Abstract. Several authors, particularly from ecological economics, locate a ‘growth imperative’ within the current monetary system based on credit money and positive interest rates. The strongest claim comes from papers such as Binswanger (2009, 2015) arguing based on a monetary circuit model that growth is unavoidable to maintain economic stability independent on the will of the economic agents. On the other side of the spectrum, Jackson & Victor (2015) have disputed this claim, presenting a post-Keynesian stock-flow consistent model that converges to a stationary state in their numerical simulations.
The central aim of this paper is to clarify why certain modeling approaches lead to a growth imperative and others do not. We analyzed the models in the tradition of Binswanger and concluded that their accounting of banks’ capital is inconsistent, and a modeling assumption central for a growth imperative is not underpinned theoretically: Bank’s equity capital has to increase even if debt does not. This is a discrepancy between the authors’ intentions in their texts and their actual models.
Second, we analyze several post-Keynesian models, a single static one, and four discrete time stock-flow consistent models. We show how to perform a stability analysis in the parameter space, and find that depending on parameter values, the stationary state can be stable or not. A stationary state with zero net saving and investment can be reached with positive interest rates, if the parameter ‘consumption out of wealth’ is above a threshold that rises with the interest rate.
We conclude that a monetary system based on interest-bearing debt-money with private banks does not lead to an ‘inherent’ growth imperative, but the stationary state can be unstable. This is caused by agents’ decisions, not by structural inevitableness. The stability analysis adds additional insights to numerical simulations of the dynamics, because we can precisely determine the parameter ranges where a stationary state can be reached.
Tim Jackson, Peter Victor and Ali Asjad Naqvi, ‘Towards a Stock-Flow Consistent Ecological Macroeconomics’, ESRC Passage Working paper Series 15-02, 2015 Abstract: Modern western economies (in the Eurozone and elsewhere) face a number of challenges over the coming decades. Achieving full employment, meeting climate change and other key environmental targets, and reducing inequality rank amongst the highest of these. The conventional route to achieving these goals has been to pursue economic growth. But this route has created two critical problems for modern economies. The first is that higher growth leads (ceteris parabis) to higher environmental impact. The second is that fragility in financial balances has accompanied relentless demand expansion.
The prevailing global response to the first problem has been to encourage a decoupling of output from impacts by investing in green technologies (green growth). But this response runs the risk of exacerbating problems associated with the over-leveraging of households, firms and governments and places undue confidence in unproven and imagined technologies. An alternative approach is to reduce the pace of growth and to restructure economies around green services (post-growth). But the potential dangers of declining growth rates lie in increased inequality and in rising unemployment. Some more fundamental arguments have also been made against the feasibility of interest-bearing debt within a post-growth economy.
The work described in this paper was motivated by the need to address these fundamental dilemmas and to inform the debate that has emerged in recent years about the relative merits of green growth and post-growth scenarios. In pursuit of this aim we have developed a suite of macroeconomic models based on the methodology of Post-Keynesian Stock Flow Consistent (SFC) system dynamics. Taken together these models represent the first steps in constructing a new macroeconomic synthesis capable of exploring the economic and financial dimensions of an economy confronting resource or environmental constraints. Such an ecological macroeconomics includes an account of basic macroeconomic variables such as the GDP, consumption, investment, saving, public spending, employment, and productivity. It also accounts for the performance of the economy in terms of financial balances, net lending positions, money supply, distributional equity and financial stability.
This report illustrates the utility of this new approach through a number of specific analyses and scenario explorations. These include an assessment of the Piketty hypothesis (that slow growth increases inequality), an analysis of the ‘growth imperative’ hypothesis (that interest bearing debt requires economic growth for stability), and an analysis of the financial and monetary implications of green investment policies. The work also assesses the scope for fiscal policy to improve social and environmental outcomes