# The Growth Spiral * Author: [Hans Christoph Binswanger](https://www.amazon.com/Hans-Christoph-Binswanger/e/B009WS7LMQ/ref=dp_byline_cont_ebooks_1) * ASIN: B00BLRXMRO * ISBN: 978-3642318801 * Pages: 182 pages * Publication: December 14, 2012 * Publisher: Springer; 2013th edition (December 14, 2012) * Reference: [[https://www.amazon.com/dp/B00BLRXMRO]] * [Kindle link](kindle://book?action=open&asin=B00BLRXMRO) --- So far, it had never been imagined that GDP should continually increase from one year to the next by a constant percentage. This was quite new—even for an economist like myself who completed his studies at the end of the 1950s. — location: [31](kindle://book?action=open&asin=B00BLRXMRO&location=31)Everyone assumes GDP should grow by some percentage but is that really meaningful? --- While working on these books, it became clear to me that both the money and the natural world played a much greater role in the economy than conventional economic theory has assumed. And so I formulated a new approach to understanding growth which, in my opinion, cannot be explained without including the contribution of monetary dynamics and of the role of natural resources in the modern economy. — location: [50](kindle://book?action=open&asin=B00BLRXMRO&location=50) --- This book offers a new theoretical approach to understanding the modern economy, focusing on its dynamic aspects. This approach stands in contrast to the static equilibrium concept which has been the foundation of conventional economics. — location: [77](kindle://book?action=open&asin=B00BLRXMRO&location=77) --- The actual takeoff started, on one side, with the invention of paper money in the seventeenth century and, on the other side, with the invention of the steam engine in the eighteenth century. Paper money and the later creation of money by banks, together with the steam and the electronic technology, created the conditions for the industrial revolution of the nineteenth and the twentieth century. — location: [180](kindle://book?action=open&asin=B00BLRXMRO&location=180) --- The actual takeoff started, on one side, with the invention of paper money in the seventeenth century and, on the other side, with the invention of the steam engine in the eighteenth century. Paper money and the later creation of money by banks, together with the steam and the electronic technology, created the conditions for the industrial revolution of the nineteenth and the twentieth century. — location: [180](kindle://book?action=open&asin=B00BLRXMRO&location=180)There was not always a growth imperative until this period when technological advance & paper money led to growth. --- However, the limits to growth turned out to be less severe than the report of the Club of Rome originally had anticipated. This made it possible to focus the concept of sustainability on a limited number of issues: above all, on the deterioration of the climate as a result of the increase in the emissions of greenhouse gases. Subsequently, there has been little talk of general limits to growth. The postulate of sustainability became an additional goal instead of replacing the goal of growth. In case of any conflict between the two goals, growth always has had priority. — location: [193](kindle://book?action=open&asin=B00BLRXMRO&location=193) --- Both equilibrium and optimal allocation are inherently static. If achieved, there are no gains nor losses from changing economic activity any further. Hence, there is also no incentive for growth. In reality, the social product has always continued to increase. To explain this continuous growth, conventional economics had to refer to “exogenous factors,” not included in the model itself. Initially, “technological progress” was used to square the circle between the growth of the social product and the static character of the model. — location: [204](kindle://book?action=open&asin=B00BLRXMRO&location=204) --- Both equilibrium and optimal allocation are inherently static. If achieved, there are no gains nor losses from changing economic activity any further. Hence, there is also no incentive for growth. In reality, the social product has always continued to increase. To explain this continuous growth, conventional economics had to refer to “exogenous factors,” not included in the model itself. Initially, “technological progress” was used to square the circle between the growth of the social product and the static character of the model. — location: [204](kindle://book?action=open&asin=B00BLRXMRO&location=204)The failure of neoclassical economics to explain growth and resorting to exogenous factors in the form of techno logical progress. --- Experience accumulates, improved education and training today improves future education and training, and the “clusters” interact and grow stronger. This is called “endogenous growth.” — location: [212](kindle://book?action=open&asin=B00BLRXMRO&location=212) --- But this “endogenization” remains nevertheless incomplete, since the factors in question are also not integrated into the model of general equilibrium. With regard to the underlying model, they remain exogenous factors, just like “technological progress.” — location: [213](kindle://book?action=open&asin=B00BLRXMRO&location=213) --- The factors and conditions characterizing the modern economy have to be integrated into the theory so that the growth tendency of the modern economy can be properly explained. This is not possible without taking account of the temporal dimension of the economic process—since growth takes time!