• ed note:   The current discussion of the core dilemma of capitalism, as a limitless system for creating growing wealth, is in terms of the crises we now face caused by it, producing socially disruptive innovation and growing financial inequity.   Those include  1) threats of rapidly growing social inequity, 2) unsustainable national and private debt, 3) disruptive scales of job loss from globalization and automation, 4) demands for unachievable ever faster and ever more complex learning and change , 5) the rapid depletion of earth’s resources, 6) disruption of the climate and earth’s ecologies, and of course 7) increasing international conflicts between conflicting economic interests,  and of course,  8) growing risks of grand scale financial collapses due to failing promises, as a kind of general list.  It’s quite a list.   There’s been a very long debate but mostly scattered in pieces and hidden from view.  That’s both because the primary culprit is our whole way of life, naturally hard to talk about, and what to do with “money” .
• The design of our economic system that defines “capitalism” is very simple.  It’s “the use of investment profits to build up investments”.  That’s it.   Why such a simple practice has a hold on us is that it promises both society and individuals ever faster growing profits without growing work.   Of course that tends to end up badly, having been much too good to be true from the start.   The equally simple design of all natural systems is that “any system needs to build up to get started, and then stop building up to continue”.  The two definitions conflict.   Keynes and Boulding foresaw that the two would come to blows, once the economic system had built up and needed to stop building up to continue.   They saw capitalism could become like a natural system and can change only if investors spend their profits.  The sense of it is that investors would “pay it forward” so their profits would take care of the future rather that keep “paying it back” so old money could take ever more from the future.  It would let our economic system first build up, and then stop building up, to be able to continue, with no guarantees but as a possible path forward.   It’s all too simple as a design problem, as how all enduring natural systems develop and needs the social principle to make sense.  The dilemma is completely unsolvable as a financial problem within capitalism, though, challenging our  whole way of life as a rather immediate concern.   jlh 3/14/16 

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from a 21st century view……

Your question is,  do we all use our profits to extract increasing pay back from others,
building up an ever growing drain on what makes our world profitable?
______
Or do we pay our profits forward to assure our world remains healthy
to grow our own ideals, our families, our communities and our world,
treating profits as a gift to what matters?
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J.M. Keynes and Ken Boulding were early and mid 20th century “whole system thinkers”.   They were true geniuses, struggling for words to convey how complex systems with all independent parts work as a whole somehow.   It’s truly the profound puzzle of nature, how illogical it is that all the independent parts of systems would act as if they were all coordinated.   They didn’t stop at just looking for simple rules of prediction having no idea where they came from or when they might change.    They also looked for and found elementally simple organizing principles of design, for how the parts of market economies coordinated with each other as whole systems and what drove them, central principles they weren’t able to communicate and that have yet to be appreciated at all.   From their views they did each say that:

the world economy would soon bankrupt itself by over-investment,
as a natural limit to unlimited financial growth,
due to the central driving financial practice of compound investment

Each was also a expansive thinker with their own ways of speaking about broad principles, so they are hard to read too.   It’s only by learning to think about the economy as a whole system, with all its parts working together, and distributing its surpluses and shortages throughout all its connections, that you can piece together from their writings the common finger prints for the above simple principle as what they were clearly saying.

I had some extra help with it, though.   I learned of Keynes’ work on the natural limits of finance from speaking with Ken, having gotten a chance to ask him in person, if he knew of any economists who had studied the limits of compound investment as a natural limit to growth.   I had asked Ken about it in 1983, and was able to understand what he said on the subject, because I had been searching for a few years already for anyone else who had discovered the principle, that growth systems, if not interfered with, would naturally upset their own conditions for growth.   It’s a completely invariant natural principle.

Ken told me of how he had taken a course from Keynes at Oxford, I think it was, and learned of Keynes’s view that the continual reinvestment of profits to continually multiply investments would necessarily bring an end to investment growth with net profits declining toward zero, in the aggregate.  That last phrase “in the aggregate” is very important to include, for the principle to make logical sense.  Keynes had illustrated what it meant with his Biblical story of “the widows’s cruse” (or ‘cup’), a story about Elijah visiting an old widow and giving her an inexhaustible cup of oil (I Kings 17:8–16), to illustrate sustainable investment as resulting from the profits always being spent.  I then also found Keynes more specific discussion of the economic principles in his 1932 General Theory of Employment, Interest and Money Ch 16 and Ken’s own inclusion of the principle in his 1962 Reconstructing Economics (ch 17).

I had discovered it  when studying growth as a natural process seen in the transformations of all kinds of other natural systems, and had self-published a book on it in 1979 An Unhidden Pattern of Events, including the essay “The infinte society: Growth induced collapse“.   That’s where I first described the pattern of systemic over-investment to the point of bankruptcy as one of escalating societal, financial and technological crises together, like we’ve been facing for a few decades now.

The strangely simple reason for every part of the economy being driven to some state of crisis and facing ever more desperate circumstances, is that “steady growth” is a process of ever bigger and faster changes in how everything in the system works.   Nothing can respond to ever faster change and so has to draw on the surplus capacities that are usually shared to create resilience throughout the system, resulting in that resilience being exhausted everywhere in the system at once.   What that gives you a way to imagine the same thing happening in your home or office to see how putting increasing demands on a whole system naturally results in causing it to fail, working as a whole and every part being pushed to its limits of its ability to work together at once.

Keynes picked a story of Elijah coming to visit an old widow to illustrate.   Most people would find the biblical stories of God needing to cleanse the world of economic wrong doing with terrible “plagues of plagues”, as in the narratives of “the flood”, “the tower of Babel” and “the Exodus”, as more clear examples of wrongful prosperity becoming self-defeating.

It can be easy to understand the basic principle, that if you demand ever growing profit from a finite set of capabilities, your investments will fail to produce the returns.   What’s hard is to imagine the world economy as a “whole system”, as a network of exchanges in which “the accounts balance” and where overwhelming constraints can develop.  Among other things Keynes said:

“Thus for a society such as we have supposed, the position of equilibrium, under conditions of laissez-faire, will be one in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero”
Ch 16 The General Theory

and Boulding:

“It is clear from the business-savings identity (8) on p. 249 that there cannot be any long-run future for business savings. In the long run there cannot be a perpetual increase in business money holdings, or in net household indebtedness to business, and in the stationary state there cannot be any long-run business accumulations.”

Most recently I’ve been discussing the broad evidence I see of the long radical deflation in energy prices( and other commodity prices too) as indicating we have now actually reached the point of bankrupting the earth.   It’s indeed a bit counter intuitive, such that only a person like me might catch the pattern.   It’s also a hypothesis that seems to cover the wide varieties of distress seeming associated with it that are otherwise improbable to occur all at once.

Where to start may be with our seeming to face  a “reverse energy crisis”,
as if all the resource producers can’t get rid of their assets fast enough.

What delivers the true answer to why that whole pattern is taking place, and I think it might be to then notice that the resource rich producers seem to have all become over committed financially too, like everyone else as well.   That’s a big part of the reason for Saudi over-production, uncontrolled overhead costs.   Of course, it was also over development of oil as a resources too, and prior commitments for the expected revenue now going unmet.  All the producers then seem to be in great need for cash and selling at bottom dollar having assumed the price would always hold.

The common cause I think might explain it all, then, would be that the financial “recovery” from the 2008 world financial collapse was done with borrowed money, not spending.  That clearly caused country on earth to maximize its use of credit, and whatever you think of it, that appears not to have revived the economies enough to get out of debt, but only sink ever further into it, so it looks like the bet made for the world “recovery” just “didn’t work”.

jlh  [draft]