# The Growth Spiral ## Metadata * Author: [Hans Christoph Binswanger](https://www.amazon.com/Hans-Christoph-Binswanger/e/B009WS7LMQ/ref=dp_byline_cont_ebooks_1) * ASIN: B00BLRXMRO * ISBN: 978-3642318801 * Reference: https://www.amazon.com/dp/B00BLRXMRO * [Kindle link](kindle://book?action=open&asin=B00BLRXMRO) ## Highlights 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) ^ref-43495 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) ^ref-23986 --- 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) ^ref-57136 --- 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) ^ref-9804 --- 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) ^ref-9804 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) ^ref-22699 --- 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) ^ref-3232 --- 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) ^ref-3232 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) ^ref-23610 --- 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) ^ref-14554 --- 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) ^ref-14071 --- 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) ^ref-4249 --- 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) ^ref-30340 --- 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) ^ref-21186 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) ^ref-8651 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) ^ref-31216 --- Rather, competition brings about a constant tendency to transformation and growth. — location: [243](kindle://book?action=open&asin=B00BLRXMRO&location=243) ^ref-57175 --- 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) ^ref-61685 --- 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) ^ref-61685 --- 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) ^ref-55516 --- 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) ^ref-50384 --- 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) ^ref-17413 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) ^ref-48889 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) ^ref-14704 --- 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) ^ref-10423 --- 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) ^ref-5223 --- 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) ^ref-51078 --- 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) ^ref-2885 --- 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) ^ref-49728 --- 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) ^ref-45867 --- 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) ^ref-45867 --- 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) ^ref-3028 --- 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) ^ref-62379 --- 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) ^ref-23118 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) ^ref-23544 Fear of losing profit & hope of gaining more, leads to tactics like erecting barriers or 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) ^ref-32549 --- 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) ^ref-59955 --- 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) ^ref-42069 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) ^ref-9112 --- 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) ^ref-6694 --- 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) ^ref-49767 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) ^ref-6210 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) ^ref-54788 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) ^ref-2663 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) ^ref-26644 --- 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) ^ref-31720 --- “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) ^ref-29366 --- 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) ^ref-51979 --- 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) ^ref-37664 --- 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) ^ref-7669 --- 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) ^ref-35891 --- 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) ^ref-19387 --- 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) ^ref-31131 --- 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) ^ref-59980 --- 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) ^ref-33745 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) ^ref-35966 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) ^ref-48091 --- 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) ^ref-34570 --- 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) ^ref-7123 --- In considering this interaction, we discover that there are two basic approaches, each with completely different perspectives. The first approach is the net product theory or surplus theory, which primarily addresses the issues of the continued creation of wealth. The second is the marginal productivity theory, which assumes that all important resources are in short supply and therefore focuses on the optimal use of those limited resources. — location: [1228](kindle://book?action=open&asin=B00BLRXMRO&location=1228) ^ref-43532 --- The marginal productivity theory is the theory of the neoclassical economists of the nineteenth century. The conventional