Unemployment reached 8.5% in March of this year, but add in the once full-time, now part-time laborers, it may be as high as 15%. Yet my fellow rail commuters somewhere between New Haven and Grand Central Terminal think they smell recovery. As one salesman put it to me, “things will come back–even better than they were before.” The impulse to undo the freefall, erase the loses, earn back the bank follows a clear logic. Get Americans spending again, stoke the Chinese factories again, send matter flowing again, and workers across the globe will work again, buy new houses again, and the positive feedback loop of prosperity will secure us in our old age, as promised, again.
In the meantime, people sleep in the woods in sight of the Metro North tracks, their laundry strung between trees, their shelters of canvas and plastic sheeting almost invisible against the grey and brown of the late winter. We hear stories of lost savings, poverty in retirement, and desperate unemployment every day.
But what if our hope for recovery stands on false assumptions? Economists tend to imagine the economy as taking place between production and consumption. But there is a larger economy of which ours is only a subset. Why then do we only speak about the economy in terms of growth? Because our history reinforces the belief in growth.
Beginning 250 years ago, political economists in Britain, France, and the United States asserted that material progress distinguished modern, commercial societies from all others. They said that the perpetual increase in wealth required only the necessary tools against the hoarding earth. Need more metal? Dig deeper mines. More fish? Use larger nets. The model held that natural capital is infinite. Advocates of economic growth acknowledged a dark side to progress. Almost all of them believed that the transfer of matter from the environment to the economy must never stop. By the 1840s–if not before–leaders in politics, business, and science asserted that growth held society together, keeping it from falling back into barbarism.
The political economists came up with their theories without asking many questions about the stuff of wealth. They appealed to Providence–the sustenance offered by a compassionate God. Their logic worked like this: Since God wanted people to manufacture things and grow rich, God will provide all the necessary raw material. Economic growth remains the heir of this mystical thinking. For while today’s economists never appeal to Providence, they remain believers. They embrace the same spooky faith that the economy grows from quarter to quarter in “normal” years and that the stuff underlying that growth has no earthly limit.
A few people in the 1990s came close to acknowledging this fact. They were not ecological economists but investment bankers working for J.P. Morgan, and in order to get around a slowdown in growth that they could not explain, they invented a series of once-obscure investment instruments now known to just about everyone. This small group of bankers realized that the long-standing loans Morgan had made to a number of major industrial firms had never delivered significant returns. Managers for these “sleepy American icons,” in the words of Jesse Eisinger, writing in Portfolio, once promised up to 20% on capital but never came close to delivering. Worse, the loans functioned as lines of credit, meaning that the firms could come calling on Morgan even should they falter near bankruptcy. The bank would then be obligated to throw good money after bad in order to save them.
The Morgan bankers invented credit derivatives in response to the poor prospects of American industry, the ancient source of real economic growth. Real growth came from the exponential rise in employment and the discovery of fresh capacity in the forms of forests, petroleum deposits, and hydroelectric power. These resources made it possible to build really big things: cities and suburbs throughout the Sun Belt, an energy infrastructure based on hundreds of millions of automobiles, and a torrent of consumer products. This was growth–not a positive differential in financial securities but biophysical expansion on a societal scale, a nation-shaping, world-transforming scale.
The financiers at Morgan who went looking for the old expansion succeeded only in finding new ways to manufacture debt. Only borrowed money and deepening debt gave them the boom they sought. Beneath their fabulous incomes, however, roiled a paycheck-to-paycheck struggle, in which homeowners found their costs rising relative to their incomes. The high price of tangible commodities–petroleum, metals, labor, and food–triggered the foreclosures that toppled the banks.
Early in the crisis, leaders in finance and government referred to the downturn as a “correction,” a word typically applied to a fall of between 10 and 20% during an overall bull-market. My definition differs by degree. The financial collapse represents a correction toward the real capacity of the economy to produce value. And since the spectacular value of the peak never rested on hard matter, there can be no going back without inflating the same bubble, causing the same misery.
In the mean time we have come to live boom lives — driving boom cars, building boom houses, and developing boom expectations for boom retirements. Tens of millions of people made decisions assuming that the actual value of the economy would support their material lives, yet that value never actually existed.
The correction increasingly looks like a transition from one economy to another. No utopia awaits us. There will always be scarcity, conflict, and the freedom and excitement of markets. But after exhausting the Earth for two centuries, capitalism is running out of people and places to mine. It thrives on untapped capacities of a kind that no longer exist. Put another way, growth has ceased; or if it has not exactly ceased, it no longer confers any benefit on the vast majority of people. As Herman Daly, Bill McKibben, and James Gustav Speth have recently argued, our growth is not economic but uneconomic. It reduces our real wealth and undermines our stability. In this sense, growth costs much more in its social and environmental externalities than it creates in human happiness.
Perhaps in this moment we can accept two truths long offered by experience but rarely acknowledged. First, economies can produce only so much wealth and the Earth offers few untapped places for employing capital. Second, vast inequalities of wealth are economically and socially unstable. Predictions of a short and painless recovery deny both truths and leave the underling causes of the crisis unexamined, making others like it inevitable.
Transitional thinking would mark this recession as a meaningful and hopeful event–not just another crash and bust. Government would rededicate itself to the general welfare (not corporate welfare), to democracy (not capitalism). The two, after all, are not the same (as China demonstrates), and they have often run counter to each other in American history. Finance in decline and democracy ascendant — not betting back to a false normality — might be nothing to fear.
Steven Stoll is the author of The Great Delusion: A Mad Inventor, Death in the Tropics, and the Utopian Origins of Economic Growth (2008) and Associate Professor of History at Fordham University.
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