Capital is always about growth and it necessarily grows at a compound rate. This condition of capital’s reproduction now constitutes, I shall argue, an extremely dangerous but largely unrecognized and unanalysed contradiction.
Most people do not well understand the mathematics of compound interest. Nor do they understand the phenomenon of compounding (or exponential) growth and the potential dangers it can pose. Even the dismal science of conventional economics, as Michael Hudson shows in a recent trenchant commentary, has failed to recognize the significance of compounding interest on rising indebtedness. The result has been to obscure a key part of the explanation for the financial disruptions that shook the world in 2008. So is perpetual compounding growth possible?
In recent times there has been a flurry of worry among some economists that faith in the long-held supposition of perpetual growth might be misplaced. Robert Gordon, for example, has suggested in a recent paper that the economic growth experienced over the last 250 years ‘could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.’ His case rests largely on an overview of the path and effects of innovations in the productivity of labor which have underpinned the growth of per capita incomes. Gordon joins with several other economists in thinking that the innovation waves of the past have been much stronger than the most recent wave, resting on electronics and computerization, that began around the 1960s. This last wave has been weaker in its effects than generally supposed, he argues, and is in any case now largely exhausted (reaching its apogee in the dot-com bubble of the 1990s). On this basis, Gordon predicts that ‘future growth in real GDP per capita will be slower than in any extended period since the late 19th century, and growth in real consumption per capita for the bottom 99 percent of the income distribution will be even slower than that.’ The inherent weakness of the last wave of innovations is aggravated in the case of the USA by a number of ‘headwinds’ that include rising social inequality, problems deriving from the rising cost and declining quality of education, the impacts of globalization, environmental regulation, demographic conditions (the aging of the population), rising tax burdens and an ‘overhang’ of consumer and government debt. But even in the absence of these ‘headwinds’, Gordon argues, the future would still be one of relative stagnation compared to the last 200 years.
A component of one of the ‘headwinds,’ government debt, has, at the time of writing, become a political football in the USA (with many echoes elsewhere). It has been the focus of strident and exaggerated arguments and claims in the media and in Congress. The supposedly huge and monstrous burden debt will place on future generations is again and again invoked to promote draconian cutbacks in state expenditures and the social wage (as usual, of course, to the benefit of the oligarchy). In Europe the same argument is used to justify imposing ruinous austerity on whole countries (like Greece), though it does not take too much imagination to see how this might also be for the benefit of the richer countries like Germany and the affluent bondholders more generally. In Europe democratically elected governments in Greece and Italy were peacefully overthrown and for a while replaced by ‘technocrats’ who had the confidence of the bond markets.
All of this has made it particularly hard to get a clear-eyed view of the relation between the compounding of debt obligations, the exponential growth of capital accumulation and the dangers they pose. Gordon’s concern, it should be noted, was primarily with per capita GDP. This looks rather different from aggregate GDP. Both measures are sensitive to demographic conditions but in very different ways. A casual inspection of the available historical data on total GDP suggests that while there has always been a loose relation between wealth and debt accumulation throughout the history of capital, the accumulation of wealth since the 1970s has been far more tightly associated with the accumulation of public, corporate and private debt. The suspicion lurks that an accumulation of debts is now a precondition for the further accumulation of capital. If this is the case, then it produces the curious result that the strenuous attempts on the part of the right-wing Republicans and analogous groups in Europe (such as the German government) to reduce if not eliminate indebtedness are mounting a far graver threat to the future of capital than the working-class movement has ever posed.
Compounding is, in essence, very simple. I place $100 in a savings account that pays 5 percent annual interest. At the end of the year I have $105, which at a constant rate of interest becomes $110.25 the year after (the figures are greater if the compounding occurs monthly or daily). The difference between this sum at the end of the second year and an arithmetic rate of interest without compounding is very small (just 25 cents). The difference is so small it is hardly worth bothering with. For this reason it easily escapes notice. But after thirty years of compounding at 5 per cent I have $432.19 as opposed to the $250 I would have if I was accumulating at a 5 percent arithmetic rate. After sixty years I have $1,867 as compared to $400 and after 100 years I have $13,150 instead of $600. Notice something about these figures. The compound interest curve rises very slowly for quite a while and then starts to accelerate and by the end of the curve it becomes what mathematicians refer to as a singularity – it sails off into infinity. Anyone with a mortgage experiences this in reverse. For the first twenty years of a thirty-year mortgage the principal still owed declines very slowly. The decline then accelerates and over the last two or three years the principal diminishes very rapidly.
