Saturday, November 16, 2013

Growth, Capitalism and the Steady State

One argument that Prof Harari likes to make is that while capitalism has produced enormous growth, it also requires economic growth, growth that can only be powered by technological advance.  Is that true?  Is steady state capitalism impossible?  What if it were?

The basic logic goes like this: borrowing and lending are at the heart of capitalism, but borrowing and lending at interest only make sense when there is an expectation that the investment will lead to net profit.  In a zero sum economy, the average net profit is zero.  Thus, on average, investing becomes a losing strategy or at best, a pure gamble.

By contrast, in a growing economy, investment buys a piece of the larger future pie.  Of course most growth inevitably hits limits imposed by resources.  Can our ingenuity continue finding more forever?  I have my doubts.