No 2121 Posted by fw, December 12, 2017
To access all other synopses from Prosperity without Growth, click on the Tab titled “Prosperity without Growth” — Links to All Posts in the top left margin of the Home page.
Yesterday’s synopsis, Section 8 of Chapter 9 of Jackson’s book, Prosperity without Growth, recounted Jackson and Peter’s discovery of a flaw in Thomas Piketty’s “algebra of equality” thesis, positing that a concentration of wealth among the few would lead to social and economic instability.
If Piketty’s thesis had been correct, Jackson recognized that it might provoke another economic “growth imperative” forestalling the course towards a post-growth economics.
In today’s synopsis of Section 9, Jackson reports how yet another threat to post-growth economics was thwarted.
This time Tim Jackson and colleague David Victor challenged the conventional wisdom that, without economic growth it would be “impossible to service interest payments and repay debts, would therefore accumulate unsustainably, and eventually destabilize the economy.”
Below, my synopsis captures the essence of Jackson’s account of how he and Victor proved that “… one more impossibility theorem against a post-growth economics turns out to be false.”
Tim Jackson challenges “conventional wisdom” which suggests that without economic growth it would be “impossible to service interest payments and repay debts, which would therefore accumulate unsustainably and eventually destabilize the economy.”
If the “growth imperative” hypothesis were correct, declares Jackson, “We would have to systematically dismantle one of the most fundamental aspects of capitalism – the charging of interest on debt – to have any chance of success” for a post-growth economy to function inside any form of capitalism.
Jackson questions why the “growth imperative” conjecture has received so little attention from economic researchers. The reason, he suggests, is at the time, there was no economic modelling tool “capable of simulating the interaction between the monetary circuit and the real economy.” [Once again, neophytes are advised to ignore the economic jargon – e.g. “monetary circuit” and zero in on the significance of the unavailability of an economic modelling tool].
The absence of such a model, notes Jackson, “was conspicuous by its absence in the run-up to the financial crisis.”
There was, however, an exception:
A former UK Treasury economist, Wynne Godley, was one of the few who predicted the 2008 crisis. Why was he able to do what others failed to do? Skipping jargon-filled parts of Jackson’s explanation, Godley and his associates developed an accounting approach that was capable of consistently and accurately tracking and recording “all monetary flows between agents and sectors across the economy.”
Subsequently, others built on Godley’s “concept of stock-flow consistent (SFC) economic models.” Today, there is a “set of accounting principles that can be used to test any economic model or scenario prediction for consistency as a possible solution to financial flows in the real world. … a powerful tool in the development of a post-growth macroeconomics.”
Tim Jackson and David Victor used the SFC model in their modelling test of the “stability of a stationary, or quasi-stationary, economy, in the presence of interest-bearing debt and commercial credit creation.”
Given the context of the test, this question derived from their “growth imperative” hypothesis:
“Does credit create a growth imperative?” Or, to be more specific: “Does an interest-based money system necessarily require growth to remain stable?”
To their surprise, with their model, they successfully simulated “a successful transition from a growth state to a stationary state without destabilizing the economy.”
While the results of their modelling do not exempt a credit-based money system from “leading to unsustainable levels of public and private debt,” the findings do “suggest that it is not necessary to eliminate interest-bearing debt per se, if the goal is to achieve a resilient, stationary or quasi-stationary state of the economy. In short, one more impossibility theorem against a post-growth economics turns out to be false.”