Economic Growth
“Economic growth may one day turn out to be a curse rather than a good, and under no conditions can it either lead into freedom or constitute a proof for its existence.” ~ German political philosopher Hannah Arendt in 1969
The belief system of all capitalists is that growth is good. It is a value judgment appraised on necessity.
A business cannot stand still. It is either going up – making more profit or going down – its capital draining away. Stasis is stagnation; an omen seldom sanguine.
The reason is confidence. Optimism spurs investments to improve capacities to deliver goods and services to existing and new customers. Such investments go unmade under uncertainty. Instead, belts are tightened by cutting expenses.
The gyre of business is spun from anticipation: businesses are built and abandoned by looking ahead. Supply is constructed from anticipating demand; hence expectation is the essential lubricant for the engine of capitalism.
Without growth, markets become stressed. Caught between the desire to avoid loss and creeping pessimism, pricing becomes tentative. Fiscal spillage – tolerated when a rising tide lifts all boats – evaporates. Facing the prospect of slowing growth, businesses reflexively cut costs. In all but the most capital-intensive industries, the single greatest cost for a business is its people; hence, employees are the first to feel the squeeze. As the fuel for a capitalist economy is consumption, reducing demand through layoffs and suppressed wages is the perfect way to shut the growth engine down.
Capitalism itself sputters when its growth engine stalls; then governments must step in to rig the confidence game again: to tilt expectation from “insufficient demand” to “more supply needed.” Not being able to flip that switch was what prolonged the Great Depression.
The optimism that engenders growth acts a self-fulfilling prophecy, at least for a spell. Because confidence is not naturally self-sustaining, especially in mature economies, capitalism is intrinsically cyclic.
Entrepreneurial intrepidity when the economy is on the upswing gives way to apprehension on a mass scale as economic growth falters. A downturn ensues for an indeterminate duration. Then, as diffuse consensus gathers that the doldrums have hit bottom, the cycle begins again.
Investment
Growth is dependent upon investment. The American and British compensation system for corporate executives is geared against investment.
Executives are now paid largely in bonuses rather than salary. These bonuses are typically tied to the share price, which in turn depends on the ability of the company to meet its quarterly earnings-per-share target. Stock buybacks tend to boost earnings per share; investment plans may dent them. Hence, executives are incentivized to short-term profiteering that has negative long-term consequences, including declining productivity and decreased competitiveness.
“The result of the increased importance of bonuses and the use of these measures of performance is that managements are now less inclined to take short-term risks, such as cutting profit margins, and more inclined to take the longer-term risks involved in lower investment and the possible loss of market share that will result from higher margins.” ~ English economist Andrew Smithers
Innovation
Innovation may provide a critical competitive advantage in many industries. Being first to market with an innovative product may provide a lead position which becomes hard to overcome. Knowing this, companies in a competitive market may rush to put a new technology out, and so be able to crow about its products’ superiority. Such a rush often has negative consequences for consumers and the company.
Business leaders tend to panic when new innovations are about to hit the market. They scramble. ~ American business management maven Marc-David Seidel
In the 1970s, airplane makers McDonnell Douglas and Lockheed were locked in a bitter rivalry. The two produced nearly identical aircraft: the McDonnell Douglas DC-10 and the Lockheed L-1011.
Component delays slowed the entry of the L-1011 into the market by a year. Its sales fared poorly against the rival DC-10, and so the L-1011 was considered a failed innovation.
Meantime, the design flaws in the DC-10 were proving lethal. The American civilian air safety regulator – the Federal Aviation Administration (FAA) – is a captive creature of the airline industry. Only after a number of crashes, in which over 600 people died, did the FAA temporarily ground the DC-10 in 1979. McDonnell Douglas, having got its head start, forged on with its DC-10. Lockheed was unable to commercially catch up.
A similar rush to airborne murder occurred in the 21st century. In its ongoing competition with Airbus, Boeing hustled out a new 737 Max airplane without sufficient software testing. Boeing’s new 737 software control system had a decided tendency to take control of the aircraft and fly it into the ground, regardless of what a pilot did. In 2018 and 2019, 2 new 737s demonstrated the defect with deadly impacts that killed 346. A safety package that could have prevented the crashes was sold as an expensive extra.
After the 1st crash, Boeing did nothing to prevent further mishaps, fearing that taking public steps to safety – even doling out information – would hurt their financial bottom line.
“They kept saying they were still analyzing, evaluating.” ~ Indonesian civil aviation head Avirianto on Boeing’s response after the 1st crash, of an Indonesian-flown Boeing 737 Max
Only after the 2nd crash was Boeing called to account via massive cancellations of pending orders for the aircraft. Unsurprisingly, the FAA pussyfooted rather than take steps to protect the public from an obviously defective product.
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There are innumerable examples of early innovations being succeeded by superior technology which never caught on. The querty keyboard had an inefficient key layout compared to the later dvorak keyboard, but the dvorak design died out. The VHS versus Betamax video player contest followed a similar pattern.
Startups
New businesses often bring innovation to the market as their raison d’etrê. While some startups offer something new in the way of products or services, the secret of success for many has been in improved efficiency and/or delivering consumer convenience.
