Review: The Limits of Business Development and Economic Growth

I recently finished reading Mats Larsson’s book The Limits of Business Development and Economic Growth, a book that’s somewhat closer to my day job for a change. To sort of jump to a conclusion, it’s a great book in its own right that I can warmly recommend and one that I’ll get to in just a second, but the most interesting insight I gained by reading it was not thanks to this book alone. It was that there are now at least three or four distinct lines of highly credible analysis, all of which come to a similar conclusion. Whether you look at the world from a limited-resources perspective, from the purely economic debt-laden economies perspective or by analyzing some simple, fundamental limits of business development as this book does, all signs point convincingly to economic growth of the world coming to an end, and doing so soon. This, for a world running and highly dependent on the current financial system which is only stable when growing, presents huge challenges on a scale that the world has never faced before.

It’s important to point out that this book in all its analysis completely omits worrying about possible resource constraints; some readers, who don’t share the limited resources-view will find this refreshing, others like myself will wonder how some people can be so blind to them. What one thinks about the omissions, however, is not important as the arguments in the book stand on their own. One of the central arguments in the book is basically that there must be an infinite number of new opportunities or the market can’t drive the economy forever – it is noted that the opportunities may not in fact be infinite, and that we already appear to be reaching the limits of business development in some areas. What is the limit, one may ask? A very simple one that applies to many, if not most, industries: one cannot produce goods at lower than no cost and faster than in no time. Larsson is very careful not to claim that everything has been invented, but it’s hard to argue with the point that the need for investments, which the economic growth depends on, will be lower in the future as as the law of diminishing returns sets in. It it also argued that we have, in the past, mainly made existing activities more efficient and invented few genuinely new activities.

An interesting note is that as efficiency improves and people place more emphasis on lower costs the average profitability of companies declines, providing there is “healthy” competition. This is, in fact, dangerous:

As we will see below, the economy needs companies that earn good profits, and in order to do this, companies need to be able to develop skills that lead to sustainable competitive advantage. The reason for this is that profitable companies are the ones that drive investments and economic growth in the economy, which is a very important role indeed. If average profitability declines, because it is becoming more and more difficult to develop sustainable competitive advantages, we will find that investments will decline, which would endanger future economic growth.

Some other interesting points include:

  • The difficulty of identifying industries that need more people in the future, which leads to suggestions of either big structural changes needed or permanent large unemployment
  • Identifying some absolute hard limits to product usage and consumption (such as caloric intake limits, time limits etc)
  • Companies achieve superior profits through being different, but there is a strong drive is to implement systems that increase similarity

All in all, the prospects of wide-based economic growth in the long term look pretty grim. As a potential cure to the situation, The Limits of Business Development and Economic Growth offers two new sources of growth. The first is has to do with secondary qualities and making people aware of them; environmentally friendly products fall into this category when customers are willing to pay a premium for products produced by responsible companies. In order to “scale up” the secondary qualities-focus, people need to realize their consumption patterns have created the current system, and that consumption pattern changes can radically alter the system.

The other, perhaps surprisingly, is introducing complementary local currencies. Complementary local currencies are monetary systems that are not based on the “traditional” fractional reserve banking and, as the term implies, local to typically a community, city or a region. They have been previously used successfully in times of high unemployment, can also work in large scale (Switzerland has 80,000 people using a WIR system and in France, 25% of the people use complementary currencies at least occasionally) and many are already in existence. There are many types of local currencies with LETS (Local Exchange Trading System) schemes probably the most popular ones. Importantly, local currencies also make the monetary system much more resilient.

And resiliency is something that the world economy desperately needs; writing before the GFC(s) hit, Larsson points out:

The global economic system and the national currency systems that are linked to it, which most economists believe to be sufficient to guard society against economic instability, have shown a number of weaknesses in the past. [...] Yet we are doing almost nothing to try to investigate the possible weaknesses or limits that this system has, or how these weaknesses can be removed or how the system can be strengthened. Our belief in the economic system seems anomalous in the light of its track-record and it may lead our thought more in the direction of religious worship than in the direction of scientific analysis. Economists sometimes defend the existing national currency system and its virtues unquestioningly in the same way that fundamentalist religious leaders defend their beliefs. It is difficult and disturbing to try to ask important questions and only be offered the answers of economic doctrine and hypotheses that are weakly supported by experience.

Some criticism

The book starts perhaps a little bit slow, some examples are a bit outdated and there is too much repetition of some core hypothesis. These are relatively minor shortcomings and as noted, more recent examples only serve to strengthen the case, not weaken it. Partly due to its age, the book misses some key developments – for example, when talking about production optimization, it misses the trend of 3D printing for distributed manufacturing as perhaps the final step in efficiency gains as it eliminates transport time delays for certain goods. It’s also interesting to see that as the book was written in 2004, it goes into talking about print-on-demand in some length and does not even begin to take into account the e-books, which now make most print-on-demand schemes seem woefully outdated. These understandable misses do not, however, make the core arguments any less convincing, quite the contrary. With e-books, the delivery time really cannot be further improved from “immediate”, and the cost of delivery is practically zero.

Books are looking like a good example of advanced transition into e-business (Larsson provides an e-business development model), and it’s important to note that as a whole this transition and efficiencies it brought did not drive economic growth; cutting costs to drive profits is not a sustainable basis for growth and thanks to the success of online orders and more recently e-books, bookstores are a quickly disappearing feature of the physical cities. E-business, when it becomes mature, reduces resource usage and optimizes the system and in the end only serves to reduce economic activity when the transition is fully completed.

In Conclusion

I would highly recommend the book, but like I pointed at the beginning, the most remarkable thing I learned from it is not solely due to this book by itself – the book is more like another piece to what is forming to be a rather alarming puzzle. It is very interesting and somewhat disconcerting how an increasing number of different lines of highly credible and logical analysis come to essentially the same conclusion: that economic growth is coming to an end, and that massive changes will result from that. Larsson’s suggestions for finding economic growth in novel areas and ways, such as secondary qualities, proper support of small businesses and local currencies, may go some way of softening the landing for at least some industries – I would, however, be more skeptical that it could prevent growth from stopping, taking all the other challenges into account. But I would agree with Bernard Lietaer, whose work Larsson references, in that the “Official Future” scenario of the business-as-usual type for the future of our economies is, by far, the least probable alternative future.

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