—and so getting rid of the idea of a static equilibrium.2 — location: [220](kindle://book?action=open&asin=B00BLRXMRO&location=220) --- Money is an integral part of the modern economy. The influence of money has been further increased by the creation of money in the banking system. Banks can advance credits to firms on the basis of money creation. The firms use them for investment and hence for the increase in production. Therefore, the increase of the quantity of money has a direct influence on the growth of the real social product. — location: [231](kindle://book?action=open&asin=B00BLRXMRO&location=231) --- Therefore, the increase of the quantity of money has a direct influence on the growth of the real social product. — location: [233](kindle://book?action=open&asin=B00BLRXMRO&location=233) --- Human imagination constantly invents or discovers new products which meet new wants. Therefore, imagination has become an important factor of production in itself, complementing labor and energy. — location: [235](kindle://book?action=open&asin=B00BLRXMRO&location=235)Human imagination is linked to the price of labour, given that all labour is a mix between physical and cognitive processes --- But since living space is not appropriated as such, and since consequently there is no price for it, this scarcity is not reflected in higher prices. Hence, economic growth continues without being impeded by the increasing scarcity of living space. — location: [238](kindle://book?action=open&asin=B00BLRXMRO&location=238)Not sure about this, wouldn't this be the price of land? --- It follows from these principles that competition in the modern economy does not lead to a general equilibrium and an optimal allocation of scarce resources. Rather, competition brings about a constant tendency to transformation and growth. The economic process cannot be conceived as a circular flow in which the income that households receive from firms is equal to their expenses on goods purchased from firms. Household income instead grows with every circular flow because of the investment financed by newly created money together with an increasing stream of natural resources, including energy. In this way the circular flows, which formerly had prevailed, turned out into an upward-moving spiral. In each round the growth process creates more possibilities for growth, which in turn induces further growth. By contrast, where growth is insufficient, profits diminish, leading to a reverse spiral, which ends in losses and in a shrinking process. This results in a growth imperative. — location: [242](kindle://book?action=open&asin=B00BLRXMRO&location=242) --- Rather, competition brings about a constant tendency to transformation and growth. — location: [243](kindle://book?action=open&asin=B00BLRXMRO&location=243) --- — location: [248](kindle://book?action=open&asin=B00BLRXMRO&location=248)The economy is not a circular flow of money but an upward spiral due to the self improving nature of firms. A symmetric downward spiral seems unlikely for the reason that firms behaviour is self-correcting. But I guess that's the point, avoiding the downward spiral creates a growth imperative. --- Our new approach allows us to overcome the distinction between micro- and macroeconomics and the division between general economics and the science of business administration. In this approach, the various special theories can be understood simply as a more thorough explanation of a coherent economic theory. — location: [262](kindle://book?action=open&asin=B00BLRXMRO&location=262) --- Our new approach allows us to overcome the distinction between micro- and macroeconomics and the division between general economics and the science of business administration. In this approach, the various special theories can be understood simply as a more thorough explanation of a coherent economic theory. — location: [262](kindle://book?action=open&asin=B00BLRXMRO&location=262) --- Competition, and hence the efficiency of economic activity, is therefore restricted in two ways. First of all, there is the difficulty in finding a suitable exchange partner. Secondly, since the prices are necessarily expressed in different (real) units, parties cannot compare systematically across a range of supply and demand the prices and in this way look for the cheapest supplier or