In 1907, Belgian-American chemist Leo Baekeland discovered the formula for an inexpensive, synthetic, nonflammable, durable, and versatile plastic, whereupon he started Bakelite in 1909 to market this now universal material which egregiously pollutes the planet for many centuries to come.
American industrialist Henry Ford did not invent the automobile, nor the assembly line. What he did do was cost-consciously innovate a way to mass-produce automobiles that middle-class Americans could afford, starting Ford Motor Company in 1903.
“Be particular. Never sell anything you would not want yourself.” ~ Bernard Kroger
Bernard Kroger, a shopkeeper’s son, invested his life savings of $372 (~$9,800 in 2018 dollars) to open a grocery store in downtown Cincinnati in 1883. The innovation that took Kroger nationwide came in 1916, when Kroger started self-service shopping. The tradition had been that merchandise was kept behind counters and delivered to customers upon request.
In the 1930s, Kroger became the first grocery chain to monitor product quality, and also the first to be surrounded on all sides by parking lots.
Ray Kroc bought into a small, San Bernardino burger joint in 1954, just after Richard and Maurice McDonald had invented the “speedee service system” for their hamburgers, milk shakes, and fries. Kroc had sold the McDonald brothers milkshake mixing machines and was impressed with the way that the McDonalds ran their restaurant.
The success of MacDonald’s is now legend. Their fast-food innovation brought a spate of imitators in the 1960s.
In 1967, Herb Kelleher and Rollin King started an intrastate airline in Texas. The ticket to success for Southwest Airlines was getting noticed via its quirky culture, serving neglected markets, and offering low fares by stripping out the service conveniences then common with the established air travel carriers in the highly regulated American market. Southwest Airlines was able to thrive only after airlines were deregulated in 1978.
Software has been the latest hurrah of American innovation, birthing many companies which are now household names, as well as many more which have been gobbled up by the giants or gone by the wayside. This wave of mindware masks an overall loss of startup vigor in the American economy, largely owing to the decline in manufacturing.
Productivity
One would naturally think that technological innovation leads to improved productivity, and thereby higher living standards; but this is often not so.
There was scant improvement in the life of the average working Brit in the century after industrialization. In the early 20th century, as Victorian inventions such as electric lighting ushered forth, productivity growth barely budged.
“You can see the computer age everywhere but in the productivity statistics.” ~ Robert Solow in 1987
The coming of the computing age was lauded at the time as offering a tremendous boon to productivity; yet output per worker did not show that to be the case. The Internet was supposed to be a 2nd coming in such productivity, but so far has been a no-show.
The American economic growth engine was humming the loudest from the start of the 2nd World War to the end of the 20th century: output per person grew 2.7% per year. Both before and after the rate was a lot lower: 1.5% from 1891 to 1939, and only 0.9% in the 21st century.
“What everyone feels to have been a technological revolution has been accompanied everywhere by a slowdown in productivity growth.” ~ Robert Solow
The failure of new technology to boost productivity became known as the Solow paradox, after Robert Solow, the economist who gave the issue a long look and was left scratching his head. Various attempts to explain away the Solow paradox – that the technological advances weren’t so great, or that there is a long time lag between innovation and productivity gain – are unsupported by the evidence.
Pollution
“I cannot conceive a successful economy without growth. We need expansion to fulfill our nation’s aspirations. In a high-growth economy you have a better chance to free public and private resources to fight the battle of land, air, water and noise pollution than in a low-growth economy.” ~ American economist Walter Heller in the early 1960s
“If a high-growth economy is needed to fight the battle against pollution, which itself appears to be the result of high growth, what hope is there of ever breaking out of this extraordinary circle?” ~ E.F. Schumacher
Economic growth is synonymous with environmental destruction: the invariable seizing of natural resources, almost all of which are not renewable, or restorable only at a cost orders of magnitude greater than their initial exploitation.
After many millennia of relentless exploitation, Earth must be more intensely gouged for raw materials. Economic growth can only consume more land. Meanwhile, freshwater supplies deplete faster than Nature can restore them.
“You could decrease environmental impact without hindering economic growth. These are 2 different subsystems.” ~ Finnish economist Tuomas Mattila
The economic sectors that do the most environmental damage are not those that employment and other growth factors depend upon. Further, development and application of engineering to reduce environmental impact can spur growth.
Consumption and trade generate waste which is dumped somewhere. In the modern economy, a tiny fraction of that waste is biodegradable on the scale of centuries. Goods last for only a short time. Garbage persists for generations.
A very few species have adapted to living off the leavings of humans, notably rats and flies. Otherwise, economic growth has been a death sentence for habitats, as the pillaging of lands, seas, and air, and the sprawl begotten from human domination, is intolerable to the life that is left unseized for our consumption.
As economies scaled in size, growth became an engine of extinction. Humanity unwittingly passed the tipping point in 1940, as the 2nd World War got underway.
Into the 21st century, with the dawning realization that the natural world has gone awry, no meaningful attempt has been made to turn back the clock toward sustainability – for that would spell the end of economic growth, at least in the minds of those ignorant of economics and unconcerned of impending extinction.
“Stop racing toward oblivion. Oh, such a sad, sad state we’re in.” ~ American musician Leon Russell in the song “Stranger In A Strange Land” (1971)
