Rent, Profit, and Degrowth – A Postscript to “Capitalism and Climate Collapse”

In Capitalism and Climate Collapse, I argued that catastrophic climate collapse cannot be avoided under capitalism because capitalism requires economic growth, economic growth requires energy growth, energy growth requires extensive burning of fossil fuels, and extensive burning of fossil fuels causes catastrophic climate collapse. To avoid collapse, we need to shrink the economy – that is, degrowth – to a sustainable level with respect to energy requirements, and then switch to a steady state economy to stay at that level. What exactly that sustainable level is is debatable, but regardless of whether it’s closer to one third of current closer energy use or closer to two thirds, we’d need some kind of degrowth to get there.

(Recipes for degrowth or other alternatives for capitalism (as we know it) typically take some political ideology as their starting point. That is, the proposed solution is based more on the utopian end-stage one wants to reach than on a thorough analysis of the actual situation and what this analysis implies. I’m not a fan of this kind of “ideal theory”,1 so let’s start in the (rather dystopian) here and now, rather than with some kind of utopian dream.)

As explained in Capitalism and Climate Collapse, capitalism requires economic growth for at least two reasons: (1) interests on debts, and (2) the economic dominance of the M−C−Mʹ​ circulation, or in other words, the widespread aim for profit or “surplus value”. In both cases, economic agents have more money later than they have now – to pay interests in the first case; in the form of profit in the second – but this is only possible in a non-growing economy if others have less money later than they have now. And if debts and the aims for profit are widespread – as they are under capitalism – then there aren’t enough of those “others”. Then economic growth is the only thing that allows the system to continue. By implication, if we want degrowth, then the first things that need to be addressed are these reasons why capitalism needs economic growth.

debts and rents

As explained before, if someone borrows a sum of money x, and needs to pay interests y, then it can only do so if it expects to have x + y at some later date – that is, if it expects to have more money later than it has now. If many people and/or businesses borrow money (mortgages, business loans, and so forth), they can only pay their debts a interests if all of them have more money later than now, which is only possible if the economy grows as a whole. Hence, a commercial lending industry based on interests depends on economic growth. Lending without interest would still be possible in a steady-state economy, but could only be a non-profit social service. Lending in a degrowth economy would only be possible with negative interests (i.e. you have to pay back less than what you loan). There may be circumstances in which this is necessary for social or economic reasons, but these will probably be very rare. In any case, a commercial lending industry based on interests depends on, but also drives economic growth. Degrowth or a steady-state economy requires the abolition (i.e. prohibition) of interests, and thus, of commercial banking. In as far as there could be loans in a degrowth or steady state-economy, these could only be government-controlled and government-funded social services.

Interests are a form of rent-extraction. Rent (typically) is income that is generated just by ownership or control of something (such as real estate, money, economic rights, a market, and so forth) rather than by producing something.2 In a steady-state or degrowth economy any kind of rent-extraction would imply an impoverishment of others. This cannot go on infinitely, and consequently, sustained and relatively widespread rent-extraction is only possible in circumstances of (sufficient) economic growth. But like interests, it also drives economic growth. Hence, to make degrowth possible, interests on loans are not the only kind of rent-extraction that must be abolished, but so must most – if not all – others. Land/house rent in excess of the costs of maintenance must also be prohibited, for example. As well as patents and copyrights (in excess of the costs of invention/creation).

This effectively means that the financial industry or FIRE (finance, insurance, and real estate) must be dissolved or nationalized. Commercial banking and other kinds of finance, real estate, and other forms of rent-extraction that FIRE depends on will all have to be prohibited. Banking might continue as a government-controlled social service, and the same will be the case for providing housing, as the prohibition of land/house rent in excess of the costs of maintenance makes the commercial exploitation of real estate impossible.

profit

The other problem explained in Capitalism and Climate Collapse was the economic dominance of the M−C−M′ circulation, or in other words, the widespread aim for profit or “surplus value”. The problem is that without economic growth one person’s profit is another person’s loss (or many other persons’ loss), which is unsustainable. The aim for profit is only really possible in circumstances of economic growth. In case of degrowth or a steady-state economy, the profit motive is cancerous, slowly (or quickly) killing the economy. A fairly straightforward solution for this problem is a 100% tax on profit. Unfortunately, this wouldn’t work as there are too many loopholes and tricks to siphon off income before they would result in nominal profit. The most obvious is raising the incomes of owners/managers of companies, but what this really does is convert company profit into personal profit. The latter is rarely called “profit”, however, so it seems like the profit just disappears. Fixing this loophole would require prohibiting wage increases (or at least, I can’t think of any other feasible way to do this) but this opens up another loophole: rather than increasing someone’s wage, just change their job title into something with a higher salary. So that loophole needs to be plugged as well, and the only way to do that is to have uniform wages – within a company everyone has the same wage.

