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Traditional economic theory practised by governments and powerful corporations asserts that capital is the limiting factor to economic growth. In a recent article for the Journal of Ecological Economics, Herman Daly, former Senior Economist in the Environment Department of the World Bank, argues that in today’s highly populated planet, the global economy depends not on capital, but on natural resources.
Could Capital Limit Capitalism?
As an economics graduate student in the sixties, Daly was taught that the secret to financial growth was the investment of capital. As traditionally taught, Neoclassical economic theory suggests that so long as capital could be tracked down to invest with, the possibility for development is limitless. Seemingly infinite natural resources simply need to be harnessed by oil refineries, factories and mills and transformed into commodities to be sold on the open market.
Bursting the Bubble
Working for the World Bank in the 1990’s, Daly saw that a dearth of raw materials and development projects was causing a slow down in economic growth. An excess of available capital was being staked in too few suitable projects, leading to low returns. He was witnessing that there were indeed limits to financial growth.
Daly started to question if capital, as understood by global economists, was really just an illusion. If if doesn’t physically exist in the real world, could it grow forever? What Daly then understood is that capital is ready cash, borrowed by people who believe they can use it to make a higher return than the rate of interest. This only worked when vital labour, technology and ecological supports were in place.
Crisis at the World Bank
Due to the apparent success of financial capital’s ability to develop the world, the World Bank’s objective became to launch “bankable projects”. The World Bank sought to make poorer countries into targets for the investment of foreign capital. This new focus resulted from a belief that wealthy countries could create physical wealth in the borrowing countries, which could be used to pay back monetary debt. As the poorer countries became richer, the wealthier countries’ GDP would increase as well. Everyone would win.
This business model soon showed its flaws. Human labour and finite natural resources could not sustain these myriad projects. Many were unsuccessful in stimulating significant profits, but borrowing countries still had to pay back their investors. Money was siphoned from the countries’ general taxes, placing the heaviest economic burden on those least effected by these stimulus projects.
The ideological flaw in their thinking was clear, but rather than admit their folly, the World Bank blamed the obstruction of government policies. They created the Washington Consensus to wipe out inconvenient environmental and labour protection laws, balanced budgets, inflation controls and social subsidies.
Governments were bought into making these adjustments, in exchange for easy lending to countries like Mexico, who could use new loans to pay back current heavy-interest debts. The new debt would have to be repaid in the future, but it offered short-term relief to contemporary powers.
Capital v. Nature
Daly now argues that contrary to classical economic theory, natural resource capital is a compliment to – not a substitute for – man-made capital. The increasing impact of human extraction on the environment has led to a decrease in the supply of natural capital, which logically leads to a scarcity of man-made capital. Unfortunately, this dynamic has only started to manifest now, concealed behind revolving doors of cash throughout the 1990s and the first decade of the 21st century.
In Daly’s view, those who insist on practising pursuing a growth based economy and business as usual, do so at great cost. Ravaging the earth’s natural resources in an attempt to meet the demand of man-made capital can, to some extent, create short-term growth. However, as we have now started to observe, this is achieved at great harm to the majority, the environment and future generations. Clearly, this system of capitalism is not sustainable.
Man-made capital can only be substituted for natural capital for so long before the hypothetical calculation and speculation on future profit catches up. Daly explains, capital can create fishing boats, but without fishermen and a plentiful school of fish in the sea, the fishing boats won’t make profit.
Due to the relative failure of capital to create real wealth, most economists today concede that there is too much debt in the world. However, by continuing to uphold belief in a growth-based economy, the World Bank’s response is to inject more capital into a system that has been on it’s last legs for years.
Although not widely publicised by the government and corporate-sponsored mainstream media, a growing contingent of economists have begun to understand the reality that capital-led economic growth is unsustainable.
Going against the whole ideological system of capitalism, Daly suggests that capital is no longer the limit to development. The security of the future global economy depends on investment into the preservation and restoration of natural resources.
“It is not for nothing that our system is called ‘capitalism’ rather than ‘natural resource-ism’. It is ideologically inconvenient for capitalism if capital is no longer the limiting factor.”
For neoclassical economics, which insists that man dominates nature, the idea that nature can limit economic growth is unfathomable. A concession of this magnitude demands a total restructuring of the economic system. As governments choose to ignore this increasingly evident truth, and the economic epidemic spreads, the cost to future generations becomes more threatening.
The paradigm of never-ending growth leaves a hangover the global economy is only now starting to feel. Coming to terms with the falsehood that world economies will continue growing into forever, means a restructuring of many long held beliefs, goals and overhauling dreams of the future. Will these changes mean the end of Western domination, a plunge into a technological devoid waste land or a Mad-Max style fight for survival? Probably not.
Slavoj Zizek has been known to say, “It is easier to imagine the end of the world than to imagine the end of capitalism.” Yet, in a generation or two, our children’s jaws will drop as we relay tales of fanciful iPhones made by economic slaves in China and the idea that people from seventeen different countries could speak different languages yet share the same currency. In the end, humans will muddle through as they always do and economic alternatives to capitalism will come and go. Bruised and wistful, our species will slowly open its eyes, awake from the capitalistic dream and wonder if it was all real.
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