Post-Growth, Credit, Interest and Money

As impressively (though unwittingly) shown by Francis Fukuyama, attempts to imagine the future of societies are likely to go wrong. Extrapolation of trends can well be a bad idea. On the other hand, some idea about what the future is to look like is needed when a major transformation of the society is to be attempted. The transformation towards a post-growth society is no exception here. It would be naive to expect an exacting outline of how a post-growth society is supposed to work, but it is important that those advocating it at least try to give answers to some inconvenient questions: what about productivity growth? Can universal basic income, supported by many in the degrowth movement, work? And what about the monetary and financial systems? The latter question has gained some attention recently, and some argue that monetary factors might be a main obstacle for a post-growth society. Their arguments should get proper consideration if we do not want to choose the wrong transition “trajectory”, given path dependencies so common in socio-economic systems.

Two authors have proposed, independently of each other, a complex argument why money and related factors might prohibit any prolonged period of prosperity without growth – in other words, they have proposed the existence of a monetary growth imperative. These authors are the US-American William F. Hixson and the Swiss economist Hans Christoph Binswanger. Although their starting points are quite different, their approaches share a common leitmotif of a profound monetary growth imperative. Most other lines of reasoning in this field are either simplistic versions of Binswanger’s and Hixson’s argument or they focus on some specific part of their more general argument, or they have too much of the touch of a conspiracy theory to be taken seriously.

Contrary to the traditional Walrasian model of the economy, where all transactions take place simultaneously, a typical firm in the modern economy has first to buy factors of production (i.e., make an investment), then it produces something, and then it sells it. This means that it has to find somebody who will give it the money/financial capital needed to pre-finance its production (buy the factors of production). Commonly, this “somebody” is some combination of banks and shareholders. As financial capital is scarce, it has a price – credits bear interest, shareholders expect profits. To repay them, our model firm has to sell its products for more than it paid for the factors of production, i.e., it must yield a profit large enough to satisfy both creditors and shareholders. This in itself is not problematic, because the reason there are firms is that they produce added value (which ideally is their profit). If all firms in the economy work this way, however, we have a problem: all the money that is in the system is the original credits out of which the firms bought factors of production. There is no money there to “pay” the profits. Thus, argue Binswanger and Hixson, firms must make larger and larger investments in every period so as to “inject” enough money into the economy to make possible selling their products (produced a period earlier) with profit. Binswanger calls this the ‘growth spiral’. An attempt to keep production constant would trigger a downward spiral leading us back to the level of a subsistence economy or, in Binswanger’s words, a Crusoe economy. In other words, if the reasoning of Binswanger’s and Hixson’s is true, we have a choice between subsistence economy on the one hand and a growth economy on the other hand (due to ecological and social limits, the latter would likely collapse sooner or later, so it is only a temporary choice). According to them, a non-growing yet prosperous economy is a non-option.

Is this the only alternative to a growth economy?

Potentially, there are some possibilities to overcome the dilemma posed by the ‘growth spiral’. One option would be to design an economic system where interest and profits would not be necessary (e.g., by redefining ‘profit’ or reforming the monetary system according to the ideas of Islamic banking) – this, of course, is much easier said than done. Another option might be, depending on the exact interpretation of the ‘growth spiral’, either a 100% reserve banking system (advocated by Hixson, whose goal, however, was a stable economy, not necessarily a non-growing one) or a 0% reserve one: indeed, the only possibility to escape the ‘growth spiral’ I found in Binswanger’s model would be to prevent banks from keeping any of the interest-based profits (i.e., no reserves). First, however, we would have to settle the point of which is the right interpretation.

The point of my post is by no means the claim that Binswanger and Hixson are right and/or that we are doomed to failure with any attempt of a transition towards a post-growth society. Even though I wasn’t able so far to find a lapse in their reasoning and although I have no idea what is to be done if they are right, this does not mean that I am right/that there is no solution. What I do think is that it is important for post-growth advocates to confront these issues and to think how a post-growth society might work to circumvent money-related problems.


6 thoughts on “Post-Growth, Credit, Interest and Money

  1. Binswanger’s conclusions assume that the monetary system is based on interest bearing debt. I agree that this type of monetary system requires growth to remain functional, but of course, this monetary system is a human construct and is just one of many options. A post-growth economy necessarily will require an alternative monetary system. There are many people that are proposing alternative systems that will make a steady state economy possible (Greco, Lietaer, etc).

    • I have not yet seen a convincing proposal for a monetary system not based on interest-bearing credit. Which of course does not mean that there is none – but my impression so far is that most suggested “solutions” are too simplistic and wouldn’t work in reality. I don’t know Greco and Lietaer, could you provide some links to their work? As I am currently working with two colleagues on a paper dealing with this subject, this might help us a lot.

      • Not trying to step on J Gusdal’s feet, but I have seen the following book review(s) on texts by each of these authors. So while I can’t be absolutely sure these are the folks intended above, the works look appropriate:

        [both books published 2001, and ISBN details are available at the link]

        And even without consulting Greco and Lietaer I would have to side with one aspect of Gusdal’s comment above – and this is simply that whatever situation(s) we find ourselves in at some future point in time we needn’t then be constrained by ideas or solutions we currently have on hand. Innovation and creativity have long been hallmarks of our kind. If indeed necessity is the mother of invention, then some clever wag will come up with something. And to the extent this future ‘solution’ is insufficient – then would our future selves suffer.

  2. On reflection I think your final comments in the whole post are somewhat in line with what I’m thinking… that we are not necessarily doomed here, but we do seem to have some unfinished work ahead.

  3. whatever situation(s) we find ourselves in at some future point in time we needn’t then be constrained by ideas or solutions we currently have on hand. Innovation and creativity have long been hallmarks of our kind. If indeed necessity is the mother of invention, then some clever wag will come up with something.

    This sounds a lot like Julian Simon, whom I am highly sceptical of. Hoping for necessity, the alleged mother of invention, can be very naive and dangerous, when overly embraced.

    On reflection I think your final comments in the whole post are somewhat in line with what I’m thinking

    I suppose, yes. Despite the Simon-point above.

  4. I rather like quite a few aspects of Simon’s thinking. Over a far longer trace of time his argument with Ehrlich might have different results, but this is mere speculation. Over the course of their bet he was right.

    On your remark about “Hoping for necessity…” I am perplexed. I think there is much value in having hope – but its not clear to me where someone has built a philosophy on hoping for necessity. Necessity is all around us, all the time. One needs to eat, and having eaten one is only temporarily satiated. In time the need to eat will return. So food is an ongoing necessity. We have enough to eat at this particular point in time, and there are stores of food for the near term. But of necessity we will need to produce more food before too long. I’m not hoping for this… it is the nature of living.

    And so far as necessity being the mother of invention, the metaphor can be elaborated to speculate about the father. Resourceful as we are under fire – responding to necessity – we can also be inventive in the absence of crisis. Innovation seems to drive expansion as much or perhaps more than interest (though I don’t know how one might evaluate this assertion). My point here is that even in a post growth scenario we can innovate. Crusoe innovated, Tom Hanks’ character innovated. It doesn’t seem as though prognosticating innovative behaviors in our future selves is somehow a hope or very naïve.

    Where I can find some common ground is if we were to sit on the sideline and wait for someone else to be the innovator. That seems dangerous if overly embraced. Like a couple of outfielders watching a fly ball hit the ground – “I thought you had it”.


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