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72 5 The Growth Imperative Prosperity or Poverty Joel Magnuson Generating a measurable rate of return for investors is the core element of any capitalist economy. Investors derive their income from percentage returns on stocks, bonds, or other business investments. If investors do not get these expected returns, they will sell their investments and seek returns elsewhere. By disinvesting, or cashing out, investors can drive down the book value of a company, which can ultimately cause the business to fail. To prevent this outcome, the prime directive of a capitalist business is to sustain robust returns and growth of financial wealth for their investors. This is the paramount goal of capitalist enterprise. To provide these returns for their investors, businesses essentially have three choices. One would be to pay investors with money held in their business bank accounts. This choice, however, would amount to self-impoverishment, as businesses would make themselves poorer by drawing down their bank account balances , just as a person would become poorer by trying to live on a savings account. Another choice would be to generate profits from sales growth gained by taking market share away from competitors. Although the threat of losing market share in a competitive marketplace can force an individual business to be innovative and create new cost-saving technology, one business’s gain is another business’s loss in a zero-sum strategy. This would ultimately be self-destructive to the interest of the capitalist class as a whole. The third and only viable, long-term choice would be for each business to generate its returns by producing and selling more goods and services for profit. The Growth Imperative | 73 In other words, driven by the financial necessity of providing investors with a robust rate of return, capitalist businesses must also sustain a robust rate of growth in the production and sale of goods and services. Financial growth is the taskmaster that drives growth in real production. To sustain ongoing growth in production and sales, businesses must use a portion of their profits for reinvestment in capital stock (plant, equipment, inventory, etc.). With more capital stock, businesses can increase their production capacity to meet the demands of new growth in output and sales. As the funds for making these capital investments are mostly derived from profits on sales, sales growth and investment are locked into a dynamic relationship: profits from current sales provide financing for new investments, these new investments drive future production and future sales, and future sales and profits will finance yet more investments, and so on. Looking at the system in its entirety, keeping the engine of the economic machine running requires a steady flow in real investments that are derived from a steady rise in production and sales. In the other words, the economy has to keep growing. This growth imperative is systemic and extends beyond merely generating returns for investors. Not only are individual businesses driven to grow, but also the entire capitalist system depends on it. If the dynamic relationship between investment and growth were to break down, the economic system would break down as well. For example, if sales growth were to slow down, the source of funds for capital investment would begin to evaporate and new investments in capital stock would begin to fall. Falling investments would lead to an overall slowdown in production and sales. With falling sales, incomes would fall, and a downward vicious circle of contraction would follow. Contraction or recession, if sustained over time, can turn into a depression, and depression signifies systemic failure of the capitalist system. As the capitalist machine speeds up or slows down, the changes are felt in every corner of the economy. Every institution within the US economy is connected to every other institution as parts in the machine, and all have evolved to be dependent on the growth imperative. Therefore, if the economy grows, there is a chorus of cheers. Consumers look to growth because it means more goods and services available in markets; workers see growing job opportunities and rising incomes; public agencies receive more money from increased sales and income tax revenue to pay for police, schools, and roads; nonprofits receive more donations and grants from rising incomes; bank loans are repaid; and, most importantly, investors’ profits are realized. When growth turns to contraction (recession), however, trepidation is felt by all. Workers experience layoffs and default on their bank loans; falling profits and share prices in the stock markets deplete the value...

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