It is worth noticing that the 100% tax on profit and the prohibition of rent-extraction make any kind of investment (which by definition is for profit) impossible. One might invest in a company that is expected to grow, for example, but this investment would then result in a personal profit for the investor, which would be taxed at 100%. Or in other words, any kind of profit – be it profit made by a company or by an individual – would have to be handed over to the state (which would have to redistribute it to those that where disadvantaged in the profit-making process). There is, thus, no place for stock-trading and all its offshoots in a degrowth or steady-state industry. (Which means that the only part of the financial industry that might not have to be shut down or nationalized is the insurance industry. “Might”, because I really haven’t given insurances enough thought to say anything sensible about this.) This raises an important question, however: what to do with existing stocks? As these would be worthless as investment instruments, they would lose much of their value, but they would (in many, but not all cases) still represent partial ownership of the joint-stock company. These partial owners (i.e., the stock-owners) have no interest in the company anymore, however, which may lead to deleterious outcomes. To avoid that, it would be best to transfer stocks/ownership to the only people who have an interest in the company (and also the only people who would be interested in buying stocks in a degrowth economy), namely, its employees.

towards degrowth

The outlines of what is necessary to avoid catastrophic climate collapse by means of degrowth (and there is no other way to avoid that) are starting to become somewhat clear. The financial industry will have to be nationalized and mostly dissolved. Interests on loans, and commercial banking must be prohibited, but non-profit banking without interests as a social service by the state might in some form be possible. Most other forms of rent-extraction, such as patents and land/house rent in excess of the costs of maintenance, will have to be prohibited as well, and the commercial housing industry (and all the real estate it owns) must be nationalized to avoid a housing crisis (resulting from the fact that providing housing can no longer be a source of profit). There must be a 100% tax on profit (of any kind) and uniform wages on the company level (i.e., every employee of a company has the same salary). Stock-trading and its derivatives are abolished and stocks are transferred to company employees.

There is some wiggle room here and there, and there are many details that can be filled in an a variety of ways, but these are the basics of a program for (necessary!) degrowth. Obviously, this would no longer be a capitalist economy. I’m not sure whether it would be entirely appropriate to call it a “socialist” economy either, as companies would still be mostly privately owned (but by the employees in many cases). What I am fairly sure about, on the other hand, is that none of this is going to be realized any time soon – if ever. What is needed to avoid collapse is – for most people, and surely for those who have most to gain from the status quo – effectively unthinkable.


addendum

(June 30) — Phil Stevens made a couple of important points in a comment a while ago.3 He wrote:

Interest-free loans within families or extended social networks have been a feature of economies since the invention of money. This highlights one of the issues I have with this blog: the assumption that even in a degrowth situation, government would continue to dominate daily life. I suspect (with zero evidence, of course) that degrowth of the economy would be accompanied by degrowth of the apparatus of government, with an increasingly localized governance dominated and authorized by personal networks. Whether this would be a good or a bad thing remains to be seen — probably some of each.

He is absolutely right, of course, that interest-free loans are common within social networks and especially within families. Nevertheless, I ignored this kind of loans in my article because they are rarely economically relevant. There are obvious exceptions — most of the famous super-rich started their business empires with interest-free loans and/or gifts from their rich families – but “normal” people cannot get loans to start a business (or to buy a house, for example) from their family, so this concerns just a very small number of cases. Within a context of degrowth that number of cases will dwindle, moreover, as (extreme) wealth is invariably based on rent-extraction. The myth that the rich are rich because they worked hard for it is a myth. The rich are rich because they are – or their ancestors were – successful in extracting money (i.e., rent) from the rest of the economy. A degrowth economy would have to restrict or ban rent extraction (for reasons explained above) and tax profit at 100% (again, see above), which would remove the basis for extreme wealth. While there may still be very rich people at the start of a degrowth regime, that is not likely to last. Soon there would be no families that are able to provide the kind of loans that would be economically significant.

Phil’s second point is that he rejects my “assumption that even in a degrowth situation, government would continue to dominate daily life”. This isn’t really an assumption, however. In the contrary, it follows from the necessity of banning interest and rent-extraction and enforcing a 100% tax on profit. You need a fairly strong government to pull that off. So, while I would vastly prefer more anarchic sociopolitical arrangements, I just don’t believe that those would be compitable with degrowth. Enforcing the bans on interest and on rent-extraction requires a strong state with an extended oversight and law enforcement apparatus, and the same is true – possibly even more so – for implementing the 100% tax on profit and dealing with attempts at tax evasion.

Degrowth is not utopian. If anything, it is dystopian. That is part of the point of my article. I’m not interested in looking at degrowth from the perspective of some rosy ideological agenda. What I want to know is what would be necessary to make it work – regardless of how dystopian that would be.


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Notes

  1. See No Time for Utopia, and chapter 16 of my my A Buddha Land in This World: Philosophy, Utopia, and Radical Buddhism (Punctum, 2022).
  2. See Rent, Debt, and Power.
  3. On June 2nd, actually, but I didn’t have time to respond until now

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