There are a number of classic anecdotes to illustrate this quality of compounding interest and exponential growth. An Indian king wished to reward the inventor of the game of chess. The inventor asked for one grain of rice on the first square of the chessboard and that the amount be doubled from one square to the next until all the squares were covered. The king readily agreed, since it seemed a small price to pay. The trouble was that by the time it came to the twenty-first square more than a million grains were required and after the forty-first square (which required more than a trillion grains) there simply was not enough rice in the world to cover the remaining squares. One version of the story has the king so angry at being tricked that he had the inventor beheaded. This version of the story is salutary. It illustrates the tricky character of compounding interest and shows how easy it is to underestimate its hidden power. In the later stages of compounding the acceleration takes one by surprise.
An example of the dangers of compound interest is illustrated by the case of Peter Thelluson, a wealthy Swiss merchant banker living in London, who set up a trust fund of £600,000 that could not be touched for 100 years after he died in 1797. Yielding 7.5 percent at a compound rate, the fund would have been worth £19 million (far in excess of the British national debt) by 1897, when the money could be distributed to his fortunate descendants. Even at 4 percent, the government of the time calculated that the legacy would be equivalent to the entire public debt by 1897. The compounding of interest would produce immense financial power in private hands. To prevent this, a bill was passed in 1800 limiting trusts to twenty-one years. Thelluson’s will was contested by his immediate heirs. When the case was finally decided in 1859, after many years of active litigation, it turned out that the entire legacy had been absorbed by legal costs. This was the basis for the celebrated case of Jarndyce versus Jarndyce in Charles Dickens’s novel “Bleak House.”
The end of the eighteenth century saw a flurry of excited commentary about the power of compound interest. In 1772 the mathematician Richard Price, in a tract that later drew Marx’s amused attention, wrote: ‘money bearing compound interest increases at first slowly. But, the rate of increase being continuously accelerated, it becomes in some time so rapid, as to mock all the powers of the imagination. One penny, put out at our Saviour’s birth to 5 percent compound interest, would, before this time, have increased to a greater sum, than would be contained in one hundred and fifty millions of earths, all solid gold. But if put out to simple interest, it would, in the same time, have amounted to no more than seven shillings and fourpence halfpenny.’ Notice once more the element of surprise at how compound growth can produce results that ‘mock all the powers of the imagination.’ Are we too about to be shocked at what compounding growth can lead to? Interestingly, Price’s main point (in contrast to the current crop of alarmists) was how easy it would be to retire the existing national debt (as the Thelluson example also showed) by putting the powers of compound interest to work!
Angus Maddison has painstakingly attempted to calculate the rate of growth in total global economic output over several centuries. Obviously, the further back he goes, the shakier the data. Significantly, the data before 1700 increasingly relies on using population estimates as a surrogate for total economic output. But even in our own times there are good reasons to challenge the raw data, because it includes a number of ‘gross national bads’ (such as the economic consequences of traffic accidents and hurricanes). There has been significant agitation by some economists to change the basis of national accounting on the grounds that many of the measures are misleading. But if we stick with Maddison’s findings, then capital has been growing at a compound rate since 1820 or so of 2.25 percent. This is the global average figure. Clearly there have been times when (for example, the Great Depression) and places where (for example, contemporary Japan) the growth rate has been negligible or negative, while at other times (such as the 1950s and 1960s) and in other places (such as China over the last twenty years) the growth has been much higher. This average is slightly below what seems to be a generally accepted consensus figure in the financial press and elsewhere of 3 per cent as a minimum acceptable rate of growth. When growth falls below that norm the economy is described as sluggish and when it goes below zero this is taken as an indicator of recession or, if prolonged, of depression conditions. Growth that goes much above 5 percent, on the other hand, is typically taken in ‘mature economies’ (that is, not contemporary China) as a sign of ‘overheating’, which always comes with the threat of runaway inflation. In recent times, even across the ‘crash’ years of 2007–9, global growth kept fairly steady, close to 3 percent or so, though most of it was in emerging markets (such as Brazil, Russia, India and China – the BriC countries in short). The ‘advanced capitalist economies’ fell to 1 percent growth or below from 2008 to 2012.
