Bit #16: Radical System Change: Bitcoin & Degrowth — Issue #8
Originally published on Medium on June 22, 2022.
This issue’s topic: The economics of never-ending growth
Just thoughts on the connection between bitcoin and elements of the “degrowth” movement that argues that never-ending economic growth is leading us toward an unsustainable and ecologically destructive path.
I’ve been reading a book called, Supply Shock: Economic Growth at the Crossroads and the Steady State Solution, by Brian Czech. Supply Shock is considered one of the fundamental readings in degrowth and steady-state economics. This relates to ideas in bitcoin in complex ways and I’m not sure that I’ll do it full justice here. However, I want to highlight some key points that I think are important for bitcoiners to know about.
Czech spends 3 chapters on the development of modern, mainstream economic thought. That is, he begins with the beginnings of classical economics and ends with the neoclassical economic growth model. Czech lays out the economic history to show that at some point, economics decouples land from its calculations on what determines production. Perhaps more nuanced, it isn’t just decoupled, it is merged with capital. This has several implications, including the merging of the rentier with the capitalist. Under classical economics, production was understood to involve land, capital, and labor.
The book presents fairly strong evidence that suggests that this was both intentional and politically driven. The transition period from classical to neoclassical economics occurred at the end of the 19th century and through the first few decades of the 20th century. During this time, there was a classical economist (then known as political economy) named Henry George, who proposed a land reform that would address what George saw as a fundamental cause of inequality under capitalism. Henry George proposed that there should only be one tax and that it should be on land. This would reign in the most unproductive participants in the economy: the landlord.
George’s ideas were so influential during the early decades of the 20th century that several political movements incorporated his ideas. Feeling threatened, the landlords fought back and used their wealth to change economics forever*. With land baron money and influence, leading American universities built economic departments that promoted a theory of economics that excluded land from the equation of production. Long story short, neoclassical economics births a theory of economic growth that ignores the limits of land and indirectly, its resources.
As Czech shows, neoclassical economics has a fundamental belief in economic growth that is based on labor, capital, and technological advances. The modern conception of this is endogenous growth theory. Paul Romer received the 2018 Nobel Prize in economics for developing the theory.
The main point of neoclassical economic growth is that in general, economic growth is tied to population growth. However, if population growth stabilizes there is another way to grow the economy and that is through technological advances. These advances can increase the output of goods and services while holding constant the amount of labor needed. For example, a person could make three chairs in a day, but with the help of a fabrication machine, this person can now make twenty chairs in a day. It is assumed that technological advances will always happen and therefore economic growth will never cease.
Romer’s endogenous growth theory defines technology as a “stock of knowledge” that can be invested in and grown in the form of research and development. The “stock of knowledge”, or ideas, comes from people. As Czech notes, “If the population stopped growing, eventually everyone would have to be a researcher to keep the growth rate of ideas increasing.” Of course, I can think of one challenge to Czech’s point, which is that artificial intelligence could replace humans as the idea makers, hence decoupling the need for population growth from economic growth based on a “stock of knowledge”. We’re not there yet as a civilization, though, and we still have to deal with the reality that the technology has to be produced, too, and if the production of technology is decoupled from land in economics, we still have a problem.
There’s a good chance I’ve sacrificed clarity for brevity… But, Czech’s argument, I think, is that by abandoning land in its production equation, economics veered so far away from the fundamental constraints of the natural laws of science that govern the environment. As a result, neoclassical economics is not based on reality. This matters because the belief that economic growth is not only a good thing but also necessary for the success of a country is rarely challenged. Governments targeting GDP growth based on neoclassical economics are pushing us beyond planetary limits.
We need a different economic system that has an unbreakable connection to the physical world and one which can transparently account for that connection. One reason why bitcoin is so easily attacked for its energy usage is that it is not too difficult to infer its total energy consumption. Since exchange is the basis of any economy, it makes sense that we should tie this core aspect to the physical world.
I’ll spend the next newsletters expanding more on the ideas introduced here and hopefully sharpen the ideas laid out above.
—
* Details on the story of Henry George and the land barons’ influence on neoclassical economics can be found in the book, The Corruption of Economics, by Mason Gaffney and Fred Harrison, published in 1994.
