The Math of Ethical Growth

I listened to this conversation between Nathan Schneider and Marjorie Kelly this week, about her new book Wealth Supremacy and why simply trying to build more ethical economic entities is insufficient. It’s a retrospective look at the evolution of her own thinking, which has been very solutions oriented, and focused on bringing additional values into business, either through entities like B-corps or the recently much maligned ESG initiatives. One thing she seemed particularly regretful about was falling into the trap of using the framing of business to advocate for these kinds of changes: accepting that the profit maximization is the most appropriate metric, and then making the case that more sustainable, equitable, diverse, egalitarian etc. businesses are more profitable, and therefore those attributes should be more widespread, even within the very narrow logic of Actually Existing Capitalism.

On one level, it would be awfully convenient if that were true, and in the context of the Long Algorithm I think it should probably be our goal to create an economy where it is true by construction: through the laws, taxes, markets, policies and social norms we adopt. But in general it doesn’t seem like that’s the world we live in right now. Extractive, monopolistic, wealth-concentrating businesses still seem to have some pretty high margins, and many folks arguing for more ethical, sustainable, equitable business have said that a lower rate of return might be acceptable or even necessary.

Mathematically, I don’t think that works out.

We have to let go of the idea of maximizing returns to capital. If a corporation will do something that’s beneficial to sustainability and it breaks even… why isn’t that good enough?

Marjorie Kelly

If you have two segments of the economy with different approaches, and one of them has a higher exponential growth rate then in the long run it will come to dominate, even if it starts out as a very small enclave. Right now (unsurprisingly) the chunk of the economy that tries to maximize its growth at all costs grows faster. And has grown faster for the last 150-250 years. So it is almost the entire economy.

Any alternative model that grows more slowly, and at this point necessarily starts out as a small fraction of the overall economy, will become an ever smaller fraction of the economy over time. Even if it grows in absolute terms! So if you want to transition from a dominant, fast-growing economic model to something else, you either need that something else to grow even faster, or you need to kneecap the dominant, fast-growing segment.

Which sounds like a pretty unpopular proposal to a lot of people.

But then, what fraction of the prevailing “fast growth” is attributable to the liquidation of natural resources, or the pervasive externalization of costs, or monopoly rents, or the arbitrary political power imbalance between capital and labor? If our laws didn’t systematically advantage capital by letting accumulate this extracted wealth and recycle it to produce more of the same type of “growth” maybe it wouldn’t be growing as fast.

But if only some people or companies choose to adopt more just and sustainable practices, and as a result they grow more slowly, they will eventually die out in relative terms as the less constrained organizations that don’t do it will grow faster and ultimately dominate.

Except of course they already dominate. In the US the wealthiest 10% of people own about 70% of everything:

  • The top 0.1% own 12.8% of all wealth.
  • The remainder of the top 1% owns another 18.6%.
  • The remainder of the top 10% owns another 37.6%.

So you either have to convince all of them to behave differently, or you have to take a lot of that wealth away from them and ensure that it ends up invested in another economic system. It could be a one-time redistribution, if the same kind of extraction and concentration simply isn’t going to be allowed going forward. Or it could be an ongoing process like Piketty’s progressive wealth tax, if that’s more politically feasible, or you believe there’s some societal value that comes from striving for greater wealth within some bounds on the overall wealth concentration.

You can imagine separating sustainability and wealth concentration into separate issues — if you don’t care about the concentration, then you can just make sustainable investments the ones that perform better, and the existing wealth will be directed toward sustainable things, but you’ll end up replicating the existing wealth and anti-democratic power imbalances.

Systemically, maybe a more interesting questions is: what would happen if we enacted polices that ensured the distributive economy had the higher growth rate? Like what if people could choose whether they wanted to invest in an economy with a lower expected rate of return, but a higher dispersion in individual economic outcomes, vs. an economy where nobody gets super rich and the overall rate of return is higher?

I honestly don’t know which one people would pick! In the US people are weirdly fixated on outcomes at the upper tail of the distribution, rather than the lower 50% of the population where nobody owns anything. It’s like playing roulette — the expected value is negative, but you’ve got an 11.5% chance of multiplying your money by a factor of 8 if you just bet on red 3 times in a row. And people play roulette, so probably some people would prefer to participate in a low-growth, high-inequality economy.

Systemically, it wouldn’t matter that much. If the distributive segment of the economy grows faster, and the fraction of the population that’s prone to gambling is pretty stable, then over time the distributive economy would dominate and the unicorn-hunting VCs would be relegated to their own quirky corner.

Redistribution vs. Predistribution

Mathematically this isn’t so different from a progressive wealth tax, which intentionally limits the rate of growth of wealth that has already been concentrated by confiscating some portion of it every year, and increasing the amount that is confiscated in proportion to the level of confiscation. But qualitatively, a confiscatory tax pushes our psychological loss aversion buttons. The money was mine, but then they took it away.

If we instead had financing, tax, and governance polices that encouraged cooperative capital formation, employee owned companies, stakeholder enterprises, steward ownership trusts and other distributive economic models more profitable than the wealth-concentrating alternatives then the egalitarian segment of the economy would ultimately dominate. This kind of predistribution isn’t a new idea, but I think making distributive structures more profitable overall than wealth concentrating structures is an important threshold to consider where the overall behavior of the system might change.

A Civilization of Gamblers

Collectively, I suspect we’re already making a version of the choice posed above between low-growth wealth-concentration, and high-growth wealth-distribution. If we were to account for the socialized costs of our current economy, and ignored the sources of “growth” that are really just zero-sum wealth transfers across an artificial boundary into the portion of our society and biosphere that we’ve labeled The Economy, how much lower would the real rate of economic growth be? Would it even be positive?

The real long-term driver of economic growth and human development is the creation of knowledge, which once produced can be made available to everybody at zero marginal cost. Because we try to maximize economic growth, but in calculating our metric of growth we ignore a bunch of enormous externalities and count transfers of natural resources and commercialization of previously non-commercial activities, we’re choosing to do a lot of the wrong things.

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Zane Selvans

A former space explorer, now marooned on a beautiful, dying world.

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