the best bidder. — location: [310](kindle://book?action=open&asin=B00BLRXMRO&location=310) --- If we therefore compare market and barter, we can first of all say that the market is efficient, while barter is not. Secondly, while barter is necessarily always in equilibrium, the market is not. — location: [329](kindle://book?action=open&asin=B00BLRXMRO&location=329) --- It is of decisive importance that in this model, the main feature of bilateral barter is maintained: All prices at which transactions are undertaken are equilibrium prices. No transactions take place outside equilibrium! — location: [367](kindle://book?action=open&asin=B00BLRXMRO&location=367)Walras' model of a market emulates multilateral barter in equilibrium, where supply and demand for each good are equal. --- Walras found it necessary to reduce a market economy to a barter economy since in the process of barter time stands still for as long as negotiation takes place. There is therefore no need to take account of disequilibria which might put into question the consistency of the system. During the process of negotiation, all prices and quantities are only calculated entities and so open to revision. During this suspended “time,” the economic units calculate the optimal use of goods on the basis of their preferences, taking account of the “exchange equation.” Given the role of the auctioneer, perfect information prevails. At every moment every partner knows what will be received in return for a good. Therefore, it does not matter whether one negotiates on the basis of prices or of quantities. The result is the same. — location: [371](kindle://book?action=open&asin=B00BLRXMRO&location=371)There is no time in Walras model and therefore no need to factor in dis equilibria as a result of time. There is also perfect information. --- In this model, money functions only as a means of calculation and at the most additionally as a store of value. — location: [384](kindle://book?action=open&asin=B00BLRXMRO&location=384) --- The transition from bilateral barter to the multilateral market occurred not through the extension of barter to ever more partners and goods, but instead through the substitution of barter by payment with money. — location: [389](kindle://book?action=open&asin=B00BLRXMRO&location=389) --- If produced means of production are used in addition to labor and materials, this just means that correspondingly more capital as an advance is needed: It is needed as a promotion factor, not only as variable capital as in Smith’s wage fund but also as fixed capital which is used to purchase produced means of production and which is not used up in one production period but rather over the course of several periods. This itself ties up capital over a longer term. So, I propose, that the word “capital” should generally be used in the classical sense understood by Adam Smith: as denoting the advance that firms need to initiate and continue production irrespective of whether it concerns variable or fixed capital and that profit and interest should only be attributed to capital conceived as an advance. — location: [487](kindle://book?action=open&asin=B00BLRXMRO&location=487) --- The function of goods, depending on their technical nature, consists in serving a productive end, the technical and physical production of other goods. The function of capital consists in acquiring for the entrepreneur those goods that are productively employed, “set to work” we could say. Capital is the means for the acquisition of goods. … The entrepreneur has to have capital before he can start to think about acquiring actual goods. — location: [496](kindle://book?action=open&asin=B00BLRXMRO&location=496) --- The function of capital consists in acquiring for the entrepreneur those goods that are productively employed, “set to work” we could say. Capital is the means for the acquisition of goods. … The entrepreneur has to have capital before he can start to think about acquiring actual goods. — location: [497](kindle://book?action=open&asin=B00BLRXMRO&location=497) --- What then is capital, if it consists neither in particular kind of goods or in goods in general? The answer is obvious enough: it is a fund of purchasing power. — location: [503](kindle://book?action=open&asin=B00BLRXMRO&location=503) --- In practice capital is understood to be the means for financing investments, i.e., money for the purpose of investment; money in this function is capital… Rieger, with his incorruptible sense of reality, adopted a perspective on the economy as a whole and identified the essence of the capitalist firm as the application of a sum of money with the aim of increasing its amount. — location: [528](kindle://book?action=open&asin=B00BLRXMRO&location=528) --- In practice capital is understood to be the means for financing investments, i.e., money for the purpose of investment; money in this function is capital… Rieger, with his incorruptible sense