The Archdruid Report

Lies and Statistics

2009-11-25T20:00:00.000-08:00

Plenty of difficulties stand in the way of making sense of the economic realities we face at the end of the age of cheap abundant energy. Some of those difficulties are inevitable, to be sure. Our methods of producing goods and services are orders of magnitude more complex than those of previous civilizations, for example, and our economy relies on treating borrowing as wealth to an extent no other society has been harebrained enough to try before; these and other differences make the task of tracing the economic dimensions of the long road of decline and fall ahead of us unavoidably more difficult than they otherwise would be.

Still, there are other sources of difficulty that are entirely voluntary, and I want to talk about some of those self-inflicted blind spots just now. An economy is a system for exchanging goods and services, with all the irreducible variability that this involves. How many potatoes are equal in value to one haircut, for example, depends a good deal on the fact that no two potatoes and no two haircuts are exactly the same, and no two people can be counted on to place quite the same value on either one. Economics, however, is mostly about numbers that measure, in abstract terms, the exchange of potatoes and haircuts (and everything else, of course).

Economists rely implicitly on the claim that those numbers have some meaningful relationship with what’s actually going on when potato farmers get their hair cut and hairdressers order potato salad for lunch. As with any abstraction, a lot gets lost in the process, and sometimes what gets left out proves to be important enough to render the abstraction hopelessly misleading. That risk is hardwired into any process of mathematical modeling, of course, but there are at least two factors that can make it much worse.

The first, of course, is that the numbers can be deliberately juggled to support some agenda that has nothing to do with accurate portrayal of the underlying reality. The second, subtler and even more misleading, is that the presuppositions underlying the model can shape the choice of what’s measured in ways that suppress what’s actually going on in the underlying reality. Combine these two and what you get might best be described as speculative fiction mislabeled as useful data – and the combination of these two is exactly what has happened to the statistics on which too many contemporary economic and political decisions are based.

I suspect most people are aware by now that there’s something seriously askew with the economic statistics cited by government officials and media pundits. Recent rhetoric about “green shoots of recovery” is a case in point. In recent months, I’ve checked in with friends across the US, and nobody seems to be seeing even the slightest suggestion of an upturn in their own businesses or regions. Quite the contrary; all the anecdotal evidence suggests that the Great Recession is tightening its grip on the country as autumn closes in.

There’s a reason for the gap between these reports and the statistics. For decades now, the US government has systematically tinkered with economic figures to make unemployment look lower, inflation milder, and the country more prosperous. The tinkerings in question are perhaps the most enthusiastically bipartisan program in recent memory, encouraged by administrations and congresspeople from both sides of the aisle, and for good reason; life is easier for politicians of every stripe if they can claim to have made the economy work better. As Bernard Gross predicted back in the 1970s, economic indicators have been turned into “economic vindicators” that subordinate information content to public relations gimmickry. These manipulations haven’t been particularly secret, either;visit www.shadowstats.com and you can get the details, along with a nice set of statistics calculated the way the same numbers were done before massaging the figures turned into cosmetic surgery on a scale that would have made the late Michael Jackson gulp in disbelief.

These dubious habits have been duly pilloried in the blogosphere. Still, I'm not at all sure they are as misleading as the second set of distortions I want to discuss. When unemployment figures hold steady or sink modestly, but you and everyone you know are out of a job, it's at least obvious that something has gone haywire. Far more subtle, because less noticeable, are the biases that creep in because people are watching the wrong set of numbers entirely.

Consider the fuss made in economic circles about productivity. When productivity goes up, politicians and executives preen themselves; when it goes down, or even when it doesn't increase as fast as current theory says it ought, the cry goes up for more government largesse to get it rising again. Everyone wants the economy to be more productive, right? The devil, though, has his usual residence among the details, because the statistic used to measure productivity doesn't actually measure how productive the economy is.

Check out A Concise Guide to Macroeconomics by Harvard Business School professor David A. Moss: "The word [productivity] is commonly used as a shorthand for labor productivity, defined as output per worker hour (or, in some cases, as output per worker)." Output, here as always, is measured in dollars – usually, though not always, corrected for inflation – so what "productivity" means in practice is dollars of income per worker hour. Are there ways for a business to cut down on the employee hours per dollar of income without actually becoming more productive in any more meaningful sense? Of course, and most of them have been aggressively pursued in the hope of parading the magic number of a productivity increase before stockholders and the public.