theory of production as taught today in contemporary microeconomic textbooks is based on the latter. — location: [1234](kindle://book?action=open&asin=B00BLRXMRO&location=1234) ^ref-46741 --- The difference between the total product and the restitution costs is the net product (produit net) or the surplus. The essential factor for the physiocrats was the fact that land requires no restitution costs. The services of the land cost nothing because the productivity of the land is constantly restored as part of the ecological cycle, with support from the sun’s energy without additional costs. — location: [1249](kindle://book?action=open&asin=B00BLRXMRO&location=1249) ^ref-10998 --- The classical value theory of labor disregards the contribution of the soil; only labor is seen to be productive. But the theory was also focused on the net product, which is income not committed to restitution expenses. Classical economists assumed, as did the physiocrats and the mercantilists before them, that solely labor requires restitution expenses. Thus, the worker—whether in agriculture, in trade, or in industry—is allotted an income only sufficient to make his “restitution” possible, that is, a subsistence wage. However, in contrast to the physiocrats, it was not simply the issue of achieving a surplus what concerned them most but rather the continuous increase of the surplus, which they primarily ascribed to the division of labor and a constant expansion of production. — location: [1304](kindle://book?action=open&asin=B00BLRXMRO&location=1304) ^ref-17401 --- The competition for jobs among the workers was apparently fiercer than the sales competition among the firms, so that the workers’ wages could be reduced to a greater extent than the commodity prices. Adam Smith was the only one to concede that the demand for labor during economic growth could increase faster than the supply of labor, so that wages could rise above the subsistence level. But such an increase was hardly discernable in the early nineteenth century. — location: [1425](kindle://book?action=open&asin=B00BLRXMRO&location=1425) ^ref-57233 Early nineteenth century was at the end of a large demographic boom with a large decline in real wages. --- When Adam Smith says of the landlords that they “love to reap where they never sowed,” Karl Marx added that capitalists earn where they have never worked. In this way, Marx brushes aside the role that capital plays as a factor of promotion, even though he occasionally admits it.7 — location: [1438](kindle://book?action=open&asin=B00BLRXMRO&location=1438) ^ref-60371 The lack of proper role for capital and money finance in early economic theories is why Marx Seems to miss its role in creating value. --- Contrary to the mercantilists, the classical economists demanded an unconditional free trade policy—much in line with the physiocrats in this respect—including the elimination of all national trade barriers and of trade promotion. To achieve this goal, they had to question the justification of a gold and silver money influx. They did thus reject protectionist trade policies with the claim that an inflow of gold and silver would not lead to any advantage for their countries, since the increase of the amount of money would only induce an increase in prices and did thus have no real impact.8 They based their arguments on the so-called quantity theory of money which does not address the relation between money influx and the formation of capital. Consequently, they dismissed the possibility of considering John Locke’s argument that the gold and silver inflow from Central and South America to Spain and Portugal had led to lower interest rates with an accompanying increase in investments. — location: [1452](kindle://book?action=open&asin=B00BLRXMRO&location=1452) ^ref-20141 In order to dismiss the claims of Mercantilists that a trade surplus is good classical economists resorted to the quantity theory of money to dismiss the idea that increased money would result in higher capital formation. --- Law pointed out that, while increasing the supply of gold and silver money could lead to price increases, increasing the supply of paper money would not. This is because paper money goes into circulation through bank loans used to fund investments and does thus lead to a corresponding increase in production. In this way, an increase in the supply of paper money does automatically lead to an increase in the real social product, so that no or only minor price increases occur.10 Law’s — location: [1473](kindle://book?action=open&asin=B00BLRXMRO&location=1473) ^ref-39626 Could we think of this as a cheaper form of money production? We also know that paper money in the form of fake gold deposit receipts was already being circulated. --- Adam Smith’s opposition to mercantilism was so strong that he also negated the impact that money had on production even after the original motive for doing so had lost its meaning. It was for this reason that he and the classical economists that followed him could not admit in their deliberations on value theory that the substance of capital is money and that the risk associated with a money advance was therefore of a monetary nature.11 — location: [1484](kindle://book?action=open&asin=B00BLRXMRO&location=1484) ^ref-13869 --- A major insight of the historical school was the observation that fixed costs arise when machinery become a part of the production process and that fixed costs have a decreasing impact on the unit costs the greater the amount produced: The unit costs or the average cost drops with increased production. When the unit costs or average costs are lowered, it also becomes possible to lower the prices so that larger volumes can be sold. Karl Bücher worked out this insight and summarized it in a “law of mass production.” — location: [1711](kindle://book?action=open&asin=B00BLRXMRO&location=1711) ^ref-8224 --- the deposits were banker's debts “past due,” and therefore not bearing interest, but created outright in order to purchase the debts of business men “not yet due,” and to bear interest until the future date when due. These debts of bankers not bearing interest became, directly or indirectly, the whole of modern money. — location: [1742](kindle://book?action=open&asin=B00BLRXMRO&location=1742) ^ref-10646 --- In summarizing the findings of the historical school and its further developments, it should be particularly noted that sequential time as a prerequisite for causal explanations and the embedding of economic processes in institutional settings that change over time are to be taken into account. This opens up a whole series of doors particularly for the explanation of the process of economic growth, its prerequisites and its consequences—doors left closed by the timeless neoclassical models. — location: [1789](kindle://book?action=open&asin=B00BLRXMRO&location=1789) ^ref-25090 --- This task is easy in so far as we already have a model of traditional agriculture that is described very precisely. It is the Robinson Crusoe model, which was and is the basis for the neoclassical and the conventional theory of production. So all we have to do is to describe the essential characteristics of this model to recognize how production in the modern economy differs from it. This will show how far a new theory of production seeking to explain the modern economy must distance itself from the neoclassical and, therefore, from the conventional theory. — location: [1986](kindle://book?action=open&asin=B00BLRXMRO&location=1986) ^ref-48129 By looking at how a modern economy differs from a Robinson Crusoe economy (based on a neoclassical model) We can understand how a modern theory should differ from conventional theory. --- The neoclassical model, upon which the conventional model is based, is not the product of (overly) abstract thinking, as is often claimed, but rather a valid description of an economic system, albeit an economic system that belongs to the past. Therefore, the issue is not just to adapt an abstract model to reality but to replace a model based on an outdated Robinson Crusoe or agrarian reality by a model explaining the reality of the modern industrialized economy. — location: [2044](kindle://book?action=open&asin=B00BLRXMRO&location=2044) ^ref-34204 Neoclassical model describes an outdated economy --- The human intellect or imagination is to the economy what sunlight is to the ecological cycle as a constantly self-regenerating driving force. Through the discovery and invention of new production processes and new products, it keeps competition alive and, with the help of competition, the market process. — location: [2246](kindle://book?action=open&asin=B00BLRXMRO&location=2246) ^ref-18266 Imagination seems to include innovation & technology. --- Imagination, which is operative in all phases of production, provides a considerable contribution to the net product. It certainly also requires logistics: The living costs of the persons doing the research must be paid for, as well as the maintenance and operation of educational and research institutions that provide the means they need for the research. This incurs considerable restitution costs. But the value of these services is by far higher than the costs incurred. — location: [2250](kindle://book?action=open&asin=B00BLRXMRO&location=2250) ^ref-1238 --- If the marginal utility of these new goods also falls when they are in greater supply, other goods appear on the horizon that once again have a higher marginal utility, etc. There is always a “hunger” for something new. — location: [2274](kindle://book?action=open&asin=B00BLRXMRO&location=2274) ^ref-33395 This also relates to one of the biggest investing mistakes proposed by / namely that you shoulda't anticipate competition too early because new markets can open up. In this instance an oversupply of goods can create the conditions for using that good to create new products. --- In the case of labor, the performer of the service and the recipient of the income are one and the same. Since the abolition of slavery, the worker is at the same time the owner of his manpower. It is to him that the remuneration for the work done accrues. — location: [2430](kindle://book?action=open&asin=B00BLRXMRO&location=2430) ^ref-1832 --- The owners of the capital of the firm are the shareholders in the case of equity capital, that is, the households who own