Steady State Economy and Private Finance Capitalism

The Steady State Economy and the Institutions of Private Finance Capitalism

An increasing (but still small) number of environmentally oriented writers are starting to call for lower levels of economic consumption in the developed world and not just for ‘green’ consumption (i.e. the purchase of goods and services produced with relatively low energy consumption and low environmental impacts). While I find this trend encouraging, it still seems that very few of these writers understand the economic implications of this call for reduced consumption. If the highly developed world substantially reduced the production and consumption of economic goods and services the short term impact would be negative economic growth and the longer term impact would be a zero growth (not zero development) economy when a sustainable steady state had been reached. The problem with this scenario is that the key institutions of private finance capitalism (the fractional reserve banking and the stock market) cannot function in an environment of constant or declining output. That this assertion is true can be understood in a simple fashion.

First consider the banking system. If society’s total output of economic goods and services is constant or declining then the purchasing power represented by banking system reserves cannot be increasing. Or at least they could be increasing only if bankers and people with holdings in bank were getting richer at the expense of the rest of society, a situation which could continue only for a finite period of time. Another way of saying the same thing is to say that when the output of economic goods and services stops growing, real interest will cease to exist. Of course fake, inflationary interest could still exist depending on the details of monetary policy. If no possibility of real bank reserve growth exists then for-profit banks in the sense that they exist today can no longer function.

Similar conclusions can be reached about the stock market. If the total output of economic goods and services is not increasing then the purchasing power represented by stock funds cannot be increasing. The fundamental physical process of capitalism is the present provision of goods and services to production enterprises in return for future production of goods and services enabled by the provided capital. In an environment of constant overall economic output this exchange of present good for future goods will, on average, be an equal exchange. That is the value of the future goods produced will equal the value of the present goods provided to enable the production process. The average equality of this exchange is the definition of a zero growth economy. The function of capital investment in such an economy will be to preserve wealth not to increase it, so that a stock market as a general money making institution will no longer be possible.

The key question which needs to be addressed by anyone proposing an end to economic growth is what kind of economic and social institutions are needed to replace those of private finance capitalism. Some indications of my own attempts (or my wild ravings as some people might call them) to envision such alternate institutions within the context of a market economy can be found elsewhere in these essays. This task is difficult but necessary. Simply calling on people to embrace voluntary simplicity while leaving the institutions of private finance capitalism untouched is not going to produce a sustainable economic future.

August 8, 2007