Harry Geels: Beyond growth and degrowth

November 28, 2023

^{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

In the context of the climate crisis, many discussions are taking place about redesigning 'the system', with different camps appearing to emerge, such as green growth, degrowth, or the free market. But what is actually behind that growth idea? And can a more robust, less growth-dependent system be set up?

ESB of November 23 contained an interesting article by Hans Stegeman, Chief Economist of Triodos Bank, entitled 'Make the economy less dependent on growth.' The reason behind this call was that 'the economy is reaching its planetary limits'. The urge to grow is said to be a political-economic problem: the deeply entrenched need for profit maximization and thus capital accumulation.

In his article, Stegeman describes roughly four ways to reduce growth incentives.

The first runs through the government. For example, through curbing the tax advantage of debt financing.

The second way concerns combating inequality: 'The greater the inequality, the more important material prosperity and its growth are. This applies at the top (where growth provides an incentive to want even more), but also at the bottom, in the form of uncertainty and income inequality. A more equal society needs less growth. In addition, greater equality reduces overconsumption at the top.' According to Stegeman, inequality could be reduced by taxing assets more heavily and labor less heavily, and by offering basic facilities and security.

The third way is by reducing the profit incentive of companies, including by adjusting governance and involving all stakeholders in the companies.

Finally, the fourth way is to reduce leverage in the system, because debt produces 'pseudo-growth'. The real economy must become more in line with the financial economy and the diversity of the financial system must be increased, including by eliminating 'too big to fail', in this case by reducing the size of banks and asset managers.  

Additional root cause analysis

Stegeman's vision to control growth – with his proposed solutions – comes close to the degrowth idea. In the same issue of ESB, Professor Barbara Baarsma (coincidentally?) had a different view: 'Without growth there is no support for greening.' Baarsma previously gave a much more extensive vision of her green growth in Financial Investigator. I have earlier argued that the climate transition benefits from the advantages of the free market, but one in which the government is independent and creates clear frameworks.

We see that there are more ways to look at the climate transition deemed necessary (to be clear: none of the three views mentioned above denies this). In my opinion, the so-called growth problem does not a priori lie with the business community, but with how we have organized the current system. The growth pressure mainly comes from four actors in the economy: governments, banks, central banks, and consumers. It is a slightly different way of looking, more of a complement to Stegeman's vision.

Four (or actually five) growth engines

Let's take a closer look at the four main players in growth:

1) Governments

Governments have taken on so many tasks - tasks that have also become more time-consuming due to more and more regulations and policies - that it is the government itself that needs economic growth, if only to be able to absorb the rising costs of all those tasks. The government itself also continues to grow. The solution to this growth pressure is to make the government smaller (which will also partly solve the problems of the tight labor market).

2) Central banks

Central banks preach the growth model with their inflation target. By fueling inflation, they want us to keep spending. The economy must not fall back. Unfortunately, few people say this clearly. The central banks also indirectly facilitate the governments' expenditure policy, for example by purchasing government bonds in times of stress (and thus reducing interest rates, i.e. financing costs, of the governments) and providing monetary stimulus.

3) The banks

The commercial banks make money by creating money. They can lend, say, ten euros for every euro of equity. Money creation promotes consumption and investment and therefore growth. When there is a crisis, banks are 'incentivized' by central banks through monetary policy to lend more. Banks, central banks and government thus form a trinity in terms of stimulus policy. Together they build up the leverage in the system.

4) The consumers

Business and consumers are like yin and yang. We cannot say that the business sector has a growth compulsion but the consumer sector does not. Previously, the WSJ wrote an article under the telling title 'It's Taylor Swift's Economy, and We're All Living in It', which previously tempted me to write a column entitled: 'It's the Taylor Swift Economy, Stupid'. Consumers now need experiences and attention. This slowing down is primarily done through the price mechanism.

And then there is an important fifth growth driver: population growth, the well-known 'elephant in the room'. The best solution for degrowth is fewer children.

The other way

In an interview with Financial Investigator, professor Arjo Klamer nicely stated: 'It is not about growth or degrowth, but about the question of why we are actually doing it all.' It is more about the question of how we can optimize quality of life. Klamer wants a more humane economy in which it is less about hard (growth) figures. According to him, it is strange that his scientific research shows that the things that people really find important often appear to deviate from their daily (work) practice.

As far as I am concerned, we would add that the climate transition should not fall into the political left-right polarization, which it has unfortunately ended up in. It is better to approach the problem from multiple angles. For example, reducing the role of the government and central banks (perhaps a right-wing position) in addition to that of reducing the size of the banks and the leverage-based spending and investment drive of consumers and companies (perhaps a left-wing position) coexist.

This article contains a personal opinion from Harry Geels

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