Perhaps the simplest way to increase productivity along these lines is to change over from products that require high inputs of labor per dollar of value to those that require less. As a very rough generalization, manufacturing goods requires more labor input overall than providing services, and the biggest payoff per worker hour of all is in financial services – how much labor does it take, for example, to produce a credit swap with a theoretical value of ten million dollars? An economy that produces more credit swaps and fewer potatoes is in almost any real sense less productive, since the only value credit swaps have is that they can, under certain arbitrary conditions, be converted into funds that can buy concrete goods and services, such as potatoes; by the standards of productivity universal in the industrial world these days, however, replacing potato farmers with whatever you call the people who manufacture credit swaps (other than "bunco artists," that is) counts as an increase in productivity. I suspect this is one reason why the US auto industry got so heavily into finance in the run-up to the recent crash; GMAC's soaring productivity, measured in terms of criminally negligent loans per broker hour, probably did a lot to mask the anemic productivity gains available from the old-fashioned business of making cars.

As important as the misinformation generated by such arbitrary statistical constructs is the void that results because other, arguably more important figures are not being collected at all. In an age that will increasingly be constrained by energy limits, for example, a more useful measure of productivity might be energy productivity – that is, output per barrel of oil equivalent (BOE) of energy consumed. An economy that produces more value with less energy input is arguably an economy better suited to the downslope of Hubbert's peak, and the relative position of different nations, to say nothing of the trendline of their energy productivity over time, would provide useful information to governments, investors, and the general public alike. For all I know, somebody already calculates this figure, but I'm still waiting to see a politician or an executive crowing over the fact that the country now produces 2% more output per unit of energy.

Now it's true that a simplistic measurement of energy productivity would still make the production of credit swaps look like a better deal. This is one of the many places where the distinction already made in these essays between primary, secondary, and tertiary economies becomes crucial. To recap, the primary economy is nature itself, or specifically the natural processes that provide the human economy with about 3/4 of its total value; the secondary economy is the application of human labor to the production of goods and services; and the tertiary economy is the exchange of abstract units of value, such as money and credit, which serve to regulate the distribution of the goods and services produced by the secondary economy.

The economic statistics used today ignore the primary economy completely, measure the secondary economy purely in terms of the tertiary – calculating production in dollars, say, rather than potatoes and haircuts – and focus obsessively on the tertiary. This fixation means that if an economic policy boosts the tertiary economy, it looks like a good thing, even if that policy does actual harm to the secondary or the primary economies, as it very often does these days. Thus the choice of statistics to track isn't a neutral factor, or a simple one; if it echoes inaccurate presuppositions – for example, the fantasy that the human economy is independent of nature – it can feed those presuppositions right back in as a distorting factor into every economic decision we make.

How might this be corrected? One useful option, it seems to me, is to divide up several of the most important economic statistics into primary, secondary, and tertiary factors. (Of course the first step is to get honest numbers in the first place; governments aren't going to do this any time soon, for obvious reasons, but there's no reason why people and organizations outside of government can't make a start.) Consider, as a good example, what might be done with the gross domestic product.

To start with, it's probably a good idea to consider going back to the gross national product; this was quietly dropped in favor of the current measure some years back, because it puts a politically uncomfortable spotlight on America's economic dependence on the rest of the world. Whichever way that decision goes, the statisticians of some imaginary Bureau of Honest Figures might sort things out something like this:

The gross primary product or GPP might be the value of all unprocessed natural products at the moment they enter the economy – oil as it reaches the wellhead, coal as it leaves the mine, grain as it tumbles into the silo, and so on – minus all the costs incurred in drilling, mining, growing, and so on. (Those belong to the secondary economy.)

The gross secondary product or GSP might be the value of all goods and services in the economy, except for raw materials from nature and financial goods and services.

The gross tertiary product or GTP might be the value of all financial goods and services, and all money or money equivalents, produced by the economy.

The value of having these three separate numbers, instead of one gross domestic (or national) product, is that they can be compared to one another, and their shifts relative to one another can be tracked. If the GTP balloons and the other two products stay flat or decline, for example, that doesn't mean the country is getting wealthier; it means that the tertiary economy is inflating, and needs to have some air let out of it before it pops. If the GSP increases while the GPP stays flat, and the cost of extracting natural resources isn't soaring out of sight, then the economy is becoming more efficient at using natural resources, in which case the politicians and executives have good reason to preen themselves in public. Other relative shifts have other messages.

The point that has to be grasped, in this as in so many other contexts, is that the three economies, and the three kinds of wealth they produce, are not interchangeable. Trillions of dollars in credit swaps and derivatives will not keep people from starving in the streets if there's no food being grown and no housing being built, or maintained, or offered for sale or rent. The primary economy is fundamental to survival; the secondary economy is the source of real wealth; the tertiary economy is simply a way of measuring wealth and managing its distribution; and treating these three very different things as though they are one and the same makes rank economic folly almost impossible to avoid.

