Wages growth, inflation, interest rates and unemployment are at all-time lows. Traditional economic models are not working. How can small business thrive in a low-growth economy?
Many small business owners find it unhelpful to engage with macro-economic policy. It seems largely irrelevant to our frame of operation. Throughout the rise and fall of empire, fashions in economic theory and the fickle passions of rulers, taverns and cafes, bakers and tailors, butchers and milliners have flourished. Small businesses dominated the main thoroughfares and side streets of the capitals of every civilisation.
People need to eat, to dress, to trade regardless of the forces shaping the geopolitics of the day. Every army has its camp followers; providing the services soldiers demand, at a price.
Of course, retail markets flourish in wealthy, successful empires and struggle when an empire is on its knees. The recent economic crisis in Greece was marked by the absence of advertising in the streets and the threadbare nature of famous retail strips. Similarly, the depression years in Australia and the US showed a dramatic shrinkage in retail activity. Nevertheless, some businesses survived the tough times, building their brands and brand loyalty or simply eking out an existence in their community.
We face an era where globalisation and online trading have undermined many of the roles filled traditionally by small business. Trade is booming, but many small businesses are not. On top of that, we now face challenges to the geopolitical framework, the availability and price of resources and the natural environment that supports and nourishes us.
How best to prepare for this apparently perfect storm?
Is zero-waste enough?
The notion of the Circular Economy is that we can no longer continue the extractive practices of the linear economy; harvesting resources, extracting the most profitable elements and throwing the remainder away. We need to emulate ecosystems, ensuring that what we don’t use ourselves is taken advantage of by another member of the eco-system. A rainforest throws nothing away, clean water flows down its rivers, to be returned by the water cycle. It is a net producer of oxygen and consumes only sunshine. Everything else cycles around within the closed ecosystem.
Implicit in our adoption of this model is the twin notions that the planetary systems that support us can only provide a finite amount of resources and survive a certain level of contamination. To preserve the supportive capacity of those systems, we must limit the extraction of raw materials and the production of waste.
Therefore, the primary focus of the current wave of Circular Economy practitioners is, justifiably, the elimination of waste through re-use, reduction and recycling.
There is an underlying problem, though, that this focus does not capture. That problem is our addiction to growth.
The challenge of growth
Put simply, the challenge of continuous growth is that we live on a finite planet and, at some point, we reach the limit of the planet to support us and so must stop population and consumption growth. This was succinctly framed by Malthus in the eighteenth century when he compared human populations to rabbits on a desert island, and the cycles of population boom and bust that characterise them. His concluding observation was that only some moral imperative could prevent humans from facing the same fate.
David Suzuki recently reframed the problem using a test-tube of nutrients and a population of bacteria that is analysed further under the mathematics of growth. “Eventually, the bacteria will consume 100% of the resources in the test-tube” he notes.
The ability of technology to solve any shortages that arose over the intervening centuries discredited Malthus so completely, that scientists (such as the Club of Rome, writing in the sixties that humanity faced major challenges by the mid-twenty first century) have been largely ignored as alarmist. Indeed, it is a defining characteristic of many contemporary, populist movements around the world that they accuse globalist governments of threatening the rights of ordinary people to consume whatever they want in the name of fictional crises that have been produced simply to scare us into submission. The rhetoric pits personal freedoms against a mythical global good.
At the heart of this hubris is our conviction that we have conquered nature; we confront global collapse as interplanetary gods waving our magical trident to perform geo-engineering on Earth or providing an escape to Mars. This is the type of desperation that led the Easter Islanders to construct huge stone statues in a vain attempt to survive without fresh water.
As a civilisation we can only survive if those of us who can see the big picture, can provide a clear portrait of a radically changed economic system with a complete understanding of what this change means for ordinary people.
The development of tools for small business to thrive in a circular economy is one step in that larger process.
Our dependence on growth
In 2008 I interviewed Dick Smith about his attempts to run Australian Geographic as a non-growth company and Dick Smith Foods as a bulwark against the damage globalisation might be doing to Australia’s food sovereignty.
Among the difficulties he faced at Australian Geographic were rising costs of both overheads and supplies, staff expectations for advancement and the ongoing need for capital investment. Ultimately he sold Australian Geographic as a going concern and the business model reverted to a traditional membership publishing one.
He also conceded defeat of the mission for Dick Smith Foods when the Green family sold their quite sizable food processing business to American interests.
“I remain a capitalist,” he told me, “No other system has provided so much advantage for so many people, but I am not sure how we can avoid its cycles of boom and bust.”
Given such a long period of economic growth, the scale of an imminent downturn is somewhat frightening.
To date, we have assumed an underlying growth in the economy to meet many of our expectations that life will improve over time. It is important to analyse those expectations so that we can better prepare to deal with the changes we face.
The mathematics of growth
Earlier I asserted that the traditional 25 year mortgage is based on a three percent inflation rate. That is because an annual three percent increase results in a doubling of the value of your asset every 25 years. A ten percent increase doubles the value every seven years. This is the basis of exponential growth. A small increase in the rate of growth, reduces the time it takes to double the value of the asset.
David Suzuki uses this to demonstrate the impact of exponential growth in his famous test tube example. You take a test tube full of a nutrient solution and you add a bacteria that reproduces every second, consuming some nutrients to do so. The population of bacteria doubles each second. At the beginning the test tube is full of nutrients and has one bacterium. At some point, the end of growth (E), the test tube is empty of nutrients and so the population of bacteria cannot grow and will collapse. One second before that (E-1), the test tube will be half full of nutrients and will have half the possible maximum number of bacteria (E-1=50%). Five seconds before the end of growth (E-5) the number of bacteria will be 3% of the theoretical maximum. Do the maths: 50, 25, 12.5, 6.25, 3.125. (E-5=3%)
He puts it this way, “At 3% of the theoretical maximum, most of the bacteria will be blissfully unaware that they are about to go extinct. There is 97% of room for growth and plenty of nutrients. Nothing’s wrong, they will say.”
