The Paradoxes of Growth: The Economic Argument for Natural Enterprise

paradoxes of growth
I‘ve written before about the Natural Economy and why it would be so much more effective and sustainable than the existing Industrial (‘market’) Economy. And though I’ve read and written a lot about the fact the Industrial Economy is dysfunctional, and most large corporations have become pathological and hugely vulnerable to change, I’ve never explained how I think they got that way. This article is an attempt to rectify that situation.
If you go back to the earliest days of enterprise, when groups of artisans, farmers or other producers got together to make a living, the model of equilibrium of such enterprises was simple: The more people in the enterprise, the more relationships you have with potential customers. The more relationships you have, the more you sell (most entrepreneurs will tell you their revenue and the ‘face time’ they spend with customers is highly correlated). The more you sell, the more cash you have, and the more borrowing capacity (if you desire to use it) you acquire. The more cash and borrowing capacity you have, the more people you can employ.

It’s a virtuous cycle, or, when it goes south and something causes your sales to fall, a vicious cycle. For the most part it achieves a certain equilibrium based on how much intrinsic need there is for your product in your local market. Growth is not an essential ingredient of the enterprise’s sustainability, and sales decline is not fatal — you simply expand or contract the size of your enterprise to match the needs in the community for what you are uniquely capable of providing.
This is represented by the four green boxes in the chart above. This is a Natural Economy model — it is almost infinitely flexible and sustainable through good times and bad. Just as the number of birds that overwinter in a community (rather than migrating or hibernating) is an adaptation to the availability of food, so does the number of people that stay in an enterprise adapt to the number of customers.
So far so good.
Humans being a very creative and ambitious species, designed for problem-solving, we don’t seem to know how to leave well enough alone. So as the world began to shrink through trade, some entrepreneurs realized that they could increase sales, and hence employ more people, by exploiting cheap foreign oil and commodities, and selling back into overseas markets. This is the essence of ‘globalization’ and for many companies it has been very profitable. It is however, subject to two vulnerabilities:

  • C1: The Finite Resources Constraint — No matter how much the technophiles and believers in the American Dream try to deny it, there is a limit to the amount of cheap resources the planet can produce. Eventually we will run out.
  • C2: The Finite Market Constraint — Ultimately there is a limit to how many people will be able to afford your product, and once those people all have it, the market for your product will inevitably plateau and (unless you innovate new products) decline.

So resourceful entrepreneurs, with the best intentions of employing lots of people and growing prosperously, began to exhibit some decidedly pathological behaviours to keep the growth cycle moving in an upward direction. The first of these pathologies was greed (P1 on the chart). Entrepreneurs noticed that the more cash (and other assets) the enterprise had, the more it was able to borrow. What’s more, if you promised people that the company would grow forever, they would give you money interest-free, in return for a share of the future incremental profits. This is called financial leverage, and it works as long as you are able to continue to grow profits at a rate faster than the rate lenders would charge for ‘risk-free’ loans.
Thus begins a cycle of addiction that introduces six new vulnerabilities into the enterprise:

  • C3: The Ponzi Suckers Constraint — The stock market is essentially a Ponzi scheme, which relies on more and more people investing in stocks in the expectation that large (double-digit) profit growth will continue more-or-less forever. As people learned in 1929, and to a lesser degree a number of times since, no growth continues forever. 

In order to try to keep the profits growing as long as possible, you do a number of things: You cut costs. You lobby governments for tax breaks, concessions and subsidies. You externalize costs by getting taxpayers and future generations to pay for your waste and pollution. You offshore labour to wage-slave countries with no social or environmental regulations. You automate and hollow out what’s core to the business and outsource what isn’t. You cut quality. You standardize everything. Then you run into:

  • C4: The Government Debt Limit Constraint — Eventually, even the friendliest corporatist governments exhaust their treasury rewarding you with tax breaks, concessions and subsidies, so they can’t pay you anymore.
  • C5: The Finite Earth Constraint — The planet can only absorb so much waste and pollution before it begins to fight back, with storms, floods, droughts, and global warming.
  • C6: The Race-to-the-Bottom Constraint — Ultimately you will run out of countries willing or able to allow you to exploit their labour at ever-lower wage rates, and you will run out of suppliers willing or able to cut costs every year.
  • F1: The Wal-Mart Dilemma — Eventually your customers, deprived of reasonable paying jobs by your and other corporations’ cost-cutting and offshoring, will become unable or unwilling to pay for the crap you produce, even at ever-lower costs.
  • F2: The Customization Paradox — While your business model depends on one-size-fits-all products and flogging lame ‘new improved’ sequel products, customers will ultimately revolt and look for innovation and imagination, even if that means they have to sacrifice and cut other spending to pay for it.

