Sunday, September 9, 2018

Competition, not consumption, drives global destruction

We have the reduce consumption and resource use”, is a statement that is gaining some traction. Considering that all that is consumed have to be produced and vice versa it is a logical claim that we also have to reduce production, but that seems to be a lot more provocative. As a matter of fact, the real driver of economic growth and resource use can be found in the conditions of production, and there consumer demand plays a minor role.

Many seem to realize that we need to consume less in order to ease the pressure on the rest of the living world. Friends of progress and development object, however, and point to that the replacement of light bulbs with much more efficient LED lights gave us more for less. But even if that example may have some merit, in the real world, despite tremendous increase in efficiency in many sectors the total resource use increases more rapidly than the population increases. One explanation of this is the rebound effect, or Jevons paradox which in short means that efficiency gains leads to lower price and subsequent increased consumption.

Jevon’s paradox is real, but it doesn’t explain it all. To understand fully what drives the economy one can’t look mainly at the consumption side, because it is in the conditions of production we find the main drivers and the main agents in the economy, the enterprises and the capital owners. Technological advances, competition and capital accumulation (profit) are the main drivers there, and they are all interlinked.

In mature markets where there is little growth, such as agriculture, competition works roughly like this: Some invention makes it possible to produce more with less labor (a combine harvester) or produce more from the same area (artificial fertilizers or irrigation). Both cases leads to lower costs per produced unit and an increased use of external resources. For a short while the frontrunners might benefit from some profit, but soon the new technology is spread to everybody and the prices fall to a new level basically reflecting cost of production. To reduce labor is the most common way to reduce cost. That statement is easily proven by the fact that advanced economies now have a few percent of its population in farming compared to some 75 percent or more, earlier. In the first development of farming, external resource use (fertilizers, import of feed, diesel etc.) increased a lot. Presently, use of external resources per produced unit has probably gone down. But the use of external resources per hour worked is still on a steep trajectory upwards. Does it matter?

Yes it certainly do. All the labor that was freed up by mechanization of farms should have something else to do, and many went to industries. There the same forces are at play, with the difference that for quite some time an industry can have real growth both in production and labor because the total production increases a lot quicker than the labor productivity. The car industry from WW II and a number of decades onwards is a good example of such an industry. Sooner or later markets get saturated and the pressure of competition increases.  Companies have to focus more on productivity and lower costs. The same happens: resource use per produced unit decreases but labor shrinks much more rapid and the end result is that use of resources per hour worked increases. Those made redundant through rationalization get a job in a new growing industry and the story is repeated.* Increased productivity also leads to increased wages and in combination with lower prices to a tremendous growth in consumption. We can therefore formulate the following:

Increases in labor productivity lead to increased use of resources and increased consumption.

There is really no way around this on an aggregate level. And it explains very well why total resource use is increasing despite all advances in efficiency. For companies in competitive markets, it is really not possible to be happy with what you do and how you do it. You have to increase productivity and innovate in order to survive. And capital owners of various sorts will demand rent on their invested capital or reschedule it to other businesses. It is all part and parcel of the capitalist market economy. Some argue that a non-capitalist market economy would be different, but I have as yet not seen any convincing theory for how such a society would look like and there are no relevant historical examples to look at either.

In a world without competition the shoemaker that finds out a way to produce the same number of shoes in half the time can go fishing half the day, but when there is competition, such an invention will lead to lower prices and the need to produce more to keep income the same. Fishing will have to wait.   

This is also the story of how economic growth works, and why it is an essential part of the capitalist market economy. If these cycles of development stalls, the whole economy grinds to halt and we have a full blown crisis coming. Calls for green growth or sustainable consumption will not change these fundamental conditions. Radical cuts in individual consumption, incomes and wage labor can change the game however.


* Some may argue that today most people made redundant are not employed in industries but in various services and that resource use in those are less. But some services consume a lot of resources, tourism is an obvious case where resource use is huge. The internet is not so dematerialized as many think and consumes an rapidly increasing share of the world’s electricity. But it is admittedly a lot more difficult to increase labor productivity in many services, a fact called Baumol’s disease and also an explanation for why economic growth has slowed down in economies undergoing this transition. Overall, this rather proves the point above.  

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