabilize global population and reduce per-capita global consumption are potentially at cross-purposes. A global population that continues to live in subsistence agrarian economies will likely be much larger than one that has fully made the transition to an urban and industrial economy, even as the latter consumes at significantly higher levels.

Advocates of degrowth propose to address this paradox through a process they call “shrink and share,” proposing not only to limit total global consumption but also to redistribute it equitably. A more equitable distribution of a smaller pie would presumably allow those remaining in deep agrarian poverty to make the leap to modern living standards and fertility rates.

Such a scheme might be possible theoretically but as a practical matter would appear to be unlikely, requiring some combination of voluntary austerity and redistribution at a global scale or, lacking that, some form of global government that would mandate limits on personal consumption and would forcibly redistribute wealth from richer precincts of the global economy to poorer ones.

Even if such a scenario were plausible, it is not clear that it would actually degrow the economy. Global per-capita income today is about $10,000–$15,000, depending on the accounting method.³² Even with perfect redistribution of wealth, this level of income would probably be insufficient to achieve something approximating modern living standards globally. Actually degrowing the economy significantly from present levels would probably leave large populations stranded in deep agrarian poverty. And to provide a first-world perspective, such a perfect redistribution would require — for global GDP to be maintained at its current level — High Income countries (World Bank designated) to reduce their present GDP by between about 60 percent to 70 percent, again depending on the accounting method.³³ This surely qualifies as exceptional austerity, voluntary or otherwise.

There is also the small matter of whether such a scheme could actually sustain itself economically or ecologically. It is not clear that such a scheme could work without large-scale collectivization, as it is not clear that the incentives necessary to keep producers producing, savers saving, and investors investing in new or replacement capital voluntarily could be sustained.

The history of the collectivization of production has not been good for either living standards or the environment. Incomes stagnate as more work often does not bring greater income. Stagnant incomes bring lower savings and capital reinvestment, and lower capital reinvestment brings aging capital stock and infrastructure and ultimately stagnant or declining economic productivity. These problems become self-reinforcing. Incomes stagnate further with declining productivity, and with declining incomes comes less surplus either to redistribute or invest in new capital and infrastructure. Aging capital stock and declining productivity also bring greater calls on natural capital.

In short, natural capital is not the only endowment that societies erode at their own risk. Societal wealth, the product of economic surplus made possible by rising economic productivity, is also an endowment that grows as societies develop economically. Erosion of that endowment erodes the surplus necessary to reinvest in new capital that is capable of sustaining living standards while requiring declining calls on natural capital.

6.

There is another path to stable and declining calls on the planet’s endowment of natural capital. Malthus erred not only because he failed to understand the relationship between fertility rates and food consumption but also because he underestimated the rate at which agricultural productivity would improve. By growing more food on every acre of land, human societies avoided mass starvation. More broadly, rising economic productivity due to technological advances raises incomes, creates economic surplus that can be reinvested in new capital and infrastructure, and produces more economic output from less natural capital input.

So long as there are large populations living in deep poverty, gains in economic productivity will be put toward greater output, assuring that some or all of the efficiencies associated with productivity gains will be put toward greater production and consumption. But once everyone on the planet achieves a satisfactory level of consumption, consumption of goods and services should stabilize while calls on natural capital should stabilize and then decline.³⁴

By satisfactory levels of consumption, what I mean is a standard of living that would be recognizable to the average citizen of an advanced developed economy — modern housing, an ample and diverse diet, sufficient electricity for run-of-the-mill household appliances, roads, hospitals, well-lit public spaces, garbage collection, and so on. The saturation of demand for goods and services in advanced developed economies in the latter half of the twentieth century provides a reasonable proxy for the point at which most people start to see diminishing utility from further household consumption.

In a zero-growth world, in which household consumption has saturated while labor- and resource-sparing technological change continues, leisure time grows continually over time while societal calls on natural capital decline.³⁵ Given these conditions, how quickly a zero-growth economy is achieved, and calls on natural capital globally peak and then decline, depends upon three closely related phenomena: how rapidly global population stabilizes, how rapidly incomes among the global poor rise, and the rate at which resource-sparing technological change occurs.

7.

Getting to a zero-growth steady state economy with declining calls on natural capital will require, then, sustaining — or better yet, accelerating — two trends that capitalism has proven better able to advance than any alternative economic arrangement to date: lifting large agrarian populations out of poverty, and improving resource productivity through technological change. The former, as noted above, is also the key to stabilizing global population.

In these regards, standard neoclassical models and theory suggest an idealized and uniform expression of capitalism. The means of production is privately owned by households. Households are free to purchase whatever goods and services they wish in an open, free market. Households are free to allocate their budget between current consumption and saving for the future, and to allocate their time between work and leisure. Producers act to maximize profits and are constrained by perfect competition.

In reality, capitalism takes many hybrid forms in economies around the world. The trends elaborated above and the many imperfect (from the admittedly reductive and formalized view of economic theorists) expressions of capitalism and markets around the world would suggest that complete private ownership of all production, perfect competition, and minimal government intervention in markets are not necessary for the basic dynamics described above to sustain themselves, and are unlikely to obtain for many generations in any case.

Scandinavian countries redistribute more income than other OECD economies. Japan, France, and South Korea have more actively engaged in industrial policy and centralized economic planning than, say, the United States or Great Britain. And while these, along with a range of other indigenous factors, appear to account for some significant variation in key trends associated with growth rates, wealth distribution, dematerialization, and calls on natural capital across national economies, the broader trends are robust. As economies develop and become wealthier, and as populations are integrated into the formal, market economy, productivity rises, calls on natural capital in relation to economic output fall, poverty is eradicated, and inequality, both within nations and between them, declines.^36,37,38

What is important is that a set of processes are established and sustained — capital formation, integration of everyone into the cash and wage economies, rising labor, capital, and resource productivity, and the generation of economic surplus for savings and reinvestment in new capital and infrastructure. These dynamics are not inconsistent with a range of state interventions in the private economy. Social insurance to reduce economic insecurity, public investment in infrastructure and the creation of public or heavily regulated private utilities to provide for basic services such as water, sewage, and electricity, antitrust and other measures to assure fair and competitive markets, public support for basic science, applied research and development, and commercialization of new technologies — all represent measures national governments in various contexts have implemented to good effect and that, depending on the circumstance, may even be essential to sustaining and accelerating rising incomes and resource productivity.

But we should also not overlook the underlying engine that has driven rising prosperity, slowing population growth rates, and increasing resource efficiency. Standing before the offices of the Federal Trade Commission in Washington, DC, is a sculpture depicting a heavily muscled man trying to restrain an even more heavily muscled workhorse. The horse represents the massive power of trade; the man represents the obligation of government to tame and bring into the service of society this wild and vibrant power. This sculpture could have been placed just as meaningfully in front of the Securities and Exchange Commission or the Environmental Protection Agency, or indeed any government entity in any country charged with harnessing and guiding the forces unleashed by capitalism. But the Federal Trade Commission sculpture also implicitly conveys a forceful warning. Tame it as you will. But don’t kill the horse we need to ride into the future.