shares, and in the case of borrowed capital the banks or rather the shareholders of the banks—the households again. The profit of the firm is attributed to the capital of the firm, which has to pay a part of it in the form of interest to the bank and another part in the form of dividends to the shareholders of the firm. But a part of the profit is retained by the firm. The shareholders participate also in the retained profit in the form of an increase in the values of their shares since the firm reinvests the retained profits. The reinvestment of the profits contributes to the future increase in profits and in this way also to the increase of the dividends. — location: [2446](kindle://book?action=open&asin=B00BLRXMRO&location=2446) ^ref-60497 --- The sustained growth process that began after the end of the Second World War made it necessary to add to the static neoclassical theory a separate theory of growth. — location: [2707](kindle://book?action=open&asin=B00BLRXMRO&location=2707) ^ref-38168 --- In his textbook “Advanced Macroeconomics,” David Romer therefore speaks of a “mysterious variable, the ‘effectiveness of labor,’ whose exact meaning is not specified and where behaviour is taken as exogenous” (David Romer 1996, p. 95). He declares: “It is only a small exaggeration to say that we have been modelling growth by assuming it” (David Romer 1996, p. 25). — location: [2746](kindle://book?action=open&asin=B00BLRXMRO&location=2746) ^ref-6016 --- We may reduce the various versions of an endogenous theory of growth to essentially four approaches. The first approach is the idea that the diminishing marginal return on capital is nullified by the fact that various forms of economic activity display positive external effects that are known as “spillovers”; this reflects the effects of “learning by doing.” Second, we have to take into account the effects of inventions and information which, after a certain period of time, are available to everyone and third the effects of agglomeration benefits in so-called clusters. These positive effects can strengthen each other in the course of time. The fourth approach is the conversion of labor to “human capital” that is seen as part of “real” capital. The result of this conversion is that only one production factor is left over, namely, “real” capital, into which human capital is incorporated. It is supposed that “human capital” can be constantly increased in terms of its effectiveness by investments in teaching and research. All these approaches to an endogenous growth theory are certainly valuable, but are not sufficient to explain why the marginal return on capital remains exactly constant when growth in population lags behind. — location: [2753](kindle://book?action=open&asin=B00BLRXMRO&location=2753) ^ref-10916 --- we have to conclude that the so-called endogenous theory of growth cannot integrate the phenomenon of growth into neoclassical theory. Rather, it renders this theory invalid in its essential parts. Therefore, we have to look for a new approach for the explanation of economic growth. Such an approach is the economy theory presented here based upon the growth spiral. It provides an explanation of the modern economy as a phenomenon that, intrinsically, manifests itself as a growth process. The specific theory of growth is replaced by a general theory of the growing economy. — location: [2785](kindle://book?action=open&asin=B00BLRXMRO&location=2785) ^ref-59437 After describing the previous economic theories & tearing down conventional economics (based on the neo- classical model) he starts to describe his own growth spiral theory. The topics he has described so far also overlap with my ideas around how economic growth and dynamics work: nature (energy, land, resources), labour & creativity. Money as a social technology that relates to trust and bi-lateral obligations. The assumption that humans want ever more stuff, or better living. --- The growth spiral shows that the goal of the modern economy is not primarily achieving an optimal use of given resources but to expand the production from period to period by constantly increasing the use of natural resources with the help of human imagination and by money creation based on credits in the banking system. — location: [2865](kindle://book?action=open&asin=B00BLRXMRO&location=2865) ^ref-49951 --- The recognition of the time dimension of the economic process allows us to explain the dynamism of a growing economy governed by a constant incentive for growth, which we have called growth impetus, as well by the necessity of growth, which we have called growth imperative. — location: [2870](kindle://book?action=open&asin=B00BLRXMRO&location=2870) ^ref-33689 --- We thus arrive at the conclusion that, in the aggregate, the modern economy is founded on both, a growth impetus and a growth imperative. There is an impetus for growth, because an ongoing investment process does not only lead to an increase in current profits but also to an increase in the present value of shares in relation to the expected future profits. There is a growth imperative because, without a continuation of the investment process, that is an increase in capital investments, firms’ profits would shrink continuously so that investors would no longer find it worthwhile to bear the risks associated with their investments. — location: [2918](kindle://book?action=open&asin=B00BLRXMRO&location=2918) ^ref-43329 --- As we already showed, the growth imperative means that there is a minimum growth rate that the economy should not undercut. Otherwise, growth will turn into a shrinking process. Should the growth rate fall short of that mark, the economy will slip into a self-perpetuating crisis with losses that lead to a continuous reduction of the social product. — location: [3139](kindle://book?action=open&asin=B00BLRXMRO&location=3139) ^ref-48189 --- Acute scarcity of capital, resulting, in previous centuries, from the dependency of capital on savings, could be removed to a large extent through credit and money creation. The essential element of this creation is the conversion of debts into money. This occurs through banks granting credits in the form of sight deposits. — location: [3553](kindle://book?action=open&asin=B00BLRXMRO&location=3553) ^ref-58761 --- The banks can obtain banknotes in the form of credits from the central bank. Banknotes were to be considered as a debt of the central bank, because they were convertible into gold. But since the convertibility of banknotes into gold was suspended, the debt became a nonrepayable debt. As nonrepayable debt can be increased without limits, also money creation can be expanded without limits. As credits are mainly given to firms and are used by firms for investment purposes, the scarcity of capital could to a great extent be surmounted. — location: [3557](kindle://book?action=open&asin=B00BLRXMRO&location=3557) ^ref-46136 --- The development of energy prices is of particular significance because the increased use of energy is the basis for most innovations. A rapid increase in energy prices disturbs the innovation activities. Current innovations may suddenly become obsolete. — location: [3619](kindle://book?action=open&asin=B00BLRXMRO&location=3619) ^ref-17248 --- the economic process was transformed into an open-ended upward-turning spiral. The explanation of the dynamics of this growth spiral is the central theme of this book. — location: [3676](kindle://book?action=open&asin=B00BLRXMRO&location=3676) ^ref-22855 --- For the understanding of the functioning of the modern economy, it is important to distinguish between barter economies and money-based market economies. — location: [3679](kindle://book?action=open&asin=B00BLRXMRO&location=3679) ^ref-14494 The book does a good job describing why it's important that we recognise the economy as a money based economy rather than an extension of a barter economy. It is important for the role of money and for the understanding of capitalism. --- Moreover, money made it possible to build artificial economic units, called firms, which need advances of money in order to be able to pay for productive services before they earn money by selling their products. These advances of money represent the firm’s capital. The deployment of capital is the precondition for transferring production from self-sufficient “households” to firms that can specialize in the production of only a few goods but at large amounts. This led to a tremendous increase in production and productivity on the basis of the division of labor. The activity of firms was originally limited by the fact that only a small amount of money was available for the formation of capital. This changed with the development of the banking system, which consists of the central bank and commercial banks. In particular, it changed with the possibility of creating money within the banking system, that is, paper money—the banknotes of the central banks—and bank money, that is sight deposits with the banks. The creation of money is effected by banks, which give credits to their customers in form of bank money. — location: [3693](kindle://book?action=open&asin=B00BLRXMRO&location=3693) ^ref-13173 The advancement of purchasing power through the issuance of credit (in effect creating money) is one of the most important functions in today's economy. --- The growth process is dominated by a growth imperative. The growth process must continue, once it has started. The reason is as follows: Without a continuous expansion of the amount of money due to the need of financing new investments, which triggers additional demand, the increased supply of products due to the previous period’s investments cannot be sold at prices, including profits, which compensate the risk of the investments. If the prices and the profits fall below the minimum level necessary for the compensation of these risks, firms will first reduce new investments but ultimately also replacement investments, entailing an absolute decline of the social product. This leads to a growth imperative in the sense that the alternative to growth is shrinkage and economic crisis. — location: [3712](kindle://book?action=open&asin=B00BLRXMRO&location=3712) ^ref-43237 On the aggregate, economies need to keep increasing investment and growth to fully consume the previous periods production or suffer from economic stagnation or crisis. ---