He makes the point that with the human population doubling every 25 years and many resources already in short supply, most scientists concur that we are in the final moments of a major collapse. “We are currently much closer than the five second point of the test tube example.”
He extends the analogy. “Let us say that a few brilliant bacteria in the test tube have explored the world around them and found three more nutrient laden test tubes nearby. Imagine that they decide to use some of the diminishing resources to go to Mars. Those three test tubes could expand the life of the colony by two seconds! This is not a new beginning, it is just a slight delay of the end.”
The point is that despite our individual and systemic dependence on continous growth, it is not sustainable. We cannot afford it because it leads directly to a collapse of the systems on which we depend.
As a result, we cannot assume a background of growth as the basis of our future planning.
The instinctive mantra of political parties that their role is to nurture and manage economic growth is a convenient fiction in the face of a radical and unpalatable truth. It is one of the reasons we no longer trust them. We know the premise rings hollow.
The role of debt
There is a very simple reason that governments and opposition parties continually talk about economic growth as the central plank in a capitalist democracy. That is, the financial system depends on it.
It is impossible to make a profit by lending money to someone unless they pay you interest. For the borrower to justify those interest payments they must be making more money from their commercial activity than the money costs them.
If you borrow a million dollars to buy a home in Sydney you will pay, over 25 years, another million in interest. If the house has not doubled in value by the time you have paid it off, you have lost money on the deal.
This simple arithmetic is the basis of our housing market, the 25 year loan and the preferred CPI increase of 3%. If inflation sits at 3% then home owners can afford to buy houses, rents are about half the cost of having a mortgage but someone paying off a mortgage pulls in front after 25 years, because they can now live in their property rent free.
That model has been seriously disrupted over the last two decades.
The same logic applies to commercial lending, the share market and international currency exchanges. Without continuous growth, the debt model collapses and so does our current financial system.
In the light of this it is interesting to consider that charging interest on loans was once illegal in Christian Europe (it was known as the crime of Ursury) and remains banned in Islam. The rise of commerce and the collapse of the Church in the face of the industrial revolution has radically changed our thinking about the role of debt.
Is degrowth possible?
There are plenty of organisations promoting the virtues of reducing our footprint: Fly less, buy less, use less, apply thrift, declutter, destress, spend nothing …. All of this is a retailer’s nightmare.
The driving logic of these campaigns is compelling. Consumption is not happiness, the ecosystem that nurtures us is overloaded, we have to reduce our footprint to survive. It is not a question of whether we can implement degrowth, it is a matter of how we survive in the face of a collapse in growth. Degrowth now, is simply an insurance policy against future systemic failure.
How on earth is this view compatible with Thriving in a Circular Economy?
The simple answer is to look at a natural ecosystem like a rainforest.
Overall the forest only consumes sunlight, it captures rainwater and releases clean fresh water into the streams that run out of it. It produces oxygen and consumes carbon from the atmosphere. Other than that, it is a closed system.
But it grows.
It teems with life.
See the article Unpacking the Circular Economy for a detailed analysis about how linear systems within an ecosystem contribute to a circular economy. Ultimately, each of us can grow as we need to, but somehow we have to particpate in the overall ecosystem.
We cannot grow exponentially. We cannot grow at the expense of future generations. But we can grow vigorously, as long as we are part of an ecosystem and ensure that our waste is someone else’s food.
The limits of growth are simply that we cannot grow by exploiting the major resources and throwing the rest away – unless we have an army of parasites, camp followers and dung beetles. Most importantly, those dung beetles, camp followers and parasites must thrive as well. There cannot be a pile of poison at the end of the line which no-one can touch, be accountable for or live with.
That is the condition of entry into the circular economy.
So, the tools of survival?
Small business has a head start.
It is a member of its community. Its stakeholders are generally its staff and customers. If remote financial markets are stakeholders then it is not, for the purposes of this treatise, a small business. Using those stakeholders to build a community network allows the business owner to go beyond profit. Instead of measuring success by how much money you can siphon from the business, start measuring how much good will you have built in your community. It is that good will that will see you through the next depression.
The Koch brothers built a fossil fuel empire that has funded the conservative political movement in the US on the basis that Good Profit is generated by harnessing the goodwill of stakeholders, not by extracting money from them. While I have differences of opinion with them on what constitutes the moral good, I have no disagreement on the application of a moral framework to business. It is essential.
Building a community network is the way to amplify the influence and reach of your business and the perceived value of your brand. Build your community and they will help you build the business, regardless what happens in the macro-economic and geo-political climate.
Secondly, there are a range of very simple management tools that allow you to differentiate between building a sustainable business and participating in the illusion of continuous economic growth.
Some of them are simple, ancient adages. Cash is king, neither a lender nor a borrower be, a stitch in time saves nine.
Behind each of these straightforward observations are centuries of wisdom. By applying the management tools that flow from these simple pearls, you can avoid the crippling bondage of debt, disposable income, built in obsolescence and churn.
You can build a sustainable business that embeds your contribution to the community in the value that you provide to the community. This is the ultimate contribution to the world you live in, and unlike your bank balance, you can take it with you.
Think about it.
It is a truly great notion.