Abstract
The growing economy can be explained by an open-ended upward-going spiral of flows of goods and services and the corresponding monetary flows between firms and households. The spiral model differs from the circular flow model by the expansion of the economic process from period to period (cf. Fig. 9.1). This expansion results from an increase in the capital of firms, that is, by investments in connection with an increase in the size and the number of firms (F1 → F2 → F3 →), an increase in the income of households in connection with an increase in the number of households (H1 → H2 → H3 →), as well as—and this is the decisive factor—an increase in the amount of credit (loans) and money in connection with the increase of the banking system (B1 → B2 → B3 →). This occurs on the basis of an increasing use of nature and an increasing contribution by the imagination of the human mind, that is, of product and process inventions. The households provide the firms with their labor and other services. In return, they receive income from the firms in the form of wages, rents, and dividends. With this income they buy the products from the firms. To simplify the model, we neglect the government sector.
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Notes
- 1.
The Robinson Crusoe-like method of economic management in earlier centuries is also the reason why, at a time when the majority of the population in Europe were self-sufficient farmers, there was no growth imperative. As a result, individual periods of growth, which arose through the influx of gold and silver and were facilitated by the use of energy—in particular the use of wind power for sailing and of hydropower for operating mills—could alternate with long periods of stagnation. It is therefore, as Rolf Peter Sieferle states, a mistake to assume that in earlier centuries there had already been continuous growth at a constant rate. Sieferle underlines this finding with a backward calculation of the social product on the basis of a constant rate of growth, with the result that: “If one extrapolates in reverse … the rate of natural growth of the age of industrialisation, as calculated by economic historians, one arrives, over longer periods of time, at a starting level well below any hope of subsistence. Therefore, historically speaking, something must have changed” (Sieferle 2003, p. 21). The historical change that he mentions is, of course, the monetarization and capitalization of the economy.
- 2.
This assessment relates, in a certain sense, to the differentiation between the income and the production (capacity) effect of investments that is fundamental to the post-Keynesian theory of growth. The latter is also characterized by the time lag between the two effects. The post-Keynesian theory, however, considers only the real economy, whereas for us it is the monetary side of the economy that is decisive. Nevertheless, also E. D. Domar points out that a constant influx of money is essential to the growth process: “It is not sufficient … that savings of yesterday be invested today, or, as it is often expressed, that investments offset savings. Investment today must always exceed the saving of yesterday … An injection of new money … must take place every day” (Domar 1957, p. 92).
- 3.
A similar description of these facts can be found in Ernst Dorfner: “Let us, for the sake of simplicity, work … with a model assuming that all the money that the entrepreneurs invest in their production is money borrowed from money lenders. If the latter lend 100, then, at a rate of 10 % interest, they will expect to receive 110 after a year. The incorporation of the rate at which money circulates does not make any difference. All the money that the entrepreneurs require and which is present in the economy is … pre-financed by loans … Then only the amount of borrowed money can be repaid and not a single mark more. A hundred mark bill remains simply a hundred mark bill, no matter how many hands it passes through, no matter how quickly it circulates. And once it has been repaid, the hundred mark bill only returns to circulation if a new loan is taken out. It may indeed be possible that, with the aid of a new loan, the former interest may at first be repaid, but, as a result of this, a new debt is incurred together with a new demand for interest. In other words: interest payments demand an increase in the existing amount of money. Interest cannot simply come about as a result of redistribution or increase in the rate at which an existing amount of money circulates. … It may be distributed differently, but it has remained the same in total.” Without an increase in the amount of money “a market economy is simply not able to function at all. … It would not only not be possible for any interest payment to be received and paid, but profits, too, could only be paid up to the amount of losses... The unsuccessful entrepreneurs would drop out of the economic process. A merciless process of selection with all its economic and social consequences would then take place at an ever increasing pace and quickly lead to the collapse of the entire system. … We can therefore take it for granted that interest payments and the average profits must represent a surplus, i.e. something gained in addition to that what already existed, and therefore cannot be the result of a process of redistribution. In the terms of game theory, this means, that our economy is not a zero-sum game like a card game in which the gains of one player are the losses of another. In the market economy game, the players return in the aggregate with profits, some with higher profits, some with lower profits, and a few may also suffer losses” (Dorfner 1994, 136ff.).
References
Domar ED (1957) Essays in the theory of economic growth. Oxford University Press, New York
Dorfner E (1994) Der Zins in der modernen Geldwirtschaft. In: Binswanger HC, Flotow P von (Hrsg) Geld und Wachstum. Stuttgart, pp 134–160
Sieferle RP (2003) Der Europäische Sonderweg: Ursache und Faktoren, 2. Auflage. Stuttgart
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Binswanger, H.C. (2013). The Economic Process as a Growth Spiral. In: The Growth Spiral. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-31881-8_9
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