Degrowth scholarship calls for reducing less-necessary production in rich countries to enable faster decarbonization and reverse other ecological pressures. But how can this be achieved? What is the mechanism? For many years ecological economists advocated setting “caps” on resource use, declining to levels that are compatible with ecological goals. This is a nice idea in the abstract, but it would be extremely difficult to implement. How do you impose the cap? How do you distribute resources within it? Who gets how much?
There is a simpler and more effective approach: credit guidance. The idea here is to impose rules that limit the quantity of finance that commercial banks can invest in problem sectors. For example, credit guidance can be used to scale down commercial investment in fossil fuel production on a binding, annual schedule. But it can also be used to reduce other destructive and unnecessary industries: SUVs, mansions, cruise ships, private jets, industrial beef, dangerous plastics, fast fashion, weapons, advertising, etc.
To grasp the power of this, and why it is needed, we need to understand something about money. Money represents command over production. Whoever issues currency – whoever creates money – can mobilize production to do whatever they want. This power is held by states and should be understood as a public good. After all, what is at stake is the mobilization of our collective labour and the common resources of our planet. But under capitalism, the power of money creation is largely franchised out to commercial banks that create money in the form of credit when they make loans.
Wielding the power of credit, commercial banks get to determine the allocation of investment and therefore determine what gets produced. They make these decisions based on whatever production is most profitable, regardless of whether it is beneficial or destructive. As a result, we get massive investment in things like fossil fuels, beef and SUVs, because these things are highly profitable to capital, and chronic underinvestment in necessary sectors like renewable energy, regenerative agriculture and public transit, because these are less profitable or not profitable at all.
This dynamic is what explains the fact that high-income countries – like the United States and Britain – are characterized by extremely high levels of resource use and yet still fail to meet many basic human needs. It is because investment is controlled in an undemocratic way, and is totally unaccountable to society.
Credit guidance can help deal with this problem. We need a democratically ratified framework to guide private investment in line with social and ecological objectives rather than just profit maximization. What are our main goals and values as a society? What do we need to accomplish? What forms of production should be increased in order to improve human well-being? What forms of production are destructive and unnecessary and should be scaled down? These questions should be democratically determined and a credit guidance framework should be established accordingly.
This is not a novel idea. Credit guidance was a basic principle of industrial policy in the middle of the 20th century. It is how states built up strategic industries, public services and national infrastructures when capital was unwilling or incapable of doing so. As we now grapple with the question of how to improve social progress while also reducing excess energy use and achieving ecological objectives, it needs to be on the table.
So, forget imposing resource caps as such. We need to set targets for reduced resource use, yes. And then use credit guidance to adjust investment flows accordingly, until the targets are achieved.
Of course, commercial credit is not the only source of investment in the economy. Large firms can also draw on their accumulated profits to make investments. The fossil fuel industry is a good example of this: they regularly use windfall profits to expand production, or to invest in other ventures that are profitable to them, even if they are clearly harmful to humanity and the rest of the living world. This is not acceptable. The accumulated profits derive from production using our labour and our resources, and the investments mobilize our labour and our resources. We should have a democratic say over investment objectives.
Therefore, the credit guidance framework should be expanded to include investment guidance too. The investments of major firms should be in alignment with democratically ratified objectives, values and priorities. For instance, under such an arrangement large corporations would be required to invest a certain share of their profits in, say, renewable energy expansion.
But while commercial investments – whether by banks or major firms – can be leveraged to produce things that are less profitable, they cannot be leveraged to produce things that are not profitable at all. For that, we need public investment. Any government that has sufficient monetary sovereignty can issue the national currency to mobilize production to do anything that we need, totally regardless of whether or not it is profitable. This power can be used to fund a job guarantee, to build universal public services, to insulate homes, to innovate more efficient technologies, etc.
Increasing public finance like this only risks causing inflation if the new production stretches the productive capacity of the economy. But this risk can be avoided entirely by reducing other, less-necessary forms of production, and this is where the credit guidance framework provides an additional benefit. It is a mechanism for inflation control that is more powerful – and less destructive to people’s lives – than the blanket interest-rate hikes that our central banks presently use.
The challenges we face are not insurmountable. We already know what needs to be done, the problem is that we do not have control over our own productive capacities and, as a result, they are woefully misallocated. This approach – credit/investment guidance and public finance – democratizes the power of money and therefore democratizes power over our collective productive capacities. It would enable us to radically accelerate improvements in people’s everyday lives and social outcomes, and radically accelerate progress toward decarbonization and ecological sustainbility.
Credit guidance strategies should be added to the other, more conventional tools that ecological economists have emphasized in the past. One is progressive taxation, which can cut the purchasing power of the rich and reduce their unnecessary consumption, and can also be used to target particular products (such as harmful products or luxury products) that we want to reduce. The second tool is legislation to ban planned obsolescence, increase product lifespans, and establish rights to repair. Together, these three can enable us to achieve the targeted downscaling that degrowth calls for.
*Thanks to Omer Tayyab for discussions about investment guidance. Thanks also to Charles Stevenson for comments on an earlier draft. We have a co-authored piece on credit guidance published in Foreign Policy.