of reality, adopted a perspective on the economy as a whole and identified the essence of the capitalist firm as the application of a sum of money with the aim of increasing its amount. — location: [528](kindle://book?action=open&asin=B00BLRXMRO&location=528) --- This realization of the firm in monetary terms flows from the fact that the creation of the firm is itself a monetary transaction—the “transmutation” of money into capital—and so the firm can only survive if the money that is expended continually flows back to it and in so doing increases, this increase being treated as a profit which at least equals the risk involved in the investment of capital and which in this way guarantees the continuous existence of the firm. — location: [581](kindle://book?action=open&asin=B00BLRXMRO&location=581) --- Firms have to keep an eye on the real wants of households so that they are able to sell their products to households, and the households have to earn money by selling their factors of production to firms for money, so that they can in turn buy products from the firms. This interconnection of monetary and real wants is the basis of the market process.8 — location: [614](kindle://book?action=open&asin=B00BLRXMRO&location=614) --- The market is in this way “regulated” by “the law of supply and demand” in such a way that over time production eventually adapts to effective demand.12 In this long-run — location: [698](kindle://book?action=open&asin=B00BLRXMRO&location=698)Describing, effectively, the capital cycle. --- There is no reason to pause in the path to increasing profits once one has taken it! Success depends on the skill of the entrepreneur in taking advantage of opportunities as they arise. The fact that each firm has to assume that already existing or potential competitors will proceed in the same way, every firm has to fear a loss in the market share and so a shrinking of its profit below the reproduction costs. If this happens, it would lead to the withdrawal of capital and eventually to bankruptcy or liquidation. The striving for the maximization of profit is therefore not solely motivated by the search for “more” but also by the avoidance of “less.” — location: [705](kindle://book?action=open&asin=B00BLRXMRO&location=705)Fear of losing profit &hope of gaining more, leadsto tactics like erecting barriersor tech innovation to cut costs. --- The firms can survive the pressure of competition by using restrictive strategies or by developing expansive strategies. — location: [710](kindle://book?action=open&asin=B00BLRXMRO&location=710) --- Since the industrial revolution, expansionist strategies based on innovation have dominated. We owe to Friedrich Hayek the idea of competition as a “discovery procedure” — location: [720](kindle://book?action=open&asin=B00BLRXMRO&location=720) --- But this synthesis remained incomplete, for Marshall did not grasp the decisive difference between the two theories. This difference does not come from the form of the supply curve, but rather from the Walrasian explanation of market price without taking into account the time dimension of the market process, whereas time plays a significant role in the classical theory. In the Walrasian model, products are offered for sale at the same instant that they are produced. In the classical model, production precedes supply in the market. If one takes account of this difference, then it can be seen that the Marshallian approach is based upon the Walrasian and not on the classical theory. In the theory of partial equilibrium, production and supply are taking place at the same time, just as in the theory of general equilibrium, and belong therefore to the atemporal theory of Walras. This explains why it is necessary to return to the classical theory of supply and demand, not only to replace the theory of general equilibrium but also to replace the theory of partial equilibrium. — location: [755](kindle://book?action=open&asin=B00BLRXMRO&location=755)Neoclassical economics of general equilibrium & partial equilibrium are missing time dynamics (due to simplifying the market to a multi agent barter) in their theories which requires going back to Smith's classical economics in order to understand. --- Consequently, the increased mechanization of production implied an enormous increase in the need for advanced money, that is, capital, which in turn made necessary the introduction of borrowed capital alongside equity capital. The borrowed capital comes primarily from banks which advance credits or loans against the payment of interest. — location: [772](kindle://book?action=open&asin=B00BLRXMRO&location=772) --- This example confirms once again that money is the true reality for a firm. But it is no longer just a matter of the relation between the profit registered in the closing balance and the equity recorded in the opening balance; it is also a question of the liquidity situation, the relationship