The Limits of The Modern Economic System

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This paper concerning the limits of the modern economic system is based mostly on the recent monumental work by T. Piketty «Capital in the XXI century» and on the earlier but still valid research by D. Meadows provided in his book «The Limits to Growth», now in its third edition. The combination of these two directions of research allow to take a fresh look on the underlying principles of the present economic system, and exposes a potential contradiction between the need for constant exponential economic growth and its destructive effect on the environment, which turns out to be the result of the modern economic system reaching its limits within the boundaries of the current capitalist model.

Historical retrospective and statistical data show, that it is the period of limitless economic growth and prosperity, which people became so accustomed to in more than 50 years since World War II, that is the temporary coincidence, and not the new stage of development for the whole system, as some people want to think. The middle of the XX century saw the peak of unprecedented rates of population and productivity growth, the reasons for which go back to the Industrial Revolution. This growth actually allowed the global economy to expand and provide a whole new level in living standards for billions. Nevertheless, the demographic transition that has already ended in developed countries is approaching its finish even in the poorest of developing nations, and the technological progress rates are getting slower and are unable to fill the niche left by the demographic component of economic growth. Moreover, since at least the 70s there have been alarming indications that the destruction of the biosphere and exhaustion of natural resources that occurred as a side effect of this turbulent growth may lead to significant increase in production expenses in the future, in which case a large portion of the economic effect created by technological progress will have to be spent to simply maintain global production on its pre-crisis level.

In these conditions old tendencies and contradictions, previously thought dead and buried by the triumphant free market, arise again, stronger than ever. The tendency of the rate of profit to fall, discovered by Ricardo and Marx, has for a long time been considered by economists to be an unfulfilled prophesy, a myth of the XIX century, disproved by the rapid march of progress. But what will happen with the rate of profit if economic growth decreases from the high rates than modern society is familiar with to 1 or 2 percent a year, a figure quite normal for the XIX century that seems utterly miserly nowadays? What will happen if, due to some ecological or resource-driven crisis, growth stops at all or becomes negative, turning into a stable decrease?

Modern studies, for example those conducted by a French economist Thomas Piketty, show that even a stable, but low, growth rate of 1-2% exposes old problems first pointed out by Marx. These issues may take different forms now than they did more than a hundred years ago, but their core, defined by the inner workings of a free market economy, remains the same. The tendency of income to concentrate in the hands of capital owners, discovered by Piketty, is the other side of the tendency of the rate of profit to fall: when the growth rate of the economy decreases below a certain point, which is the rate of profit that capital owners are accustomed to, they compensate for it by increasing the share of the surplus value in the product, therefore decreasing the share that goes to the employees for their labor. Without this mechanism the rate of profit would fall to the actual value of economic growth, thus fulfilling, with a long delay, the prognostications of Marx and Ricardo. Should the rate of profit remain the same, Marx’s prediction of absolute impoverishment (that is, the decrease in income and quality of life) of employees will come to life, possibly for the first time in modern history.

The only scenario that defeats both these tendencies is the scenario of continuous high economic growth that was observed during the whole of the XX century, but there is a nigh-insurmountable obstacle in its path: the natural limits to growth, defined by the amount of resources available on our planet and the capacity of the environment to process pollution. All three of these tendencies are connected: to exist in the modern system, capital has to provide a certain rate of profitability, to ensure the profitability of capital, the system has to either maintain constant economic growth that leads to surpassing the natural limits of pollution and resources, or to decrease the share of income that goes to hired labor, which leads to complications of a socio-political character, seeing how high quality of life is a prerequisite for modern liberal democracy, at least in developed countries.

This paper takes a look at all three of these tendencies and examines their interaction with one another, as well as possible ways to overcome the present situation.

Download the paper in pdf form

Published at: 2016.09.25
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