At this point, you’re getting pretty desperate to keep the wheels from coming off your enterprise. Pathology is now not an option. You conspire with a few competitors, buy up the rest of them and create an oligopoly (P2), threatening, bribing or buying off all new competitors, and using your oligopoly (and oligopsony) power to fix prices you charge customers, and fix prices you pay to suppliers. Uh oh:

  • C7: The Consumer Debt Limit Constraint — Soon, no matter what you charge, your customers are maxed out, and they can’t buy any more. They find workarounds — they share media files, borrow tools from neighbours, make their own stuff, fix stuff instead of buying new from you. 

Time to abandon ‘face time’ and crank up the propaganda (P3) to brainwash people into believing your ‘brand’ is worth a premium. So you blanket the airwaves with commercials — who cares if they’re lies? But you’re just getting in deeper:

  • F3: The Counterculture Paradox — It’s easy to become ‘too’ trendy, over-hyped, and then people will desert you in droves for the No Logo alternative. Yes, you can co-opt it (Wal-Mart Organics) but lots of your customers are wise to you by now. Your brand is now a joke.

Meanwhile, to ratchet up all this activity, you’ve had to create a huge and hierarchical organization (P4) so you can stay in (what you think is) control. Your investments in legacy systems are massive. Trying to change anything is impossible. Economies of scale turn out to be diseconomies. You at the top are so disconnected from your customers you have to hire consultants and experts to tell you what they think your customers need. You can’t adapt to changing needs anyway — you have to grow profits by 20% again this year with zero-risk new products.

  • F4: The Strategy Paradox — By the time your massive hierarchical organization’s strategy can be implemented to respond to the changing market, the market’s already moved on you again. You’re too big to improvise, and you have no resilience to unforeseen changes.
  • F5: The Innovator’s Dilemma — The more you try to focus on your core customers, the ones that kept you in business last year, the more vulnerable you become to disruptive innovators, lean, hungry little organizations unafraid to take risks, that eat away at your organization’s sales from the bottom up, until you start losing your customers in droves.

In his book Beginning Again, David Ehrenfeld uses this analogy to discuss what happens when all these vulnerabilities combine to stretch the Industrial Economy to the limit, and then beyond: “It is like a massive flywheel, spinning too fast for its size and construction, coming apart in chunks as it spins”. This is the economic world that James Kunstler portrays in The Long Emergency, as the fragilities of corporate growth combine with the constraints of unsustainability.
What will happen when we run out of cheap oil and other resources, and cheap labour, and borrowing capacity to buy anything more? When we run out of customers for the shoddy junk we produce, and investors for wildly overpriced houses and stocks? When the IMF tells the US Government it’s in default and has to pay back what it owes, knowing it can’t? When natural devastation produces more social, political and economic crises than we could ever afford to repair or hope to cope with? When customers can’t and won’t buy what we produce, and we are unable to change and produce what they will buy?
It’s a grim scenario, and the wild volatility in today’s markets foreshadows its inevitability.
But suppose instead of getting caught up in this madness, you and your partners operate a Natural Enterprise? Instead of having to cut quality to keep profits growing, you can provide products of high quality, because there are no shareholders telling you you have to keep growing. Instead of standardizing and mass producing, you can customize everything to the individual customer’s requirements, and the customer is right there to help you do so. Instead of having to hype your brand, you can hype your proximity to customers and the value of personal service. Instead of having to plan for every unforeseen problem, you have the resilience and improvisational ability to adapt to changes on the fly, easily. Instead of being the victim of disruptive innovators, you are a disruptive innovator.
You don’t have to worry about finite non-renewable resources because the only ones you use are renewable. You don’t have to worry about running out of customers because your customers are so close to you they’re your customers for life, and they’re all you need. You don’t have to worry about increasing your profits to keep shareholders happy because you don’t have any shareholders — you control your own destiny. You don’t have to worry about government handouts running out because you never had them or depended on them in the first place. You don’t have to worry about cleaning up your pollution and waste because you don’t produce any. You don’t have to worry about finding cheaper and cheaper labour because your enterprise does just fine paying its people what they need. You don’t need to worry about customers not being able to afford what you offer because you’ve designed it so they can afford it and because it meets a need that no one else can fill.
When the massive flywheel of the Industrial Economy comes apart in chunks, Natural Enterprises will be there to help people get what they need and make a living for themselves, and to replace the collapsed economy with a new, sustainable, responsible, Natural Economy.
It won’t happen any other way. We can’t rely on the ‘market’ or on politicians or consumer movements to fix the Industrial Economy in time, even if they wanted to — it operates on its own momentum, massive, fragile, vulnerable and already beginning to shake apart.
And the business model of this sustainable, responsible, Natural Economy will be simple — just the four green boxes in the chart above. Adapting andresponding to human needs, in equilibrium. No growth necessary.

