A popular trope about market-based economies is that they would require infinite growth, putting them in inherent contradiction with a natural world of (limited) resources. Jonathan Cobb has a video on YouTube that makes this case.
He states that as the production of goods and services increases, the change in supply would tend to force down market prices and likewise the return of capital. He states this is a feature of a capitalist economy, but the criticism is indeed directed at the market system generally, not just an economy predominantly of wage labor. As he states, deplenishing returns cause firms to seek new, untapped markets, playing into what he calls the “growth imperative.” Eventually, firms must employ the military might of nation-states to conquer new markets.
Cobb is correct that an unencumbered market system does tend to experience falling profits. If that meant a market-based economy is doomed to crash as access to new markets is slowed or severed, that would be a mortal criticism of the market process, but a series of false premises critically wreck the argument.
Before getting to those, I should mention that on its own terms, the argument is fallacious. The idea is that because the firms that make up a market economy require constant growth (according to Cobb), the market system itself would too. However, this is not necessarily the case. From Wikipedia, “The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part).” It could be the case, as is true in any actually existing semi-free economic system, that firms come and go, developing and replacing products and supplanting competitors in the process. While reaching the same customer base, relatively more successful firms and start-ups can and have continuously taken the place of less successful ones.
But couldn’t it be that at some point, maybe in an isolated community, all the companies have so saturated the economy with goods that profit margins are extremely low or non-existent? First, as a consumer, what would be wrong with that? But if that were the case and consumer product prices were so low, capital would be freed up to develop new goods that people couldn’t afford otherwise. That’s nothing catastrophic and utilizes the same market size.
About the False Premises
I think I’ve debunked the argument on its own terms, but I spotted a few unstated premises that should be examined too.
One false premise is that firms are acting with perfect or practically perfect knowledge. For profits to have reached zero, firms must have a full account of consumer demand, supply volatility, and a thousand other concurring factors of an industrial economy. In reality, the future is unknown to some degree, so there is a certain element of risk. Better entrepreneurs can forecast future consumer preferences or changes in production factors. If the market were fixed in size, there would still be room for firms to profit from better forecasting future market conditions.
A second false premise is that market conditions are unchanging, that time stands still. All else remaining equal (that is, if no products were developed, no customers or competitors were born or died or moved, consumers didn’t changed their tastes, no additional savings or investments were secured, no technology was created or became obsolete, and no knowledge or research was discovered), profits would tend to fall to zero as supply of a good increased. (It could never reach zero profit, for the reason I mentioned in the paragraph above.) Still, the price of the end consumer product would tend to fall at a slower rate than the cost of resources necessary to manufacture that product. As capital saved or formerly used for less profitable purposes became available, more capital-intensive stages of production (like the earlier stages of production) could expand in the place of less capital-intense ones, allowing for the cost of the factors of production at each earlier stage to fall to a greater extent than later stages. In basic terms, the production costs would fall more quickly than the product price, leaving the possibility for profit to expand as prices fell.
Recasting the ‘Growth Imperative’
I believe I’ve show how the argument about a constant need for new markets is self-defeating and contains faulty premises. But perhaps the growth imperative instead is about an ever-present need to expand profits. This would be no better. A well-operated for-profit firm pursues wealth maximization. The concepts of profit and wealth are related, but not the same. Firms must demonstrate to investors that their resources are being put, according to consumer preferences, to the most urgent uses. They are concerned with the risk and uncertainty of its activities, which profit maximization ignores. In some cases, for-profit firms determine that forgoing some short-term profit would be better in the long run, anticipating that the proportion of assets to liabilities would increase.
The mindset that people want to improve their standard of living isn’t limited to a market economy. If this is the argument, it’s really a misplaced argument in favor of stagnation (euphemistically called “sustainability”) and placing some other value over the life of human beings.
The consumption of goods doesn’t destroy matter, but transforms it. We make the most of the world around us by using the judgement of our free minds to transform matter (in forms often thought to be useless previously) into resources for our betterment. Falling prices, product innovation, and resource economizing are not bugs of a free(d) market system, but a feature. I’m the first to concede that these are not fully utilized features, but that is because of systematic efforts veering those benefits to people with political pull.
Who Plans Whom? 