Now it deserves to be said that the chance that any such statistical scheme will be adopted in the United States under current political and social arrangements is effectively nonexistent. Far too many sacred cows would have to be put out to pasture or rounded up for slaughter first. Still, current political and social arrangements may turn out to be a good deal less permanent than they sometimes seem. What might replace them, here and elsewhere, is a topic I plan on exploring in a future essay here.

How Relocalization Worked

2009-11-18T15:14:00.000-08:00

One of the points that I’ve tried to make repeatedly in these essays is the place of history as a guide to what works. It’s a point that deserves repetition. A good many worldsaving plans now in circulation, however new the rhetoric that surrounds them, simply rehash proposals that were tried in the past and failed repeatedly; trying them yet again may thus not be the best use of our limited resources and time.

Of course there’s another side to history that’s more hopeful: something that worked well in the past can be a useful guide to what might work well in the future. I’d like to spend a little time discussing one example of this, partly because it ties into the theme of the current series of posts – the abject failure of current economic notions, and the options for replacing them with ideas that actually make sense – and partly because it addresses one of the more popular topics in the ongoing peak oil discussion, the need for economic relocalization as the age of cheap abundant energy comes to an end.

That relocalization needs to happen, and will happen, is clear. Among other things, it’s clear from history; when complex societies overshoot their resource bases and decline, one of the things that consistently happens is that centralized economic arrangements fall apart, long distance trade declines sharply, and the vast majority of what we now call consumer goods get made at home, or very close to home. Now of course that violates some of the conventional wisdom that governs economic decisions these days; centralized economic arrangements are thought to yield economies of scale that make them more profitable by definition than decentralized local arrangements.

When history conflicts with theory, though, it’s not history that’s wrong, so a second look at the conventional wisdom is in order. The economies of scale and resulting profits of centralized economic arrangements don’t happen by themselves. They depend, among other things, on transportation infrastructure. This doesn’t happen by itself, either; it happens because governments pay for it, for purposes of their own. The Roman roads that made the tightly integrated Roman economy possible, for example, and the interstate highway system that does the same thing for America, were not produced by entrepreneurs; they were created by central governments for military purposes. (The legislation that launched the interstate system in the US, for example, was pushed by the Department of Defense, which wrestled with transportation bottlenecks all through the Second World War.)

Government programs of this kind subsidize economic centralization. The same thing is true of other requirements for centralization – for example, the maintenance of public order, so that shipments of consumer goods can get from one side of the country to the other without being looted. Governments don’t establish police forces and defend their borders for the purpose of allowing businesses to ship goods safely over long distances, but businesses profit mightily from these indirect subsidies nonetheless.

When civilizations come unglued, in turn, all these indirect subsidies for economic centralization go away. Roads are no longer maintained, harbors silt up, bandits infest the countryside, migrant nations invade and carve out chunks of territory for their own, and so on. Centralization stops being profitable, because the indirect subsidies that make it profitable aren’t there any more.

Ugo Bardi has written a very readable summary of how this process unfolded in one of the best documented cases, the fall of the Roman Empire. The end of Rome was a process of radical relocalization, and the result was the Middle Ages. The Roman Empire handled defense by putting huge linear fortifications along its frontiers; the Middle Ages replaced this with fortifications around every city and baronial hall. The Roman Empire was a political unity where decisions affecting every person within its borders were made by bureaucrats in Rome. Medieval Europe was the antithesis of this, a patchwork of independent feudal kingdoms the size of a Roman province, which were internally divided into self-governing fiefs, those into still smaller fiefs, and so on, to the point that a single village with a fortified manor house could be an autonomous political unit with its own laws and the recognized right to wage war on its neighbors.

The same process of radical decentralization affected the economy as well. The Roman economy was just as centralized as the Roman polity; in major industries such as pottery, mass production at huge regional factories was the order of the day, and the products were shipped out via sea and land for anything up to a thousand miles to the end user. That came to a screeching halt when the roads weren’t repaired any more, the Mediterranean became pirate heaven, and too many of the end users were getting dispossessed, and often dismembered as well, by invading Visigoths. The economic system that evolved to fill the void left by Rome’s implosion was thus every bit as relocalized as a feudal barony, and for exactly the same reasons.

