Three Key Steps to Sustainability

Linked with Richard Douthwaite – Ireland, and with the Foundation for the Economics of Sustainability.

A long excerpt of a discussion on a google group (no more existing, put there by Janet M. Eaton, Wed 18 Sep 2002, SAND IN THE WHEELS (n°145), ATTAC Weekly newsletter:

By Richard Douthwaite,

… Falling profits and unused capacity from last year’s investments obviously discourage companies from making further investments in the current year. This has serious results. In normal years in OECD economies, somewhere between 16% (Sweden) and 27% (Japan) of GNP is invested, and a similar proportion of the labour force employed, in projects which, it is hoped, will enable the economy to grow the following year. If the expected growth fails to materialise and further investments are cancelled, up to a quarter of the country’s workers can therefore find themselves without jobs. With only savings or social welfare payments to live on, these newly-unemployed people are forced to cut their spending sharply, which in turn costs other workers their jobs. The economy enters a downward spiral, with one set of job losses leading to further ones. The prospect of this happening terrifies governments so much that they work very closely with the business sector to ensure that, regardless of any social or environmental damage, the economy continues to grow.

This is the main reason why short-term sustainability gets in the way of the longer-term kind. Governments need to be able to be much less concerned about whether growth occurs or not before they can feel free to tackle long-term unsustainability. So how might the link between growth and employment be broken? How can the rate of growth be made a totally unimportant indicator, at least as far as politicians and the general public are concerned? After all, as infinite growth is impossible in a finite world, an economic system has to have the ability to cease to grow without collapsing before it has any claim to be considered sustainable.

Despite the above, the main reason why the economy implodes when investment stops is not that people lose their jobs and consequently have less to spend. Any market economy that functioned well would automatically re-allocate a resource ( in this case, people) that was surplus in one area of activity to some other where it could be used. This is not happening in the present economic system because, as the rate of investment slows down, the money supply contracts, making it impossible for trading in the rest of the economy to carry on at even its former level – and still less expand to take on the newly redundant workers. What is needed, therefore, is a constant stock of money rather than one which, like a fair-weather friend, tends to disappear when times get hard.

Money disappears because almost all the money we use only comes into being when a company or an individual draws on a loan facility they have been granted by their bank. Borrowers create money when they spend their loans and it disappears when the loans are repaid. Consequently, if people ever repay loans worth more than the total value of the new ones being taken out, as can happen if the proportion of national income being invested declines, the amount of money in circulation will fall. This makes it harder to do business. Redundancies occur. And that, in turn, destroys the optimism required for further borrowing.

For example, if enough people begin to fear for their jobs (’Perhaps I ‘d better not take out that car loan just now’) or think that house prices are about to fall so that there’s no need for them to rush to take out a mortgage to secure a place on the property ladder, they are collectively making self-fulfilling prophesies. Whatever enough of them fear or expect will come about. They will defer borrowing, less money will be put into circulation, the property market will become less buoyant, and, yes, there was no need to rush to get into it after all. It’s the same with business. If enough firms think that their future prospects are so doubtful that it would be better not to risk borrowing to expand, they will find that they were right and there really was no need for a loan to put in that extra equipment.

This mechanism works in the opposite direction too. If people are optimistic and increase their borrowings, the extra money they put about enables an increased amount of business to be done. Firms find that not only are they running into capacity constraints but they are more profitable when their books are done at the end of the year because, with extra money in circulation, there was more of it to be shared around. So they borrow to expand, and this in turn provides work for other companies who, when they reach their production limits, borrow to expand as well.

The modern economy therefore constantly moves between boom and bust because of the way the money system works. There are very few periods in which there is a happy medium, an in-between. In the booms, the economy enters a virtuous circle with borrowing leading to more profits and therefore more borrowing. The only danger is inflation. In the busts, cuts lead to further cuts and a vicious spiral down … (full text).

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