between cash and fixed assets. — location: [850](kindle://book?action=open&asin=B00BLRXMRO&location=850) --- The rate of increase was very low. This first changed with the discovery of the Americas, resulting in a flood of gold and silver which, via Spain and Portugal, spread throughout Europe, chiefly to France, the Netherlands, and England. Prices rose, and there was also a demand for ever greater amounts of money, since the influx of gold and silver coins had stimulated trade and commerce, whose growth in turn depended on increasing amounts of coins. — location: [997](kindle://book?action=open&asin=B00BLRXMRO&location=997)The role of gold and silver in the money supply. The influx of co in probably kickstarted a boom. --- The discrepancy between the strong demand for money and the limited possibilities of increasing its quantity was overcome at the end of the seventeenth century by the introduction of paper money. The decisive step was the foundation in 1692 of the Bank of England, which from 1696 on issued bank notes. At the same time, Britain adopted gold coin as the standard currency, lending the new system stability despite—or because—of the fact that intrinsically valueless paper money circulated alongside gold coins. — location: [1008](kindle://book?action=open&asin=B00BLRXMRO&location=1008)Paper money introduced in England in late 1600 s. When else was paper money used? why was it introduced at this time? --- The issue of bank notes was later supplemented by bank money based on the creation of sight deposits at commercial banks on the giro or checking accounts, which could be exchanged 1:1 for paper money. The commercial banks obtained paper money, which in the meantime had become legal tender, from the Bank of England, either against gold or credit. But the bank could offer commercial banks only a limited amount of paper money on credit so long as this paper money was convertible into gold coins. The level of the Bank of England’s gold reserves therefore represented a limitation on the creation of bank money. — location: [1013](kindle://book?action=open&asin=B00BLRXMRO&location=1013)Deposits at commercial banks were convertible into gold, therefore money creation was limited by gold reserves. --- In 1931 England put an end to the obligation to convert paper money into gold on demand, and the rest of the world eventually followed suit. One small element of the gold standard remained, in that a central bank was still obliged to settle debts with another central bank in gold. Ultimately, when the International Monetary Fund was formed in 1946, it was considered sufficient that central bank debts be covered in US dollars and that only the US dollar was convertible into gold. This obligation was itself unilaterally terminated by the USA in 1973. This had been the final end of the gold standard regime. — location: [1019](kindle://book?action=open&asin=B00BLRXMRO&location=1019)Convertibility of the currency ends. what's the purpose of reserves after that? --- This abolished in principle all restrictions on the increase of the quantity of money. And so money seems to come from nowhere. — location: [1028](kindle://book?action=open&asin=B00BLRXMRO&location=1028) --- Today the producers of money are in the first instance the commercial banks and not the central banks (for the sake of convenience, we will henceforth refer to commercial banks simply as “banks”). All newly created money—with the exception of the advance of emergency credit to the state by the central bank—is principally bank money. Monetary creation is therefore part—the most important part—of the business activity of a bank. — location: [1030](kindle://book?action=open&asin=B00BLRXMRO&location=1030) --- “A bank … is not an office for borrowing and lending money, but it is a manufactory of credit” — location: [1033](kindle://book?action=open&asin=B00BLRXMRO&location=1033) --- The trick in money creation is that the credit granted by the account holder to the bank in form of sight deposits does not appear to be a debt, because the debt changes into bank money. This is even a superior form of money since it makes payment easier; a payment can be authorized in writing or electronically and has not to be passed from hand to hand. — location: [1052](kindle://book?action=open&asin=B00BLRXMRO&location=1052) --- The capacity of commercial banks to create money is limited only by the small part of sight deposits they have to hold with the central bank as a reserve. The banks have to hold central bank money in a certain relationship to sight deposits on the liability account in their balance sheet, whereby this relationship is determined both by the custom and practice of the bank, as well as by regulations regarding minimum reserves.3 The crucial point is however that the central bank can always provide additional money to the banks, which they need as a reserve, mostly by repurchase agreements which can be interpreted