Here’s how it worked. Each city – and “city” in this context means anything down to a town of a few thousand people – was an independent economic center; it might have a few industries of more than local fame, but most of its business consisted of manufacturing and selling things to its own citizens and the surrounding countryside. The manufacturing and selling was managed by guilds, which were cooperatives of master craftsmen. To get into a guild-run profession, you had to serve an apprenticeship, usually seven years, during which you got room and board in exchange for learning the craft and working for your master; you then became a journeyman, and worked for a master for wages, until you could produce your masterpiece – yes, that’s where the word came from – which was an example of craftwork fine enough to convince the other masters to accept you as an equal. Then you became a master, with voting rights in the guild.

The guild had the legal responsibility under feudal municipal laws to establish minimum standards for the quality of goods, to regulate working hours and conditions, and to control prices. The economic theory of the time held that there was a “just price” for any good or service, usually the price that had been customary in the region since time out of mind, and the municipal authorities could be counted on to crack down on attempts to push prices above the just price unless there was some very pressing reason for it. Most forms of competition between masters were off limits; if you made your apprentices and journeymen work evenings and weekends to outproduce your competitors, for example, or sold goods below the just price, you’d get in trouble with the guild, and could be barred from doing business in the town. The only form of competition that was encouraged was to make and sell a superior product.

This was the secret weapon of the guild economy, and it helped drive an age of technical innovation. As Jean Gimpel showed conclusively in The Medieval Machine, the stereotype of the Middle Ages as a period of technological stagnation is completely off the mark. Medieval craftsmen invented the clock, the cannon, and the movable-type printing press, perfected the magnetic compass and the water wheel, and made massive improvements in everything from shipbuilding and steelmaking to architecture and windmills, just for starters. The competition between masters and guilds for market share in a legal setting that made quality and innovation the only fields of combat wasn’t the only force behind these transformations, to be sure – the medieval monastic system, which put a good fraction of intellectuals of both genders in settings where they could use their leisure for just about any purpose that could be chalked up to the greater glory of God, was also a potent factor – but it certainly played a massive role.

The guild system has nonetheless been a whipping boy for mainstream economists for a long time now. The person who started that fashion was none other than Adam Smith, whose The Wealth of Nations castigates the guilds of his time for what we’d now call antitrust violations. From within his own perspective, Smith had a point. The guilds were structured in a way that limited the total number of people who could work in any given business in any given town, and of course the just price principle kept prices from fluctuating along with supply and demand. Thus the prices paid for the goods or services produced by that business were higher, all things considered, than they would have been under the free market regime Smith advocated.

The problem with Smith’s analysis is that there are crucial issues involved that he didn’t address. He lived at a time when transportation was rapidly expanding, public order was more or less guaranteed, and the conditions for economic centralization were coming back into play. Thus the very different realities of limited, localized markets did not enter into his calculations. In the context of localized economics, a laissez-faire free market approach doesn’t produce improved access to better and cheaper goods and services, as Smith argued it should; instead, it makes it impossible to produce many kinds of goods and services at all.

Let’s take a specific example for the sake of clarity. A master blacksmith in a medieval town of 5000 people, say, was in no position to specialize in only one kind of ironwork. He might be better at fancy ironmongery than anyone else in town, for example, but most of the business that kept his shop open, his apprentices fed and clothed, and his journeymen paid was humbler stuff: nails, hinges, buckles, and the like. Most of this could be done by people with much less skill than our blacksmith; that’s why he had his apprentices make nails while he sat upstairs at the table with the local abbot and discussed the ironwork for a dizzyingly complex new cutting-edge technology, just introduced from overseas, called a clock.

The fact that most of his business could be done by relatively unskilled labor, though, left our blacksmith vulnerable to competition. His shop, with its specialized tools and its staff of apprentices and journeymen, was expensive to maintain. If somebody else who could only make nails, hinges, and buckles could open a smithy next door, and offer goods at a lower price, our blacksmith could be driven out of business, since the specialized work that only he could do wouldn’t be enough to pay his bills. The cut-rate blacksmith then becomes the only game in town – at least, until someone who limited his work to even cheaper products made at even lower costs cut into his profits. The resulting race to the bottom, in a small enough market, might end with nobody able to make a living as a blacksmith at all.

Thus in a restricted market where specialization is limited, a free market in which prices are set by supply and demand, and there are no barriers to entry, can make it impossible for many useful specialties to be economically viable at all. This is the problem that the guild system evolved to counter. By restricting the number of people who could enter any given trade, the guilds made sure that the income earned by master craftsmen was high enough to allow them to produce specialty products that were not needed in large enough quantities to provide a full time income. Since most of the money earned by a master craftsman was spent in the town and surrounding region – our blacksmith and his family would have needed bread from the baker, groceries from the grocer, meat from the butcher, and so on – the higher prices evened out; since nearly everyone in town was charging guild prices and earning guild incomes, no one was unfairly penalized.

