I was asked to explain something I asserted in How to mow the lawn, regarding the tendency of infinite investment growth to produce either unemployment or overwork or a mixture of the two. Now this is miles away from mainstream thought, and indeed I have not fully explored the speculation myself, but the basic concept is this: In the geometric growth model we have a population that grows at an ever-increasing (compounding) rate, and we attempt to overcome the ever-increasing needs of that populace through ever-increasing production. We take advantage of the compounding nature of economic growth to make sure it follows the same pattern as population, by continually investing a portion of our output in improving our ability to produce. This is really the basis of economic growth at all: Rather than putting 100% of our abilities towards making what we consume today, we dedicate say, 10% to improved machines and methods, which will make tomorrow’s production more abundant than today’s. By partially restraining our appetite for consumption and properly directing what we have saved into real improvement of means, we will enable ourselves to produce more. If we repeat this process each year or each generation, we can expect that next year (since we have increased our productive capacity) the 10% of our output which we invest is a bigger total investment than was this year’s. To take Keynes’s metaphor, we are eating a smaller portion of the pie, in order to make the pie grow larger, and by continuing in this practice, we can expect that the pie eventually becomes so large that the portion which we consume is actually larger than the entire pie with which we started. By investing a roughly fixed percentage of each year’s output in improving next year’s methods, we create an economy of compounding growth.
So once this has been achieved (a fixed practice of continuous, substantial investment) we have on the chart two geometric curves, continually growing ever steeper according to their rate of growth, and as long as our level of investment is sufficiently high, the curve on top will forever be production, while population is always a little shallower, a little lower, and always falling a little behind. In fact, the whole idea is that production must grow faster than does population so that quality of life may continuously improve. If the curves are actually parallel (the rate of growth in production and population are identical) quality of life must actually decline in the sense that the per-capita production is actually declining. This is reflected visually in the fact that the curves always stay the same vertical distance apart, but the that distance becomes more and more insignificant compared the enormity of the totals. What I’m getting at is that the growth of production must be on a trajectory to pull ahead of population, not track it, for the outcome to seem desirable. Per-capita production must increase (obviously) to achieve our goal of appreciable prosperity. If population is to grow on an infinite compounding course, production simply must compound even more aggressively to satisfy this.
[None of the above is inevitable. What I am saying is merely that given the goals of an infinite growth policy, the only apparent or real success of such a policy will consist of production growth accelerating ahead of population growth. This may not be possible, the investments may yield declining returns, production may be misallocated, production growth may hit absolute limits, etc. I merely claim that the infinite growth policy, if it ever succeeds or appears to succeed, will inevitably involve this: The rate of growth in production must exceed the rate of growth in population, because per-capita production must continually increase in order for economic policy to be of visible benefit to the consumer. Each generation must be richer, and not merely larger at the same level of wealth, for the public to view policy as a success.]
Along with the Austrians, I don’t approve of the use of mathematics to attempt to describe human action, but since I’m illustrating a concept of which I don’t approve, I’m going to include some graphs to illustrate what I’m getting at.Here we have the Malthusian view of the relationship between population and output (production), population being the red line, and projected output being the blue line. Their crossing represents the Malthusian “crisis point,” where population growth overtakes the limits of production, and scarcity and starvation take over. In this vision, the red line would not actually continue up as projected, but instead the population would be limited by the crisis, through famine and other destructive events resulting from the failure of the economy to provide for the vast numbers of people.