In 1820, Maddison calculates, global output was worth $694 billion in 1990 constant dollars (‘billion’ on the US scale, meaning 1,000 million). By 1913 it had risen to $2.7 trillion (on the US scale a trillion is 1,000 billion); in 1973 it stood at $16 trillion and by 2003 nearly $41 trillion. Bradford DeLong gives different estimates, starting with $359 billion in 1850 (in 1990 constant dollars) rising to $1.7 trillion in 1920, $3 trillion in 1940, $12 trillion in 1970, $41 trillion in 2000 and $45 trillion in 2012. DeLong’s figures suggest a lower initial base and a somewhat higher rate of compound growth. While the figures are quite different (testifying to how difficult and often arbitrary these estimates are), in both cases the effect of compounding growth (with considerable temporal and geographical variation) is clearly visible.
So let us take a 3 percent compound rate of growth as the norm. This is the growth rate that permits most if not all capitalists to gain a positive rate of return on their capital. To keep to a satisfactory growth rate right now would mean finding profitable investment opportunities for an extra nearly $2 trillion compared to the ‘mere’ $6 billion that was needed in 1970. By the time 2030 rolls around, when estimates suggest the global economy should be more than $96 trillion, profitable investment opportunities of close to $3 trillion will be needed. Thereafter the numbers become astronomical. It is as if we are on the twenty-first square of the chessboard and cannot get off. It just does not look a feasible growth trajectory, at least from where we sit now. Imagined physically, the enormous expansions in physical infrastructures, in urbanization, in workforces, in consumption and in production capacities that have occurred since the 1970s until now will have to be dwarfed into insignificance over the coming generation if the compound rate of capital accumulation is to be maintained. Take a look at a map of the city nearest you in 1970 and contrast it with today and then imagine what it will look like when quadrupled in size and density over the next twenty years.
But it would be a serious error to assume that human social evolution is governed by some mathematical formula. This was the big mistake made by Thomas Malthus when he first advanced his principle of population in 1798 (roughly the same time when Richard Price and others were celebrating – if that is the right word – the power of exponential growth in human affairs). Malthus’s arguments are directly relevant to the issue at hand, while they also provide a cautionary tale. He argued that human populations, like all other species, had the tendency to increase at an exponential (that is, compounding) rate, while food output could at best increase only arithmetically given the conditions of agricultural productivity then prevailing. Diminishing returns on the application of labor in agriculture were likely to make the gap between rates of population expansion and food supply even greater over time. The widening gap between the two curves was taken as a measure of the increasing pressure of population on resources. As the gap increased, the inevitable result would be, Malthus argued, famine, poverty, epidemics, war and increasing pathologies of all kinds for the mass of humankind. These would act as brutal checks to keep population growth within the bounds dictated by supposedly natural carrying capacities. Malthus’s dystopian predictions did not come to pass. In recognition of this, Malthus later broadened his principles to include changes in human demographic behavior, the so-called ‘moral restraints’, such as later age of marriage, sexual abstinence and (tacitly) other techniques for population limitation. These would dampen if not reverse any tendency towards exponential population growth. Malthus likewise failed miserably to anticipate the industrialization of agriculture and the rapid expansion of global food production through colonization of hitherto unproductive lands (particularly in the Americas).
By invoking the tendency towards the exponential growth of capital accumulation, are we in danger of repeating Malthus’s mistake of assuming human evolution conforms to a mathematical formula, rather than reflecting fluid and adaptable human behaviors? if so, are there ways in which capital has been and is adapting to accommodate disparities between an accumulation process that is necessarily exponential (if that is indeed the case) and the conditions that might limit the capacity for exponential growth?