Now of course the guild system did finally break down; by Adam Smith’s time, the economic conditions that made it the best option were a matter of distant memory, and other arrangements were arguably better suited to the new reality of easy transport and renewed economies of scale. Still, it’s interesting that in recent years, the same race to the bottom in which quality goods become unavailable and local communities suffer has taken place in nearly the same way in most of small-town America.

A torrent of cheap shoddy goods funneled through Wal-Mart and its ilk, in a close parallel to the cheap blacksmiths of the example, have driven local businesses out of existence and made the superior products and services once provided by those businesses effectively unavailable to a great many Americans. In theory, this produces a business environment that is more efficient and innovative; in practice, the efficiencies are by no means clear and the innovation seems mostly to involve the creation of ever more exotic and unstable financial instruments: not necessarily the sort of thing that our society is better off encouraging.

Advocates of relocalization in the age of peak oil may thus find it useful to keep the medieval example and its modern equivalent in mind while planning for the economics of the future. Relocalized communities must be economically viable or they will soon cease to exist, and while viable local communities will be possible in the future – just as they were in the Middle Ages – the steps that will be necessary to make them viable may require some serious rethinking of the habits that now shape our economic lives.

A Gesture from the Invisible Hand

2009-11-11T17:58:00.000-08:00

It’s been a long road, but we’ve finally reached the point in these essays at which it’s possible to start talking about some of the consequences of the primary economic fact of our time, the arrival of geological limits to increasing fossil fuel production. That’s as challenging a topic to discuss as it will be to live through, because it cannot be understood effectively from within the presuppositions that structure most of today’s economic thinking.

It’s common, for example, to hear well-intentioned people insist that the market, as a matter of course, will respond to restricted fossil fuel production by channeling investment funds either in more effective means of producing fossil fuels, on the one hand, or new energy sources on the other. The logic seems impeccable at first glance: as the price of oil, for example, goes up, the profit to be made by bringing more oil or oil substitutes onto the market goes up as well; investors eager to maximize their profits will therefore pour money into ventures producing oil and oil substitutes, and production will rise accordingly until the price comes back down.

That’s the logic of the invisible hand, first made famous by Adam Smith in The Wealth of Nations more than two centuries ago, and still central to most mainstream ideas of market economics. That logic owes much of its influence to the fact that in many cases, markets do in fact behave this way. Like any rule governing complex systems, though, it is far from foolproof, and it needs to be balanced by an awareness of the places where it fails to work.

Energy is one of those places: in some ways, the most important of all. Energy is not simply one commodity among others; it is the ur-commodity, the foundation for all economic activity. It follows laws of its own – the laws of thermodynamics, notably – which are not the same as the laws of economics, and when the two sets of laws come into conflict, the laws of thermodynamics win every time.

Consider an agrarian civilization that runs on sunlight, as every human society did until the rise of industrialism some three centuries ago. In energetic terms, part of the annual influx of solar energy is collected via agriculture, stored in the form of grain, and transformed into mechanical energy by feeding the grain to human laborers and draft animals. It's an efficient and resilient system, and under suitable conditions it can deploy astonishing amounts of energy; the Great Pyramid is one of the more obvious pieces of evidence for this fact.

Such civilizations normally develop thriving market economies in which a wide range of goods and services are exchanged. They also normally develop intricate social abstractions that manage the distribution of these goods and services, as well as the primary wealth that comes through agriculture from the sun, among their citizens. Both these, however, depend on the continued energy flow from sun to fields to granaries to human and animal labor forces. If something interrupts this flow -- say, a failure of the harvest -- the only option that allows for collective survival is to have enough solar energy stored in the granaries to take up the slack.

This is necessary because energy doesn't follow the ordinary rules of economic exchange. Most other commodities still exist after they've been exchanged for something else, and this makes exchanges reversible; for example, if you sell gold to buy marble, you can normally turn around and sell marble to buy gold. The invisible hand works here; if marble is in short supply, those who have gold and want marble may have to offer more gold for their choice of building materials, but the marble quarries will be working overtime to balance things out.

Energy is different. Once you turn the energy content of a few million bushels of grain into a pyramid, say, by using the grain to feed workers who cut and haul the stones, that energy is gone, and you cannot turn the pyramid back into grain; all you can do is wait until the next harvest. If that harvest fails, and the stored energy in the granaries has already been turned into pyramids, neither the market economy of goods and services or the abstract system of distributing goods and services can make up for it. Nor, of course, can you send an extra ten thousand workers into the fields if you don't have the grain to keep them alive.

