Understanding the Core Mechanisms Behind Growth: A Shift in Emphasis

Understanding the Core Mechanisms Behind Growth: A Shift in Emphasis
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By Tim Robert Schleicher, member of the St. Gallen Symposium's global Leaders of Tomorrow community

In debating growth, we usually focus on its desirability - and neglect to discuss the underlying core mechanisms. The origins of growth should factor into these discussions in order to achieve a deeper understanding of the subject. One such underlying core mechanism of growth, is the often-elusive interest rate. It is through the interest rate that the concept of growth has formally embedded itself in society. For now, let us focus on the individual level and try to observe a basic economic rationality by analyzing a loan, and the resulting interest.

A century ago, the economic sociologist Max Weber questioned why - e.g. for an entrepreneur - the "exchange of current 100 for future 100 + x is rational". This exchange is rational: if both contractual partners expect a growth exceeding the value of x. If the expected growth was lower than x, it would be irrational for both to engage in the exchange; if the expected growth was equal to x, it would be rational only for the creditor. The expected growth must be higher than x, for the investment to be rational for both the creditor and the debtor. To further illustrate this point, consider that there are two resulting "constraints" for growth at the micro level - one direct, and one indirect. The direct constraint reflects the need to at least "break even", and get back the payment including interest: 100 + x. The indirect constraint reflects the desire on the part of the debtor to see a return on the investment: to have increased his or her capital, 100 + x + z.

The resulting dynamic of added value greatly exceeds the covering of needs. Moreover, interest is not only based on the retrieval of capital invested, but on the accelerated retrieval of it. Consequently, the sooner the creditor receives payment, the less the debtor is required to pay in interest. In other words: growing fast (not simply growing) becomes the maxim. This has far-reaching implications - as we can imagine.

After clarifying the desirability (or lack thereof) of growth - conclusions can be drawn based on an understanding of its origins. There is no problem if growth is fully desirable. However, if it is not fully desirable, politicians and economists will face a severe challenge - because as the remarkable innovator Stephan A. Jansen articulated, "Growth is implanted into capitalism's helix of acceleration by an almost irreversible trick: interest".

We can identify a clear lack of research and understanding regarding the possibility of instituting an economic system without growth and interest although Western societies appear to be embarking on this path. There are a number of approaches worth considering - for example, the idea of a "demurrage" (or "tax money") which might allow for a negative nominal interest rate when money is withheld. Interestingly, until now, this concept has been viewed as boosting rather than reducing growth (and justice).

This brief discussion illustrates the importance of examining the underlying core mechanisms of growth. Researchers and decision-makers alike require more resources to examine the origins of these phenomena, to increase awareness of these mechanisms, and to appreciate their significance in all fields. Despite the difficulties inherent in such an endeavor, this shift in emphasis is essential for a sustainable future.

Growth - The good, the bad, and the ugly will be debated in the light of the 46th St. Gallen Symposium (11-13 May 2016).

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