What is Capitalism? The dictionary defines it as “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.” While accurate enough, this definition fails to capture the essential characteristic which distinguishes capitalism from other economic systems, past and present. For one thing, even in the quintessential capitalist economy – our own – the state intervenes significantly in trade and industry; for another, there have been non-capitalistic economic systems in which trade and industry (or more precisely, craftsmanship) were in private hands, be they those of yeomen, guildsmen, or lords of the manor.
A simpler definition, I think, better captures the essence of Capitalism and that is “an economic system based on the charging of interest for the use of capital”. This is Capitalism’s distinguishing feature, that which sets it apart from prior systems and probably future ones, as well. It is so integral a part of our economic life we forget – or more likely never even considered – how unique in human history such a system is. Who is aware that for most of its history the Christian Church condemned usury as a sin, canon law defining usury as the charging of any interest, not the muddled banking law euphemism, “exorbitant interest”. In fact, all three of the Abrahamic religions condemned usury (though in Talmudic law it applied only to intra-Israelite transactions) and one – Islam – still does.
To understand how the very basis of the economic system which we laud today for bringing unprecedented material wellbeing to so many could be universally condemned in the past, we have to consider what life was like throughout most of history. Life in the past was characterized by constancy not change. Our ancestors lived lives virtually identical to those of their ancestors. There was little to none of what we would consider “economic growth.” The human population, to take one example, hardly increased for the first three-quarters of the Christian era until improved dietary, medical, and sanitary conditions sparked explosive population growth from the mid-18th century on.
In such a world who had need to borrow? Primarily, it would be those who had fallen upon hard times, most likely because of circumstances beyond their control – a natural disaster, an epidemic, war. To lend money to such unfortunates was an act of Christian charity; to require that the debtor repay more than he was lent coldhearted, sinful. For instance, a farmer who borrowed to recover from a flood could only be expected to generate enough “profit” from “investing” in his land; i.e., as great a harvest, as he had prior to his misfortune (it being a no-growth world). He could not, therefore, repay his creditor more than he had been lent without perpetuating his misfortune.
What changed the repute – and the definition – of usury was the tremendous business opportunities the discovery of two new worlds – one geographic, one intellectual – offered. The profits attainable from investments in trade and industry, as Europe prospered from the discovery of the New World and the technological advances enabling the Industrial Revolution, made a loan – even a usurious one – a blessing, not a bane. The enterprising were happy to borrow at interest and creditors happy to lend. It was a win-win situation. Everybody profited, because a growing economy made it possible to repay the interest on loans.
But we live on a finite planet with finite resources. Economic growth as we have known it must necessarily come to an end someday. Are we approaching that date? Have we passed it? Certain signs suggest we have. Most tellingly, global oil production by conventional means has peaked. Nonsensical as that sounds in a time of low oil prices, a reflection on the broader picture confirms this. A world in which we are employing ever more expensive means for maintaining our fuel supply – squeezing tar from sand, fracturing the earth, drilling in deep-water, feeding corn to our cars, grasping at alternative energy sources – is not a world swimming in oil. We may be able to maintain supply – even increase it – by such desperate measures, but only at great cost. The meaningful measurement is not how much oil is produced or at what price it sells, but the energy returned for the energy invested (EREI), and this has been in marked decline with the peaking of conventional production. The equivalent of a barrel of oil spent to produce oil by conventional means often returned a hundred or so barrels; today’s fracked wells return only 4 or 5 barrels. Such a marked decline in EREI has to result in lessened prosperity; i.e., lower living standards.
If we have reached the limit of how much of earth’s bounty we can tap – particularly with regard to the lifeblood of modern industrialized society – does it mean an end to economic growth? Barring the discovery of some new energy source on the scale of the fossil fuel windfall, it would seem necessarily so. And if we are at the limits to growth, what does that imply for the capitalistic foundation of our economic system? Is Capitalism dependent on growth for its suitability as the basis for an economy because usury requires that capital invested return more than just the amount invested?
Let’s investigate this question at the macro level. In a non-growing economy – call it a sustainable, zero growth, steady state, or whatever economy – production of goods and services would remain constant from year to year. Consider the economy, for the moment, as if it were a single investor producing a single product: widgets. Any amount invested would generate no increase in output. To do otherwise would violate the assumption of zero growth. For instance, if it cost a million dollars to produce a million widgets which yield a profit of one dollar per widget, a million dollars invested in widget production would generate a million widgets and a million-dollar profit. If the investor borrowed a million dollars at interest to invest in widget production, he would be unable to repay the interest expense (assuming no increase in the sales price of widgets; i.e., no inflation). By contrast, in a growing economy where a million dollars invested could be expected to generate more than a million widgets the profit from the additional production would cover the interest expense. This has been the case for the last couple of hundred years, the Age of Capitalism.
At the individual or corporate level, some would still prosper in a non-growing economy, for instance, by investing in cost-saving innovations which enable a million widgets to be produced for half a million dollars or a million and a half widgets for a million dollars. But, given that total widget production cannot grow (remember, we’re assuming a zero growth economy), some must lose while others gain. In toto, the loss/gain ratio must correspond to our simplified one-investor, one-product economic model in which the interest charged for the use of capital cannot be met in a non-growing world.
How the constraint of a static economy would play out in terms of economic indicators in our complex, capitalistic economy is not clear. Most likely, bankruptcies – personal, corporate, and governmental – would become commonplace; interest rates would plummet to near zero; investment in capital expenditures would be postponed, then cancelled. In the long-run, until population growth, too, becomes static, global living standards must decline, even if some countries, through special circumstances like abundant natural resources or the power to overconsume, continue to prosper. Hardship will drive desperate people to political violence in their own country or perilous migration to fairer lands. All the while, sage economists will debate fixes, which those in power will implement in a futile attempt to “grow” the economy.
Does this sound like the world we live in today? Will it increasingly characterize our world in the years to come? Will it mean we have reached the end of growth? If so, will we recognize that fact and devise a new economic system which is not based on the charging of interest for the use of capital?