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8 Responses to The Paradoxes of Growth: The Economic Argument for Natural Enterprise

  1. Dave Smith says:

    Absolutely brilliant, Dave! Thank you!

  2. george ruby says:

    Your comments are interesting, but as you say about Wal Mart, every one seems to have tunnel vision with oneway to doing things. Try this on for size, Trusts that form businesses where the basis principals are theday to day operators, such as franchise’s and the employees are paid on incentive’s on the large part and the suppliers are partners or part of the company. Harmony, friendship, trust, honesty, faith and theability to feed and cloth’s your family are the real bottom line items. If people could get there head outof the _ _ _ there would be NO REAL WORLD PROBLEMS as there is today. Bottom line, if everyone is working,they won’t Dont have time to cause problems.

  3. Vish Goda says:

    Dave:Couple of points – The green boxes – well, they cannot always be an end in themselves. In that, one of underlying assumptions is that everyone in the community have something to sell or buy – which is not true most of the time for most of the members.Second point:”In order to try to keep the profits growing as long as possible, you do a number of things: You cut costs. You lobby governments for tax breaks, concessions and subsidies. You externalize costs by getting taxpayers and future generations to pay for your waste and pollution. You offshore labour to wage-slave countries with no social or environmental regulations. You automate and hollow out what’s core to the business and outsource what isn’t. You cut quality. You standardize everything.”This is absolutely true – but what can prevent this? Looks almost like a natural progression from a natural economy, as resources dwindle and as skills deteriorate or as you age – you look for alternate sources – while this is deplorable – how do you fix it. In a natural economy, when the condition that triggers this behavior happens, what should be thumb-rule to alleviate the pains of the community – that will result in terms of loss of revenue?Also, how do I get to your podcast? Looks like there is a dead end without any idea where my requests are going?Great thoughts as always.Vish

  4. Vish Goda says:

    Dave:How about testing out the concept of Natural Enterprise? I am serious.What I am suggesting is to set up our own little world in one of these online communities like “Second Life” or “Kaneva”. Lets create a set of natural enterprises, working on the rules that would be the “Constitution” of this enterprise – and then lets see how far we can take it.What do you think?Vish Goda

  5. Dave Smith says:

    I don’t know about living and working in a virtual world (never tried it) but suggest one community that worked for awhile during the seventies “recession” that could be a model is the Briarpatch Network.

  6. Mariella says:

    Hi Vish Goda… I think your idea is great, but I don´t know how to do it…. I thought about using this kind of interaction some time ago, while watching children play “age of empires” or another game about a city and how to manage it succesfully. I thought about it as a way of showing what alternative money and its economies is about and how to develope local commerce.I´ll give a look to Briarpatch Network. Please count with me. My mail is

  7. Vish Goda says:

    Hi Mariella,I too have never used any of the virtual world sites and so am not going to be a great help here. But I just thought it would be a great social experiment to study how people will respond in a natural enterprise. My own guess is that it will start off very well. But the best test is when a system is placed under duress. Thats when the cracks open up – we just need to find how many are there.RegardsVish

  8. Alfonso says:

    I don’t want to bother, and might be oversimplfying… but, doesn’t it look very much like Malthus?

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