The peoples of agrarian civilizations generally understood this. It's part of the tragedy of the modern world that most people nowadays do not, even though our situation is not all that different from theirs. We're just as dependent on energy inputs from nature, though ours include vast quantities of prehistoric sunlight, in the form of fossil fuels, as well as current solar energy in various forms; we've built atop that foundation our own kind of markets to exchange goods and services; and our abstract system for managing the distribution of goods and services -- money -- is as heavily wrapped in mythology as anything in the archaic civilizations of the past.

The particular form taken by money in the modern world has certain effects, however, not found in ancient systems. In the old agrarian civilizations, wealth consisted primarily of farmland and its products. The amount of farmland in a kingdom might increase slightly through warfare or investment in canal systems, though it might equally decrease if a war went badly or canals got wrecked by sandstorms; everybody hoped when the seed grain went into the fields that the result would be a bumper crop, but no one imagined that the grain stockpiled in the granaries would somehow multiply itself over time. Nowadays, by contrast, it's assumed as a matter of course that money ought automatically to produce more money.

That habit of thought has its roots in the three centuries of explosive economic growth that followed the birth of the industrial age. In an expanding economy, the amount of money in circulation needs to expand fast enough to roughly match the expansion in the range of goods and services for sale; when this fails to occur, the shortfall drives up interest rates (the cost of using money) and can cause economic contractions. This was a serious and recurring problem in the late 19th century, and led the reformers of the Progressive era to reshape industrial economies in ways that permitted the money supply to expand over time to match the expectation of growth. Once again, the invisible hand was at work, with some help from legislators: a demand for more money eventually give rise to a system that produced more money.

It's been pointed out by a number of commentators in the peak oil blogosphere that the most popular method for expanding the money supply -- the transformation of borrowing at interest from an occasional bad habit of the imprudent to the foundation of modern economic life -- has outlived its usefulness once an expanding economy driven by increasing fossil fuel production gives way to a contracting economy limited by decreasing fossil fuel production. This is quite true in an abstract sense, but there's a trap in the way of putting that sensible realization into practice.

The arrival of geological limits to increasing fossil fuel production places a burden on the economy, because the cost in energy, labor, and materials (rather than money) to extract fossil fuels does not depend on market forces. On average, it goes up over time, as easily accessible reserves are depleted and have to be replaced by those more difficult and costly to extract. Improved efficiencies and new technologies can counter that to a limited extent, but both these face the familiar problem of diminishing returns as the laws of thermodynamics, and other physical laws, come into play.

As a society nears the geological limits to production, in other words, a steadily growing fraction of its total supply of energy, resources, and labor have to be devoted to the task of bringing in the energy that keeps the entire economy moving. This percentage may be small at first, but it's effectively a tax in kind on every productive economic activity, and as it grows it makes productive economic activity less profitable. The process by which money produces more money consumes next to no energy, by contrast, and so financial investments don't lose ground due to rising energy costs.

This makes financial investments, on average, relatively more profitable than investing in the kinds of economic activity that use energy to produce nonfinancial goods and services. The higher the burden imposed by energy costs, the more sweeping the disparity becomes; the result, of course, is that individuals trying to maximize their own economic gains move their money out of investments in the productive economy of goods and services, and into the paper economy of finance.

Ironically, this happens just as a perpetually expanding money supply driven by mass borrowing at interest has become an anachronism unsuited to the new economic reality of energy contraction. It also guarantees that any attempt to limit the financial sphere of the economy will face mass opposition, not only from financiers, but from millions of ordinary citizens whose dream of a comfortable retirement depends on the hope that financial investments will outperform the faltering economy of goods and services. Meanwhile, just as the economy most needs massive reinvestment in productive capacity to retool itself for the very different world defined by contracting energy supplies, investment money seeking higher returns flees the productive economy for the realm of abstract paper wealth.

Nor will this effect be countered, as suggested by the well-intentioned people mentioned toward the beginning of this essay, by a flood of investment money going into energy production and bringing the cost of energy back down. Producing energy takes energy, and thus is just as subject to rising energy costs as any other productive activity; even as the price of oil goes up, the costs of extracting it or making some substitute for it rise in tandem and make investments in oil production or replacement no more lucrative than any other part of the productive economy. Oil that has already been extracted from the ground may be a good investment, and financial paper speculating on the future price of oil will likely be an excellent one, but neither of these help increase the supply of oil, or any oil substitute, flowing into the economy.