There is, however, a prior consideration that needs to be addressed. If population is growing exponentially (as Malthus supposed), then the economy has to grow at a parallel rate for living standards to be sustained. So what, then, is the relation between demographic trajectories and the dynamics of capital accumulation?
Currently, the only countries that are increasing their populations at a 3 percent compound rate of growth or more are in Africa, South Asia and the Middle East. Negative population growth rates are found in Eastern Europe, while Japan and much of Europe have such low growth rates that they are not reproducing themselves. In these last cases economic problems are arising because of lack of domestic labor supply and because of the increasing burden of supporting aging populations. A smaller and often declining workforce has to produce sufficient value to pay pensions to an increasing retired population. This relation continues to be important in certain parts of the world. Early on in capital’s history, rapid population growth or a vast reserve of untapped and yet-to-be urbanized wage labor unquestionably helped to fuel rapid capital accumulation. Indeed, a plausible case can be made that population growth from the early seventeenth century on was a precondition for capital accumulation.
The role of what Gordon calls ‘the demographic dividend’ in fostering economic growth was clearly important in the past and continues to be so. The vast inflow of women into the labor force in North America and Europe after 1945 is one case in point, but this is something that cannot be repeated. The world’s labor force expanded by 1.2 billion between 1980 and 2009, nearly half of that growth coming from India and China alone. This too will be hard to repeat. But in many parts of the world this relation between rapid population growth and rapid capital accumulation is beginning to break down, as population growth conforms to an S-shaped curve that starts flat and then accelerates exponentially upwards before rapidly slowing down to become flat, with zero or even negative population growth (for example, in Italy and Eastern Europe). It is into this demographic vacuum of zero growth in some parts of the world that strong migration streams are drawn (though not without social disruptions, political resistances and a lot of cultural conflict).
While population projections even in the medium term are a particularly tricky proposition (and the projections change rapidly from year to year), the hope is that the global population will stabilize during this century and peak at no more than 12 billion or so (perhaps as low as 10 billion) by the end of the century and thereafter achieve a steady state of zero growth. Clearly this is an important issue in relation to the dynamics of capital accumulation. In the United States, for example, job creation since 2008 has not kept pace with the expansion of the labor force. The falling unemployment rate reflects a shrinkage in the proportion of the working-age population seeking to participate in the labor force. But whatever happens, it is pretty clear that capital accumulation in the long-term future can rely less and less upon demographic growth to sustain or impel its compound growth and that the dynamics of production, consumption and realization of capital will have to adjust to these new demographic circumstances. When this might happen is hard to say, but most estimates suggest that the vast increase in the global wage labor force that occurred after 1980 or so will be hard to replicate once it exhausts itself after 2030 or so. In a way this is just as well, given that, as we have seen, technological change is tending to produce larger and larger redundant and even disposable populations among the less skilled. The gap between too few high-skill workers and a massive reserve of unemployed and increasingly unemployable medium- and low-skill workers appears to be widening, while the definition of skills is evolving rapidly.
So would it be possible for capital accumulation to move beyond the exponentials it has exhibited over the past two centuries on to a similar S-shaped trajectory as has occurred in the demographics of many countries, culminating in a zero-growth, steady-state capitalist economy? The answer to this prospect is a resounding no, and it is vital to understand why. The simplest reason is that capital is about profit seeking. For all capitalists to realize a positive profit requires the existence of more value at the end of the day than there was at the beginning. That means an expansion of the total output of social labor. Without that expansion there can be no capital. A zero-growth capitalist economy is a logical and exclusionary contradiction. It simply cannot exist. This is why zero growth defines a condition of crisis for capital. If prolonged, zero growth of the sort that prevailed in much of the world in the 1930s spells the death knell of capitalism.
