Why capitalism must expand – whatever the environmental consequences 1

I have suggested several times that capitalism’s destructive relationship with the environment is not a matter of greed. Nor is it natural to industrial systems. Rather, it inheres in the basic economic structure of capitalism itself – in the things that make it capitalism rather than any other kind of economy. But how is this so? One would never have drawn any such conclusions from economic theory as it is taught in our universities or the way most professional economists talk about their subject.

The key question is how investment works under the rules of a capitalist economy. These rules have evolved along with capitalism itself, but the basic cycle as it now operates is very simple. Imagine that you have a good deal of money available to invest, and choose a sector where a lot of ‘fixed’ capital is needed. That is, your business will need to pay for a lot of materials and facilities before it can even start doing business. This might mean almost anything – expensive tools, specialised equipment, vehicles, energy generation, storage, offices, changes to the terrain, and so on – all of which must be paid for before production can start and none of which will be paid off until you have been in business for a long time – certainly years, and quite possibly decades.

For example, a car or a cement factory can cost several hundred million dollars, almost all of which must be paid for before the first car or bag of cement comes off the production line. A nuclear power station can costs several billion dollars, yet will not generate one iota of revenue until long after its owners have had to start paying out to build it. To fund these enormous outlays, even the biggest company has to borrow equally enormous sums, all of which must be paid back, typically over a very long period.

The upshot of this is that there is a constant pressure on the owners to keep selling the product. That makes it extremely difficult to reduce sales of even the most environmentally destructive product, once the capital has been raised and the factories, roads and power plants are in place. On the contrary, there is bound to be a pressure to deal with any such problem far more economically, such as be simply denying its reality. Other stakeholders in this process – including the workers whose jobs are at risk and the governments whose loans and tax revenues are equally on the line – will frequently back them up, sometimes (as in the case of global warming and other environmental problems) beyond all reason. So it is no wonder that every successive environmental problem, from industrial accidents to global resource depletion to climate change, are routinely denied by big business: they know who will be expected to pay for the damage.

In fact, far from showing restraint, there is ample reason to believe that having a lot of fixed capital to pay off will not only encourage owners to look the other way when problems loom but actively encourage them to expand production as much as possible. The more any given piece of equipment or building or other facility can be used while the debt is outstanding, the more income it will generate to pay off the debt. For example, if a car production line is used for three shifts each day rather than one or two, then the part of the costs that goes towards paying for the factory building (or approach roads or office space or any number of other items) can be spread out over more cars. As a result, both the costs and the value of the output will go up, but because nothing extra is being paid to use the factory 24 hours each day, the cost per car goes down and the revenue available to pay off the debt goes up. So it always makes sense to look for new ways to intensify production, so that more revenue can be had for the same costs.

On the other hand, the value of your investment is constantly being eroded by competitors. If you plan for your investments to pay for themselves over many years, you can assume that three things will happen. Firstly, your equipment will wear out, while more recent entrants to your market will be using more up-to-date machinery that does the same job at lower costs. Secondly, notwithstanding all the laws of patents and intellectual property, you can expect any innovations you have made to be copied by others without them having to bear the research and development costs you had to pay for. And finally, the longer the term of your investment, the more likely it is that you will find the whole way your investment works radically undermined by a truly ‘destructive’ innovation that simply changes the way things are done in your industry. Thus, the car destroyed the horse and cart, the valve was all but eliminated by the transistor, the European and American car and electronics industries wilted before the Japanese quality revolution, supermarkets are destroying small retail businesses everywhere, and right now downloading is destroying CD and DVD businesses all around the world.

All these forces means the same thing: you need to exploit your capital as much and as quickly as you can, which ultimately means one thing: make and sell more. The environmental effect of this imperative may be mitigated by improvements in efficiency, but the likelihood is that any given business will also find easier but less desirable techniques for solving their economic problems, such as to manipulating customers, markets and suppliers. Obsolescence can be built into products in all sorts of ways. They may also be eased by protective governments (many of which have not hesitated to put the interests of business before those of their own people), by buying out competitors and by flagrant abuse and dishonesty of one kind or another.

A good deal needs to be added to the basic production process to make sure that all these extra goods and services are sold, of course, and it is no coincidence that mass production and mass marketing came into existence hand in hand, or that encouraging debt and consumerism has long since been a matter of government policy. The stability of our society relies on industrial systems that operate on a larger and larger scale, and under a capitalist economic system that means the ability of big businesses to repay the loans and bonds that have been used to finance all this. That in turn means profit, without which not only these investments would collapse but the entire system of employment and the entire tax system that underpins government would simply disappear.

Yet there is no economic necessity for our economy to work like this. Society is perfectly capable of identifying its own needs. We are perfectly capable of building factories and offices and communications and energy generation systems and all the rest without all the paraphernalia of big business. To claim that we need the profit motive to make people behave in an economically rational manner is not so much doubtful as absurd, given how irrational every bubble and collapse proves profit to be. Likewise the severely deceptive ‘price signals’ from mostly imagined ‘markets’ – they serve the purposes of a small elite that does so well out of these fictions, but the continual assertion that we are capable of nothing more intelligent surely requires more than the routine abstractions of discredited politicians, ivory-tower economists and toadies to big business itself.

And as the above argument I hope shows, any idea that capitalism can be the centrepiece of any attempt to deal with serious environmental problems is not so much absurd as grossly irresponsible, not to say terrifying. Capitalism is incapable of weaning itself off growth, because that is what the basic rules of investment demand. So where it has invested in selling physical goods, it must grow its output and so increase its physical impact; and where it is a non-physical service, it must intensify its use of the many physical resources even the most ‘dematerialised’ service employs. It is incapable of shutting down the most filthy factories or deliberately choosing a more expensive but environmentally more rational way of delivering our economic needs, unless this can also be proved to be the most profitable way of proceeding. That may sometimes be the case, but to rely on such a foolish assumption in the face of the worst threat to the planet in human history must surely be regarded as verging on insane.

More of RJ Robinson at http://richardjrobinson.blogspot.com/

One comment on “Why capitalism must expand – whatever the environmental consequences

  1. Reply Jerry Fox Feb 27,2010 7:03 am

    Capitalism supported by fractional reserve banking and the artificial support of governmental bailouts does require constant expansion both to pay off the inherent interest and to delay the inflationary effects of the money supply. I hope that you are not trying to lump the great system of free enterprise which has helped to make America the envy of the world, being linked to a Constitutionally maintained money supply, to this travesty that has come to be called “Capitalism”. Under the former, there is no need for constant expansion to support a healthy thriving economy along with proper concern for any environmental issues.

Leave a Reply