One intriguing detail of this scenario is that it has already affected the first major oil producer to reach peak oil -- yes, that would be the United States. It's unlikely to be accidental that in the wake of its own 1972 production peak, the American economy has followed exactly this trajectory of massive disinvestment in the productive economy and massive expansion of the paper economy of finance. Plenty of other factors played a role in that process, no doubt, but I suspect that the unsteady but inexorable rise in energy costs over the last forty years or so may have had much more to do with the gutting of the American economy than most people suspect.

If this is correct, now that petroleum production has encountered the same limits globally that put it into a decline here in the United States, the same pattern of disinvestment in the production of goods and services coupled with metastatic expansion of the financial sector may show up on a much broader scale. There are limits to how far it can go, of course, not least because financiers and retirees alike are fond of consumer goods now and then, but those limits have not been reached yet, not by a long shot. It's all too easy to foresee a future in which industry, agriculture, and every other sector of the economy that produces goods and services suffer from chronic underinvestment, energy costs continue rising, and collapsing infrastructure becomes a dominant factor in daily life, while the Wall Street Journal (printed in Shanghai by then) announces the emergence of the first half dozen quadrillionaires in the derivatives-of-derivatives-of-derivatives market.

Perhaps the most important limit in the way of such a rush toward economic absurdity is the simple fact that not every economy uses the individual decisions of investors pursuing private gain to allocate investment capital. It may not be accidental that quite a few of the world's most successful economies just now, with China well in the lead, make their investment decisions based at least in part on political, military, and strategic grounds, while the nation that preens itself most proudly on its market economy -- yes, that would be the United States again -- is lurching from one economic debacle to another.

It is unfortunately also the case that many of the nations that have extracted their investment decisions from the hands of a self-terminating market system are not exactly noted for their delicate care for human rights. If that proves to be the wave of the future -- and it may be worth noting that Oswald Spengler, among others, predicted that outcome -- then the invisible hand may end up giving us all the finger.

Harnessing Hippogriffs

2009-11-04T17:02:00.000-08:00

One of the more interesting aspects of writing these essays is that I can never predict in advance what will get me a flurry of outraged responses each week. It’s a fair bet that something always does; the collective conversation of the modern industrial world has become so overheated in the last decade or so that it’s difficult to say much of anything without getting somebody in a swivet; still, what it is that sets off the swiveteers routinely catches me by surprise.

Last week was no exception. Of all the things in that essay that might plausibly have launched the usual cries of outrage, the one that did so was an offhand reference to the free market fundamentalists of the Austrian school, many of whom insist that the proper solution to every economic problem is to let the market have its way. As it happens, in making that comment I was thinking specifically of Michael Shedlock aka Mish, whose blog is one of the handful I read daily.

Mish is among the most thoughtful and articulate proponents of the Austrian school in today's blogosphere, and he has an excellent eye for the economic news that matters – which is by and large exactly the economic news that the rest of the media avoids covering. Very nearly the only thing on his blog that makes me roll my eyes is his repeated insistence that the market is always right and government regulation is always wrong; no matter how berserk the market gets, its vagaries are for the best, and any problems should be corrected by privatizing even more government functions. Now of course Mish is hardly an official spokesperson for the Austrian school, as if there were such a thing, but he's not exactly alone in his insistence, either.

Enough people in the peak oil scene share similar views that it's probably necessary to say something about the free market and its potential for solving or creating problems during the twilight years of industrialism ahead of us. Any such comments need to be prefaced, though, by a reminder that a spectrum consists of something other than its two endpoints. Just as a great many people on the left have picked up the dubious habit of using labels such as "fascism" for any political system to the right of Hillary Clinton, a great many people on the right seem to have convinced themselves that any form of economic regulation at all is tantamount to some sort of neo-Marxist hobgoblin – a "socialist-communist-ecologist" system, to use a phrase that actually appeared in one of the comments fielded by last week's post.

Now it bears remembering that drowning is not the only alternative to dying of dehydration; there's a middle ground that is noticeably more pleasant than either. The same principle also applies in economics. The experiment of having government own all the means of production in an industrial society, along the lines proposed by Marx, received a thorough test at the hands of the Communist bloc and failed abjectly. At the same time, the experiment of having government keep its hands off the economy altogether in an industrial society, along the lines proposed by a great many free-market proponents these days, received an equally thorough test, and failed just as dismally. The test took place a little earlier; in America, it ran from the end of the Civil War into the first decade of the twentieth century, and the result was a catastrophic sequence of booms and busts, the transfer of most of the nation's wealth to a tiny minority of wealthy people, the bitter impoverishment of nearly everyone else, and a level of social unrest that included two presidential assassinations and so many bomb attacks on the rich and their families that bomb-throwing anarchists became a regular theme of music-hall songs.

