In fact, it turns out (Figure 12) that the ceteris paribus clause is absolutely vital. The behaviour of the share of income going to capital depends crucially on what happens to the savings rate in the economy. It also depends on what happens to the rate of return on capital, and this in its turn depends on something called the elasticity of substitution between labour and capital – broadly speaking the ease with which it’s possible for the owners of capital to substitute capital for labour. If the savings rate remains constant (as Piketty assumed) and it is relatively easy for the owners of capital to protect their returns by substituting away from costly labour with cheap capital, then it is indeed possible for income inequality to rise explosively as growth rates decline.

However, there is absolutely no inevitability at all that a declining growth rate leads to explosive (or even increasing) levels of inequality. If the savings rate remains constant, but the elasticity of substitution between capital and labour is low, a radically different future emerges, wage labour is protected, the rate of return on capital falls as capitalists continue to try and save, but income inequality declines significantly.

In reality, this latter scenario is not particularly likely to occur. It is more likely that any decline in the rate of return on capital would lead to a declining savings rate. When this happens, the economy is considerably less sensitive to the substitutability between labour and capital. Rates of return fall more or less slowly according to whether the elasticity of substitution is (respectively) lower or higher, but in both cases remain comparable with those achieved in a growing economy. Income inequality falls in both cases, even before fiscal interventions. Not surprisingly, fiscal interventions are considerably more effective in such an economy than in one with constant savings and high elasticity of substitution.

The most worrying counter-example is the case where there is a continual increase in the capital-to-output ratio and a high substitutability between capital and labour. It is possible to envisage scenarios in which this occurs. For instance, with increasing automation dominated by relatively few companies with a high degree of monopoly power over labour, there are clearly conditions under which income inequality increases significantly, posing exactly the dangers that Piketty has highlighted.

On the other hand, it is possible to envisage circumstances in which there is far less substitutability between labour and capital even under conditions of rising capital to output ratio such as those that might prevail in the transition to a low-carbon economy. This would of course involve protecting the quality and intensity of people’s time in the workplace from substitution by the owners of capital. But such a proposal is not a million miles from suggestions that government should act as ‘employer of last resort’ in stabilising an unstable economy.32

In short, the idea that rising income inequality is an inevitable consequence of falling growth rates is fundamentally wrong. On the contrary, an economy with a declining growth rate might equally be headed towards lower income inequality and greater stability of employment. The choice, it turns out, lies in the underlying structure of economic relations and, in particular, in the relations between labour (the workforce in paid employment in the economy) and capital (the owners of productive and financial assets).

5 Confronting the Post-Growth Challenge

A decade after the onset of the financial crisis, governments around the world are as wedded to the goal of economic growth as they have ever been. The expectation is that a return to ‘normal’ levels of growth will not just solve our economic woes, but is the only possible way to bring poor people out of poverty.

In the name of growth, successive governments have justified austerity, reduced their commitments to welfare spending, cut taxes for the richest and withdrawn vital safety nets for the poorest in society. These regressive policies are busy compounding the injustice of income inequality with something even worse: inequalities in healthcare, in longevity, in basic security, in human dignity. These new and deepening inequalities are beginning to undermine the social fabric of society and threaten political stability.

The same strategy is depleting finite resources and placing increased risks on the environment. Declines in the quality of physical resources are already evident and the dynamics of depletion place ever greater costs on society. Authoritative estimates of the costs associated with unmitigated climate change are salutary. Without investment in newer cleaner technologies, these additional risks will also depress the potential for growth.

Behind these conditions lies a steady decline in the rate of growth of labour productivity, stemming from roughly half a century ago (Figure 6). The reasons for this decline are contested. Some point to a variety of secular ‘headwinds’ – such as rising debt overhang – which slow down demand, as well as to basic technological factors that put the brake on supply. Others have pointed to a diminution in demand in the advanced economies in particular.

