A simple model of Keynes' Proposal for stable Economic Climax
Naturally Stabilizing Economies by Ending Compound Investment (for profitability)

J L Henshaw
id @ synapse9.com  09/16/07 05/21/08 08/26/08 6/19/12

More discussion of the theory from a natural systems perspective is at NaturalClime.htm and searching the site and my blog for mentions of Keynes.    This page introduces a simple spreadsheet model showing the effect.    The automatic compounding of investment income ends to allow the physical processes of economies to switch from expanding to maturing, and distributing wealth thereby too.  Real sustainable development is more complicated, but as a financial choice it amounts to a single simple policy decision to preserve capital by turning off the "multiplier".  Otherwise the multiplier is only turned off when investments or returns themselves collapse.   The general idea was first proposed by economist J. M. Keynes saying:

"may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism" (General Theory, Ch 16)

It was then promoted for decades by visionary economist Kenneth Boulding, which I discovered when working on it in the early 1980's.  This version focuses on the simplest rule that would end the compounding of returns, voluntary spending by investment owners.   That would keep economies from falling into global credit traps, as so prevalent in the long history of economic disasters.   To keep economies profitable in the long term investors would need to spend their profits in the interest of maximizing the profitability of the environment they are profitinb from, i.e. as an endowment for sustainability. 

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The short statement:  

Economies grow because surpluses are reserved for expanding them.   Growth in a market economy is managed by allocating funds from a savings pool to generate returns, and those returns then added to the pool to increase the total amounts invested.   It increases the investments and the returns exponentially, by adding positive %'s of the prior total.   The end for that comes at a pont of "over-investment" when increasing investment becomes less and less profitable.  Then, as the whole falils to prosper, investors still seeking maximum growth for themselves do so as the expense of everyone else, rather than as before to the benefit of everyone else.  

Seeing diminishing returns for the whole approaching, a choice could be made to prevent a terminal decline in the profitability of the whole, by a collective choice to end the general compounding of returns, as socially discredited.   One practical way would be to distinguish between earned and unearned income, encouraging people to save from earned income, but prevent the saving of returns on investment (unearned income).  Then investors would need to spend their unearned income on purposes serving other values.

It's not important here to discuss all the reasons our economy developed a plan to grow ever faster forever.  It's only important to note that literally all kinds of systems in nature initially develop with a growth process, whatever their natural beginning or end.   It's essentially a law of physics, that nothing can start at it's full size, but due to the conservatin of energy needs to begin with the kind of non-linear development we call growth.  

No doubt ending economic growth would be a big adjustment, but it need not mean slowing things down, except as people realize slowing down a bit might be a more profitable way to go.   It just means removing the steering principles that result in automatic maximum rates of expansion, and guiding investors to invest so the system as a whole remains profitable. 

Nature demonstrates this investment strategy as growth slows down at the point where organisms or other systems begin to mature.  At that time their self-investment goes stabilizing at a peak of vitality and maximizing their ability to interact with their environment.   It's a process of turning from inward to outward interests, like students perfecting their development as they complete school so they can become independent actors in the world.   So turning the use of the investment profits from internal to external growth  is a way to copy nature's method.  

The cybernetic steering principle is for the viewpoint of cells that have doubling to grow their body, as it begins to become taxing rathre than enriching, turn you attention to perfecting other things.  It's the standard investment principle of family businesses, in which people work very hard to make it grow till it can support their true interests in having a business.   

The graphs are of a very simple but very natural economic "through-put" model from an Excel spreadsheet, using the variables: Investment, Capital, Products and Returns on Investment (1): 

1) Investment funds build Capital goods

2) Capital goods build Products

3) Capital goods and Products both decay over time

4) Investment funds produce Returns and do not decay

5) Returns are added to Investment funds at first

6) So Investments, Capital and Products first multiply and then stabilize

After year 20 in the model, to keep it simple, either investment is stopped or compounding the returns is stopped, causing a developmental turning point.   These demonstrate the control potential for these two types of 'intervention', one destructive and the other constructive.    What Keynes noticed was that as complications of growth set in, if the constructive choice was not made the destructive one would happen.

	A. In limitless economic growth, investment builds capital goods, and capital goods build products.    Returns of a small  % then adds to investment, and this forms a continually multiplying spiral of expansion as long as resources of ever greater amounts and ever lower costs keep being found too.
	B. If investment were suddenly ended, capital goods would decay with some parts wasting away more quickly than others, and everything would wind down.  It's hard to imagine a choice people could make to end investment permanently.   It's easier to imagine how a gereral financial collapse might result in economic breakdown and decay.  The reality is that most complex societies in history seem to have done something of the sort, and vanished without leaving a record what the self-created problem they faced was, like Rome, the Mayans, Easter Islanders.
	C. Ending the compounding of investment would be an actually quite small change in the economy, having a quite large accumulative effect.   Here only the increment by which investment is increased each year is restricted.   The behavior switches from a run-away explosion to seeking a self-defined natural balance.    This represents transformative cybernetic control.  It is a large conceptual leap to imagine, but satisfies the necessity that we somehow end our exploding economic footprint on the earth.  It does so without disrupting the physical economy of the time except to alter its rate of change.   What most people don't realize is that this is the growth sequence of their own original biological growth and development.  We all started from a short period of exponential expansion (starting from a single fertilized cell).  That 'immature' explosive growth was followed by switching to maturation and leading to our independence in the world.  Maturation is the step to independence.   That's actually the normal development sequence for all living things, and an option that is available for economies.  If you consider the time scale in the charts to be hundreds of years, give or take, this might also suggest the general time scale over which this kind of change might take effect, starting growth for a short period and maturing growth for a long period.

notes:
(1) definitions of the variables and the model and a few notes are to be found in GrowthSwitch.xls It's a series of 3 simultaneous relationships, Economic Product: P1=C0*R, Capital: C1=C0-C0*d+I0 and Investment: I1=I0+I0*r.   Run 2 makes I0=0 at step 20, and run 3 makes  r=0 at step 20.   That's the entire difference.  Many more features could be added, but the result is the same if, as here, 'r' includes all the regularly reinvested returns on investment and setting it to zero has no other effect on how returns on investment are used.