An image of capitalism based on constant growth has become established in public perception and political discussions. This is eating its way into more and more areas, becoming unsustainable if not tamed or stopped, or at least prevented from growing. Supporters of the degrowth movement even use a correlation between GDP growth and CO2 production to legitimize the demand for a restriction on GDP growth.
In this picture, capitalism is equated with a system with principles and rules like communism or Leninism. In a world with many uncertainties between war and sustainability, it is doubted that growth is a meaningful goal in itself, just to satisfy the capitalist system and keep it alive.
Professor Werner Plumpe paints a very different picture of capitalism in an interview with Daniel Stelter (Starker Staat, BTO Podcast #150 from 7.8.22). For Plumpe, capitalism is not a system, but a concept that enables us humans to exist in such a numerous form on this planet with limited resources. He provides a different explanation and definition:
Capitalism is an economic system by which mass production is made possible in order to provide goods in a cheap form for a broad market. Capitalism therefore requires large amounts of capital in order to build up production capacities and then make the goods available to a broad mass of consumers at low cost.
In this picture and narrative, it is clear that the concept of capitalism must be constantly adapted to the current conditions of technology, the market and production possibilities. It thus becomes clear that states, as organizers of the rules for our coexistence, must constantly ensure that capitalism functions in the fairest possible way in the game of markets.
As we humans have not yet been able to slow down our own absolute population growth and, according to current forecasts, will not be able to do so until 2080, Plumpe believes that capitalism is the economic concept that enables us to achieve this growth. Regardless of the chosen form of government, as we can see in China, for example.
Does this concept of capitalism need growth to work?
In a blog post “Klement on Investment”, Joachim Klement looks at the fundamentals of growth models. These models are based on a constant increase in productivity growth, for example by 1 percent per year. Klement shows that over a longer period of time since the beginning of industrialization and even in times of massive digitalization and enormous technologization in the last 30 years, productivity growth has been declining.
This is a serious problem for us as humanity and the expected stability of our economic systems. As the population in Western countries will decline over the next few years and the population in all other parts of the world will start to shrink in the course of this century, we can only expect GDP to fall.
If economies stop growing, then values such as shares or other goods will also stop growing. Is it still worth investing in the future in such a world? Will sectors such as VC and PE still make sense and be able to generate returns?
Joachim Klement has tracked down an interesting new article by Thomas Philippon. He has discovered that by using a linear productivity function instead of the exponential productivity function commonly used in today’s models, it is possible to explain the continuous decline in growth rates.
With constant increases in productivity (linear), only ever decreasing growth can be generated. This would explain the observed slowdown in growth worldwide.
This realization would and should lead to a completely new understanding of growth. Because it would also mean that interest rates continue to fall and saving is no longer actually worthwhile. The steady fall in real interest rates over a longer period of over 100 years has already been demonstrated by several authors such as Ray Dalio and Bridgewater.
Is the money supply actually responsible for growth?
Our money supply M3 in the eurozone and also the US money supply has been growing for decades. When we look at the issue of money supply growth, we usually focus on the relationship between money supply and inflation. In the past, the federal banks were only able to control the money supply indirectly because the money was created by the banks. The federal banks can exert influence primarily by actively shaping their communication (forward guidance) and open market transactions, which they use to influence interest rates. (Standing facilities and minimum reserves are rather subordinate instruments in the current times).
With the last financial crisis in 2008, asset purchase programs were added in the USA and Europe, with which the central banks now intervene directly in the money supply. This has been further intensified by the coronavirus measures and, in Europe, by the European recovery fund.
The issue of inflation is currently a major concern because goods from the energy sector in particular have risen massively as a result of the three systemic disruptions of the last two years (coronavirus, supply chains, war), thereby driving up basket-of-goods inflation on a massive scale.
The admonishers on the markets make the connection that real inflation is money supply growth minus economic growth, referring to the Scottish philosopher David Hume and his quantity theory.
At the very least, this simple view shows that the massive growth in the money supply since the financial crisis has led to significant asset inflation in equities and real estate. This type of inflation is not captured by the basket of goods model and means that owners of shares and real estate can feel richer than they did 12 years ago.
We humans are wondrous little animals when we look at price stability and basket inflation in large packs and communities with slightly different shades over the years and are pleased that an obviously higher money supply does not seem to lead to higher (basket) inflation. At the same time, we enjoy the feeling that we are somehow richer now because our share and real estate values have apparently risen.
So perhaps it doesn’t really matter whether the money supply actually influences growth and whether there is a demonstrable connection. Perhaps we humans have just made up a jumble of models and theories in which we look at the key figure of basket of goods inflation with great concern. At the same time, we look with great satisfaction at inflation, or in positive terms, the increase in the value of assets such as shares and real estate.
So, who needs growth if not capitalism?
If capitalism is not a system and monster that is constantly dependent on new growth, who needs annual GDP growth at all?
It is beyond the scope of this text to approach the calculation of GDP even superficially. There are several methods of calculation used by the Federal Statistical Office, which publishes our figures. The calculation is carried out differently by different countries. The calculation methods are regularly (albeit differently) adjusted in all countries.
Thus, we are all looking at a figure that essentially tells us whether the economy in a country is growing or shrinking. Why should we invest (in the future) if the probability that the investment will pay off is decreasing across the board because the entire economy is shrinking? GDP and the outlook for the fundamental development of an entire economy are the last link in the chain of a hopefully fact-based business plan and business model that the investment will really pay off.
A positive GDP outlook therefore supports the thesis that everything will remain roughly as we know it and that the specific investment case we are looking at can therefore actually be realized.
Physicists smile at mechanical engineers who have devised simple tinker-factors for certain complex relationships: in a specific environment with clear boundary conditions, these form a good approximation for describing reality.
With GDP, we seem to have created a massively subjective tinker-factor. Without knowing its scope, we use it to convey a positive basic feeling for further investment in the future.
And yes: the concept of capitalism needs a positive basic framework for a new investment in means of production so that consumption becomes possible for many at a particularly attractive price.
So, if we want to successfully develop the very successful model of capitalism as an enabler for a higher standard of living for as many people as possible, two aspects seem important to me:
- The concept of GDP as a measure that a country’s economy is doing so well that we can quite fundamentally continue to invest should be developed further. The current concept of GDP should be interpreted differently by people who are concerned about our planet and are looking for simple explanations. GDP is in fact not a measure of destructive growth, but a now very abstract KPI for the degree of integrity of a national economic system.
- The state, as the democratically legitimized steward of our interests, has so far been the driving force behind new rules to create and maintain a fair and just market economy. With models such as impact investing or impact entrepreneurship, there are approaches for how entrepreneurs, employees and consumers can achieve forward guidance in the future without the need for further intervention and state laws.