There remains a disturbing possibility that the huge productivity increases that characterised the early and middle twentieth Century were a one-off, something we can’t just repeat at will, despite the wonders of digital technology. A fascinating – if worrying – contention is that the peak growth rates of the 1960s were only possible at all on the back of a huge and deeply destructive exploitation of dirty fossil fuels (Figure 7); something that can be ill afforded – even if it were available – in the era of dangerous climate change and declining resource quality. Low (and declining) rates of economic growth may well be the ‘new normal’.

The critical question is how policy should respond to this not-so-new reality. Over the last few decades, capitalism has had a very specific response. From the early 1970s onwards, falling labour productivity growth has been rewarded with even lower wage growth (Figure 11). Faced with diminishing returns, producers and shareholders have systematically protected profit by depressing the rewards to labour. Governments have encouraged this process through loose monetary policy, poor regulatory oversight and fiscal austerity. The outcome for many ordinary workers has been punitive. As social conditions deteriorated, the threat to democratic stability has become palpable.

The prevalent ‘rescue narrative’ relies on an assumption that productivity growth will recover, primarily through new technological breakthroughs. Candidate ‘saviours’ in these rescue narratives are various. For some, innovation will arrive from investment in the same clean, low-carbon technologies that are needed to tackle climate change and offset resource depletion. For others, innovation will come from a new digital revolution: increased automation, robotisation, artificial intelligence.

But the conditions for any of this enhanced investment remain uncertain at best. Financial instability, debt overhang and rising inequality haunt the financial ecosystem within which these new investment portfolios must flourish. The dynamics of loose monetary policy continue to favour speculation in financial assets rather than investment in the productive capacity of the economy.

The low carbon investment scenario is particularly vulnerable to policy uncertainty. Without clear regulatory guidance or a market price on carbon, leveraging the trillions of dollars of investment needed to meet climate change targets looks extremely challenging. Commitments to the Paris Agreement have yet to be met with clear delivery plans.

The two investment strategies may also turn out to be in competition with each other. While some believe that enhanced automation will reduce our overall carbon footprint, the current evidence for this is at best partial and mostly anecdotal. It is essentially a strategy that substitutes capital for labour on a massive scale. Since capital assets require material inputs, the likelihood is that it will have a higher resource footprint and higher carbon emissions than a strategy that is more labour intensive.

The social consequences of increased automation might be even more unpalatable than the environmental impacts. In particular, without quite radical policy intervention, including a massive redistribution in the ownership of capital assets, the enhanced automation scenario is likely to lead to an unequal and increasingly polarised society. Of particular concern is that these technologies are qualitatively different from those which produced the massive rise in productivity growth up to the mid 1960s.

The technological revolution of the 19th and early 20th Century tended to increase the potential for workers to improve their productivity of their labour. This led to higher wages and greater spending power in the economy. The expansion of consumer demand provided a further stimulus to growth and productivity improvement. Putting technology in the hands of workers created new jobs in the economy and allowed for a general improvement in the quality of life of citizens.

There is a real danger that new digital and robot technologies will remove the need for whole sections of the working population, leaving those who don’t actually own the technologies without income and without bargaining power. Meanwhile the owners of these technologies are likely to acquire unprecedented market power, and the conditions for ordinary workers will deteriorate even further. This is essentially the world described by the upper line in Figure 12 above, in which it becomes easy to substitute capital for labour, difficult to maintain demand and impossible to stop inequality rising steeply.33

Reaching beyond these potentially destructive conditions is not impossible. There is an emerging interest in ideas around de-growth and in the economics of a potential ‘post-growth’ society.34 These approaches tend to accept that beyond a certain point, and for a variety of reasons, economic growth is neither desirable nor indeed feasible. Whether for secular reasons, or from a decline in resource quality, or from the need to curtail damaging environmental impact, proponents of these ideas attempt to envision the social conditions (and economic implications) of a world in which, for the advanced economies at least, it is necessary to do without growth.