How, then, can capital continue to accumulate and expand in perpetuity at a compound rate? How can it do so when it seems to entail a doubling if not tripling in the size of the astonishing physical transformations that have been wrought across planet earth over the last forty years. The dramatic industrialization and urbanization of China over those years is a foretaste of what would have to be accomplished to keep capital accumulation going in the future. For much of the last century large parts of the world were attempting to mimic the growth path of the United States. In the coming century most of the world would have to mimic the growth path of China (with all its ghastly environmental consequences), which would be impossible for the United States and Europe and unthinkable almost everywhere else (apart from, say, Turkey, Iran and some parts of Africa). Throughout these last forty years, it is worth remembering also that there have been multiple traumatic crises, usually localized, cascading around the world, from South-East Asia and Russia in 1998 through Argentina in 2001 to the almighty global financial crash of 2008 that shook the world of capital to its very roots.
But it is here that the cautionary tale of Malthus’s mistaken dystopian vision ought to give us pause. We need to ask: in what ways can capital accumulation change its spots to adapt to what appears a critical situation in order to reproduce itself? There are, in fact, a number of key adaptations that are already occurring. Can the difficulties be staved off and if so can they do so indefinitely? What behavioral adaptations, akin to Malthus’s ‘moral restraints’ (though the term ‘moral’ will hardly end up being appropriate), might reshape the accumulation dynamic while preserving its necessary essence of compounding growth?
There is one form that capital takes which permits accumulation without limit and that is the money form. This is so only because the money form is now unchained from any physical limitations such as those imposed by the money commodities (the metallic moneys like gold and silver that originally gave physical representation to the immateriality of social labor and which are largely fixed in terms of their global supply). State-issued fiat moneys can be created without limit. The expansion of the contemporary money supply is now accomplished by some mix of private activity and state action (via the state–finance nexus as constituted by treasury departments and central banks). When the US Federal Reserve engages in quantitative easing it simply creates as much liquidity and money as it wants at the drop of a hat. Adding a few zeros to the quantity of money in circulation is no problem. The danger, of course, is that the result will be a crisis of inflation. This is not occurring because the Federal Reserve is largely refilling a hole left in the banking system when trust between the private banks broke down and interbank lending, which was leveraged into massive money creation within the banking system, broke down in 2008. The second reason why inflation is not on the horizon is because organized labor has almost zero power (given the disposable surplus labor reserves) In these times to raise wages and thereby influence the price level (though class struggles in China have raised labor costs there marginally).
But, plainly, the perpetual accumulation of capital at an exponential rate by way of an exponential creation of money is almost certain to end in disaster unless accompanied by other adaptations. Let’s go through a number of these before deciding whether they add up to what a sustainable future for the reproduction of capital might look like under conditions of perpetual compound growth.
Capital is not only about the production and circulation of value. It is also about the destruction or devaluation of capital. A certain proportion of capital is destroyed in the normal course of capital circulation as new and cheaper machinery and fixed capital become available. Major crises are often characterized by creative destruction, which means mass devaluations of commodities, of hitherto productive plant and equipment, of money and of labor. There is always a certain amount of devaluation going on as new plants drive out old before their lifetime is over, as more expensive items are replaced by cheaper items because of technological changes. The rapid deindustrialization of older industrial districts in the 1970s and 1980s in North America and Europe is an obvious example. In times of crisis, of war or of natural disasters, the devaluation can be massive. In the 1930s and the Second World War losses were considerable. Estimates from the IMF suggested that the net losses worldwide in the financial crisis year of 2008 added up to close to the value of one whole year’s global output of goods and services. But large though these losses were, they did little more than generate a brief pause in the trajectory of compounding growth. In any case, as property values recovered, particularly in the USA and the UK, where they had been hit hard during the crisis, so a lot of asset values were recovered (though, as always, they now lay in the hands of the rich folk, thereby contributing to the massive regressive redistribution of wealth that, in the absence of revolutionary interventions, typically occurs in the course of a crisis). The devaluations would have to be vastly greater and longer-lasting than those experienced in 2008 (closer, perhaps, to those of the 1930s and 1940s) to really make much of a difference.
The problem of the uneven development of devaluation and of geopolitical struggles over who is to bear the cost of devaluation is significant, in part because it frequently relates to the spread of social unrest and political instability. So while devaluation does not work very well as an antidote to compounding growth worldwide, its geographical concentrations do have a significant bearing on the dynamics of anti-capitalist sentiment and struggle. The two ‘lost decades’ of development throughout most of Latin America produced a political climate of opposition to neoliberalism (though not necessarily to capital) and this has in turn played an important role in protecting the region from the worst impacts of the global crisis of devaluation that broke out in 2008. The differential imposition of losses on, for example, Greece and southern Europe more generally amounts to a geographical version of the redistributions of wealth occurring between rich and poor.