as credits to the banks. — location: [1056](kindle://book?action=open&asin=B00BLRXMRO&location=1056) --- The price in the form of interest can be agreed before production is initiated. Instead, the risk that banks bear is the credit risk, because the reimbursement of credits is never guaranteed. — location: [1069](kindle://book?action=open&asin=B00BLRXMRO&location=1069) --- In this example, profit arises from the difference between the interest which borrowers pay for their credit and the costs of banking activity. Interest payments are made by the reduction of the borrowers’ sight deposits, thus by a reduction of bank debt. — location: [1116](kindle://book?action=open&asin=B00BLRXMRO&location=1116) --- In this sense, the creation of credit and money is a self-referential process which in principle—taking account of the possibilities of refinancing through the central bank—can proceed to infinity. Since credit is either rolled over or new credit replaces the old, the quantity of money simply grows from period to period in the historical process. — location: [1120](kindle://book?action=open&asin=B00BLRXMRO&location=1120) --- This circumstance compels the banks to protect themselves against this risk to the credit they grant, and they generally do this by granting credit only to those firms that have sufficient equity capital. In addition to this, the credit is secured by collateral. This presupposes that the borrowing firm possesses real property, especially land and buildings. Real property therefore serves—as Gunnar Heinsohn and Otto Steiger (1996) have shown—also as the necessary condition of the production of money it is used to secure credits. — location: [1130](kindle://book?action=open&asin=B00BLRXMRO&location=1130) --- Banks also insure themselves by granting credit not only to private persons and institutions but also to the government—mostly through the purchase of treasury bonds or government debt on the open market. Government debts deemed as being secure, since by definition the state cannot go bankrupt at least in terms of its own currency. The reality behind government debt is the power of the state. — location: [1134](kindle://book?action=open&asin=B00BLRXMRO&location=1134) --- If we take into account what interest actually means in practice, the phenomenon of interest can be explained very easily. It is simply the price of credit. Why can lender of money charge a price for the credit? For no other reason, he owns the good which he is lending. — location: [1142](kindle://book?action=open&asin=B00BLRXMRO&location=1142)Interest is the price of credit --- The level of this price was originally determined by the amount of savings. This amount was relatively small with regard to the demand, and therefore, the interest level comparatively high. Since today money consists mainly of bank money that is produced by bank granting credits and that for this reason the amount of credits can increase far beyond the amount of savings, the interest level is much lower as it was before. Its level has at the minimum to cover the production costs of bank money. These costs are first of all the costs of running the banks themselves, secondly the interests to be paid on saving deposits, and thirdly the refinancing costs when the banks need central bank money. Above and beyond these costs, the banks can set a profit margin as compensation for their exposure to risk and as an additional surplus. — location: [1146](kindle://book?action=open&asin=B00BLRXMRO&location=1146)Interesting to think about the fact that the costs of running a bank should be embedded into the interest rate. With the same level of demand, interest rates should go down over time because of technological advancement and efficiencies. How does demand charge? Is it just the demand for loans as a result of the economy? Is supply constrained? Is there a capital cycle in the supply of bank landing? --- This does not mean that no savings are required to finance investments. They are in fact an important precondition. But this is primarily related to the building of equity capital. — location: [1160](kindle://book?action=open&asin=B00BLRXMRO&location=1160) --- In the credit and money market, the reverse occurs. Here the demand determines together with the fixed price—the rate of interest—the supply of money. The main condition is that the borrower has sufficient equity capital to provide security to the creditor. — location: [1164](kindle://book?action=open&asin=B00BLRXMRO&location=1164) --- The central bank will seek to adapt to the given situation. On the one hand, the rate of interest should keep money sufficiently scarce in order to avoid excessive inflation. On the other hand, the rate of interest should be sufficiently low, such that the demand for credit persists, that is, the rate of interest should be below the average rate of profit. — location: [1177](kindle://book?action=open&asin=B00BLRXMRO&location=1177)