8.5
The Drivers of Economic Growth
If this is so, what drives
the current fixation of (un) economic growth? One aspect of the answer is that
growth appears to avoid the need to address a variety of problems – because
with more growth, it is argued that greater income and wealth in the future can
be devoted to dealing with poverty and even environmental problems. The
so-called “Environmental Kuznets curve” appears to show an improvement in
environmental conditions as societies become richer. However, it turns out that
this is largely an illusion because as they become richer countries they
‘offshore’ their dirty industries to poorer countries like China and then
import the products produced with environmentally destructive technologies
instead of producing them themselves.
What particularly drives
the growth process is, however, a debt based money and banking system. For
centuries most societies regarded money lending against collateral and the
payment of interest as unethical and socially corrosive. In pre- industrial
economies which do not grow repayment of loans with interest compounded each
year would transfer greater proportions of national income to money lenders and
be destabilising. However, when lending occurs to industries and people whose
production and incomes are growing there is an increment of income and
production to be shared with lenders. Larger scale production, involved
purchased inputs and paying wages with a time gap until later product sales
brought money in from distant markets – this frequently necessitated money to
be advanced to cover the gap.
The finance sector evolved
to serve this need. But now the economy
had to keep on growing to repay loans and pay the interest too. If and when the
economy did not grow this lead to insolvencies.
It also put the solvency of the finance sector at risk if loans could
not be repaid.
An insolvent bank sector
would have further implications for aggregate demand and markets in the
economy. Although most people probably think that it is created by governments
97% of the money in circulation is in the form of deposits created out of nothing
when banks make loans. If lending slows down, or goes into reverse with loans
being paid back, then the money supply falls.
A self reinforcing vicious circle occurs. With unemployment and
bankruptcies increasing, households and companies hold back on discretionary spending on
themselves or on investment projects. Expenditure falls even more. The growth
economy based on debt money does not have a reverse gear. It grows or
collapses.
Only the state can save
the economy in these circumstances. Faltering economic activity typically means
that taxation revenues will fall while some state expenditure like social
welfare and unemployment benefit will rise. So the state tends to fill the
deficit in demand but at the expense of a budget deficit. The state (or the
central bank) may also step forward to bail out important “too big to fail”
institutions like the banks.
All of these processes
mean, however, that a crisis of private sector finances arising from too much
debt in relation to faltering economic growth gets turned into a crisis of
state finances as state revenues fall, and expenditures rise, leading to a
rising deficit.