Conversely, privatization of public assets, the creation of new markets and further enclosures of the commons (from land and water to intellectual property rights) have expanded the terrain upon which capital can freely operate. The privatization of water provision, social housing, education and health care and even war making, the creation of carbon trading markets and the patenting of genetic materials have given capital the power of entry into many areas of economic, social and political life that were hitherto closed to it. As an outlet for compounding growth these additional market opportunities have been significant, but, as with devaluation, I do not believe they constitute enough potential to absorb compounding growth, particularly in the future (they did, I believe, play a significant role in the 1980s and 1990s). Besides, when everything – but everything – is commodified and monetized, then there is a limit beyond which this process of expansion cannot go. How close we are to that limit right now is hard to judge but nearly four decades of neoliberal privatization strategies have already accomplished a great deal and in many parts of the world there is not much left to enclose and privatize. There are, in addition, many signs of political resistance to the further enclosure and commodification of life forms beyond where we are now and some of these struggles, against, for example, water privatization in Italy and genetic patenting, have been successful.
Consider, thirdly, the limits that might be encountered with respect to final consumption and the realization of capital. One of the ways that capital has adapted to compound growth has been through radical transformations in the nature, form, style and mass of final consumption (aided, of course, by population increases). Economic limits to this are set by the aggregate effective demand (roughly, wages and salaries plus bourgeois disposable incomes). Over the last forty years that demand has been strongly supplemented by private and public debt creation. I focus here, however, on one important physical limit which is set by the turnover time of consumer goods: how long do they last and how quickly do they need to be replaced?
Capital has systematically shortened the turnover time of consumer goods by producing commodities that do not last, pushing hard towards planned and sometimes instantaneous obsolescence, by the rapid creation of new product lines (for example, as in electronics in recent times), accelerating turnover by mobilising fashion and the powers of advertising to emphasize the value of newness and the dowdiness of the old. It has been doing this for the last 200 years or so and concomitantly produced vast amounts of waste. But the trends have accelerated, capturing and infecting mass consumption habits markedly over the last forty years, particularly in the advanced capitalist economies. The transformations in middle-class consumerism in countries like China and India have also been remarkable. The sales and advertising industry is now one of the largest sectors of the economy in the United States and much of its work is dedicated to the acceleration of the turnover time of consumption.
But there are still physical limits to how fast the turnover of, say, cellphones and fashions can be. Even more significant, therefore, has been the move towards the production and consumption of spectacle, a commodity form that is ephemeral and instantaneously consumed. Back in 1967 Guy Debord wrote a very prescient text, “The Society of the Spectacle,” and it almost seems as if the representatives of capital read it very carefully and adopted its theses as foundational for their consumerist strategies. Everything from TV shows and other media products, films, concerts, exhibitions, sports events, mega-cultural events and, of course, tourism is included in this. These activities now dominate the field of consumerism. Even more interesting is how capital mobilizes consumers to produce their own spectacle via YouTube, Facebook, Twitter and other forms of social media. All of these forms can be instantaneously consumed even as they absorb vast amounts of what might otherwise be free time. The consumers, furthermore, produce information, which is then appropriated by the owners of the media for their own purposes. The public is simultaneously constituted as both producers and consumers, or what Alvin Toffler once called ‘prosumers.’ There is an important corollary here and this broaches a theme that we will encounter elsewhere: capital profits not through investing in production in these spheres but by appropriating rents and royalties on the use of the information, the software and the networks it constructs. This is just one of several contemporary indications that the future of capital lies more in the hands of the rentiers and the rentier class than in the hands of the industrial capitalists.
Excerpted from “Seventeen Contradictions and the End of Capitalism” by David Harvey. Published by Oxford University Press. Copyright © 2014 by David Harvey. Reprinted with permission of the publisher. All rights reserved.