Why is slow growth a problem?

Posted: 10 February 2016 in Uncategorized
Tags: , , , ,


There is no doubt that, eight years after the crash of 2008, the world economy continues to stagnate. The problem of slow growth is confirmed by Joseph Stiglitz [ht: ja], who bases his argument on the latest report from the United Nations, World Economic Situation and Prospects 2016 (pdf). Thus, for example, the growth rate of developed economies, which averaged only 0.8 percent over the 2007-2014 period, was projected for 2015 to be 24 percent less than before the crash (and forecast to still be less than in 2007 for at least the next two years). For other groups of countries, the decline is even worse: 54 percent for developing countries and 132 percent for economies in transition.

A few days ago, I argued that slow growth was a fundamental problem for capitalism. The question is, why?

To be clear, there’s a reasonable argument to be made that we would all be better off with less or no growth. That’s certainly true for our natural environment, in terms of issues such as global warming, pollution, and so on. Fewer resources would be extracted; less energy would be needed, thus lowering the level of greenhouse gasses; and, in general, less environmental damage might be caused by our economic activities.

My argument, however, is about the predominant economic system in the world today. It is capitalism that has a slow-growth problem. And that’s because growth is both a premise and promise of a particularly capitalist way of organizing our economic activities.

It is a premise in the sense that capitalists—the capitalist class as a whole, not necessarily individual capitalists in one enterprise or another—can collect and utilize for their own purposes more surplus-value when capitalism is growing—when productivity is high, when more commodities are being produced, when the economy as a whole is growing. There’s more surplus available, even if workers’ wages are rising, and each member of the capitalist class can get their aliquot share of that growing surplus.

Of course, capitalists can get more surplus even when the economy is not growing, or growing only slowly. But that requires additional measures, such as keeping wages low. If, for whatever reason, they’re able to keep workers’ wages from growing, then the difference between the value those workers produce and what they receive in income can still grow.

employment gap

And, as it turns out, capitalism has a way of keeping workers’ wages from rising: unemployment. According to the United Nations, just in the OECD countries, 44 million workers were unemployed in 2015, about 12 million more than in 2007. And one third of unemployed individuals were out of work for 12 months or more in the last quarter of 2014—a 77.2 percent increase in the number of long-term unemployed since the financial crisis hit.

One of the key premises of capitalism is that it provide sufficient jobs to employ everyone who wants to (and, of course, needs to) work. Clearly it hasn’t been able to do that in the years since the crash—and slow growth in the foreseeable future will maintain or even increase the existing “employment gap.”



But, of course, the existence of a large number of unemployed workers has had the desired effect: real wages declined from 2008 onward and, even as they began to increase in 2015, they’re still far below what they were before the crash.

And while the decline in real wages certainly serves to increase profitability in the short run, it has also undermined the ability of workers to buy back the commodities they produce. That undercuts the consumption contribution to growth. In turn, capitalists have been hesitant to continue to invest, which is lowering investment, another key component of growth.

What this means is we can expect little economic growth now and in the years to come. And, as I have shown, slow growth undermines both the premise and promise of capitalism.

  1. Have data, lack theory
    Comment on David Ruccio on ‘Why is slow growth a problem?’

    Everybody knows: the economy does not function as economics textbooks say. This holds — with damaging consequences — in particular for the labor market. The fatal professional incompetence consists in:
    • Until this day, the representative economist has not realized that the overall systemic interdependencies establish a POSITIVE feedback loop between the (aggregate) product and the (aggregate) labor market.
    • Until this day, the representative economist cannot tell the difference between income and profit.

    In the following a sketch of the formally and empirically correct employment and profit theory is given.

    The most elementary version of the correct employment equation reads:

    From this equation follows inter alia:

    (i) An increase of the expenditure ratio rhoE leads to higher employment. An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<1 indicates credit contraction/debt repayment.

    (ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.

    (iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment. This implies that a HIGHER average wage rate W leads to HIGHER employment. This is, of course, contrary to conventional economic wisdom (2015).

    (iv) The complete and testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and the trade balance with the rest of the world.

    Point (i) and (ii) is familiar Keynesian stuff. Let us focus here alone on the factor cost ratio rhoF as defined in (iii). This variable embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment increases if the average wage rate W increases relative to average price P and productivity R.

    In order to avoid worldwide unemployment and deflation the average wage rate must therefore rise worldwide. For the relationship between real wage, productivity, profit and real shares see (2015, Sec. 10)

    The correct profit equation reads: Qm = Yd+I-Sm (2014, p. 8, eq. (18))*
    Legend: Qm: monetary profit, Yd distributed profit, Sm: monetary saving, I investment expenditure

    The profit equation gets a bit more complex when foreign trade and government is included. The equation says (for the world economy as a whole):

    (v) Strong growth = high investment I is good for the overall monetary profit of the business sector as a whole.

    (vi) Strong consumption expenditures = low saving Sm or even dissaving -Sm = growing consumer debt is good for profit.

    (vii) By implication high government deficit spending = growing public debt is good for profit.

    (viii) High profit distribution Yd is good for profit.

    Profit and profit distribution constitute a self-reinforcing feedback loop. The same holds for profit and investment. These built-in positive feedback loops explode the notion of equilibrium: the monetary economy is NOT a self-optimizing equilibrium system.

    Note, that overall profit has nothing to do with productivity or low wages. These and other factors affect only the distribution of overall profit between firms or countries. Note also, that the profit equation holds for the USA, Russia, China, the EU and all other countries/associations, that is, it does not matter at all whether one has a market economy or private property or free enterprise or any other of the alleged characteristics of capitalism.

    David Ruccio has to do a lot of scientific homework in order to make his data speak.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350

    * https://commons.wikimedia.org/wiki/File:AXEC09.png or https://commons.
    wikimedia.org/wiki/File:AXEC08.png or https://commons.wikimedia.org/wiki/File:

  2. […] issue is slow economic growth. As I wrote back in February, while there’s a reasonable argument to be made that we would all be better off […]

  3. […] I have argued before (e.g., here, here, and here) capitalism has a real growth problem. The premise and promise of capitalism are that it […]

  4. […] I have argued before (e.g., here, here, and here) capitalism has a real growth problem. The premise and promise of capitalism are that it […]

  5. […] I explained in 2016, contemporary capitalism has a slow-growth problem—”because growth is both a […]

  6. […] ***As I explained in 2016, contemporary capitalism has a slow-growth problem—”because growth is both a premise and promise of a particularly capitalist way of organizing our economic activities.” […]

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