Addressing inequality under such conditions is a particular concern. Reaching one or other of the worlds described by the lower lines in Figure 12 requires us to confront certain fundamental aspects of capitalism. For example, without a proactive distribution of resources, it is difficult to see how the social devastation of a highly unequal society is to be avoided. Without proactive labour and income policies, it is difficult to see how incomes for ordinary people can be maintained, let alone improved. And without state investment, it is difficult to see how basic services can be maintained for the majority of the population.

A key issue for government, in conditions of declining growth, is the ability to maintain the fiscal headroom within which to protect democratic legitimacy. Electorates tend to punish administrations badly when social investment falls. If declining growth is met with fiscal austerity it is likely to lead to progressively worse social outcomes and increasing political fragility.

One way in which government may attempt to improve this situation is through recovering political control over the creation and supply of money. Some surprisingly conventional voices have called for an end to banks’ power to create debt-based money and the implementation of a so-called ‘sovereign money’ system.

A recent IMF working paper identifies several clear advantages to this, better control of credit cycles, the potential to eliminate bank runs, and dramatic reductions in both government and private debt. Under such a system the state would no longer have to raise money for investment and welfare on commercial bond markets. Instead they could spend directly into the economy, as and when financing was needed, subject only to the caveat that such spending was non-inflationary. Proposals for such systems are currently under consideration in Iceland and in Switzerland.35

Such ideas tend to be regarded at best as marginal distractions by mainstream economists and at worst as obstacles to growth. Sectors which make vital contributions to our quality of life, provide decent work, and substantially reduce our material footprint are derided as ‘stagnant’ because they have a lower potential for labour productivity growth. Social investment is seen as irrelevant to the pursuit of profit.

In a growth-obsessed world it is easy to end up overlooking the parts of the economy that matter most to human wellbeing. By understanding and planning for the conditions of the ‘new normal’ associated with low growth rates, it is possible to identify more clearly the features that define a different kind of economy. A simple shift of focus opens out wide new horizons of possibility.

Another such ‘backstop’ policy, which has received increasing attention recently is the idea of a universal basic income. When the availablity of wage labour declines and the downward pressure on wage growth increases, the dynamics of inequality sharpen considerably. In the absence of policy measures to combat these conditions, they are likely to lead to further stagnation in demand and increasing political instability. The provision of a universal basic income at a level sufficient to ensure basic minimum living standards could do much to offset these destabilising influences.36

Elaborating on these ideas is beyond the scope of this paper. Rather, my principal aim has been to tease out the underlying dynamics of a global economic and social system in crisis. In the process I have attempted to illustrate more precisely how the strategy of chasing after growth in the face of challenging fundamentals is leading to rising instability and the fractured politics of a deeply unequal world.

But the suggestion that rising inequality is somehow an inevitable result of a decline in the growth rate is fundamentally wrong. More correct would be to argue that rising instability (both social and financial) is result of trying to protect the growth rate in the face of an underlying decline in productivity, by privileging the interests of the owners of capital over the interests of those employed in wage labour in the economy. Reversing this trend by raising the labour productivity growth rate through selective technologies is a highly uncertain strategy that may exacerbate the environmental and social problems of the 21st century.

In the light of that analysis, it is clearly pertinent to look beyond the outcomes associated with the continued pursuit of the prevailing economic paradigm. Elsewhere, I have argued that the task of elaborating a less capitalistic, more resilient post-growth economy is precise, definable, meaningful, and pragmatic. 37

Clearly, such ideas fly in the face of much conventional wisdom. They will be most challenging of all for highly capitalistic societies. But the dangers for capitalism are not confined to the challenge from emerging economies for whom the transition may be easier. The dynamics of the existing growth-based paradigm are driving environmental damage, exacerbating social inequality and contributing to increased political instability. There has never been a more urgent need to question the growth imperative. There has never been a more opportune time to develop the design concepts for a resilient post-growth society.