Now it's always possible for theorists to contrast a Utopian portrait of a free-market economy against the gritty and unwelcome realities of extreme socialism, just as it's possible for people on the other side of the spectrum to contrast a Utopian portrait of a socialist economy against the equally gritty and unwelcome realities of unfettered capitalism. Both make great rhetorical strategies, since the human mind is easily misled by binary logic: if A is evil, it seems wholly reasonable to claim that the opposite of A must be good. The real world does not work that way, but this is hardly the only case in which rhetoric ignores reality.

The problem with the rhetoric, however, may be stated a bit more precisely: however pleasant they look on paper, free markets do not exist. Strictly speaking, they are as mythical as hippogriffs.

It occurs to me that some of my readers may not be as familiar with hippogriffs as they ought to be. (Tut, tut – what do they teach children these days?) For those who lack so basic an element in their education, a hippogriff is the offspring of a gryphon and a mare; it has the head, body, hind legs, and tail of a horse, and the forelimbs and wings of a giant eagle. Hippogriffs are said to be the strongest and swiftest of all flying creatures, which is why Astolpho rode one to the terrestrial paradise to recover Orlando's lost wits in Orlando Furioso, and why Juss rode one to the summit of Koshtra Pivrarcha to rescue Goldry Bluszco in The Worm Ouroboros. They are splendid creatures, no question; their only disadvantage, really, is the minor point that they don't happen to exist, and drawing up plans to use them as a new, energy-efficient means of air transport in the face of peak oil, for instance, will inevitably come to grief on that annoying little detail.

Free markets are subject to essentially the same little problem. There have been many examples of market economies in history that were not controlled by governments, but there have been no examples of market economies that were not controlled, and if one were to be set up, it would remain a free market for maybe a week at most. Adam Smith explained why in memorable language in The Wealth of Nations: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices." When a market is not controlled by government edicts, religious taboos, social customs, or some other outside force, it will quickly be controlled by combinations of individuals whose wealth and strategic position in the market enable them to maximize the economic benefits accruing to them, by squeezing out rivals, manipulating prices, buying up their suppliers, bribing government officials, and the like: that is to say, behaving the way capitalists behave whenever they are left to their own devices. This is what created the profoundly dysfunctional economy of Gilded Age America, and it also played a very large role in setting up the current debacle.

There's a rich irony here, in that the market economy portrayed in textbooks – in which buyers and sellers are numerous and independent enough that free competition regulates their interactions – is exactly the sort of commons that so many free market proponents insist should be eliminated wholesale in favor of private ownership. All commons systems, as Garrett Hardin pointed out in a famous essay a while back, are hideously vulnerable to abuse unless they are managed in ways that prevent individuals from exploiting the commons for their own private benefit. This year's Nobel laureate in economics, Elinor Ostrom, won her award for demonstrating that it's entirely possible to manage a commons so that Hardin's "tragedy of the commons" does not happen, and she's quite right – there have been many examples of successfully managed commons in history. Strip away the management that keeps it from being abused, however, and the free market, like any other commons, rapidly destroys itself.

This does not mean that the best, or for that matter the only, alternative to the unchecked rule of corporate robber barons is Marxist-style state ownership of the economy; once again, dying from heatstroke is not the only alternative to dying from hypothermia. It means, rather, that something between these two extremes might be worth trying, especially if it can be shown by historical evidence to work tolerably well in practice. Of course this is what history shows; broadly speaking, economies that leave the means of production in private hands, but use appropriate regulation to harness their energies to the public good, consistently produce more prosperity for more people than either unfettered capitalism or extreme socialism.

This being said, the midpoint between these extremes may not lie where today's conventional wisdom tends to place it. Consider an example from the not too distant past: a large industrial nation with a capitalist economy, but remarkably tough regulations restricting the growth of private fortunes and the abuses to which capitalist economies are so often prone. The wealthiest people in that nation paid more than two-thirds of their annual income in tax, and monopolistic practices on the part of corporations faced harsh and frequently applied judicial penalties. The financial sector was particularly tightly leashed: interest rates on savings were fixed by the government, usury laws put very low caps on the upper end of interest rates for loans, and hard legal barriers prevented banks from expanding out of local markets or crossing the firewall between consumer banking and the riskier world of corporate investment. Consumer credit was difficult enough to get, as a result, that most people did without it most of the time, using layaway plans and Christmas Club savings programs to afford large purchases.

According to the standard rhetoric of free market proponents these days, so rigidly controlled an economy ought by definition to be hopelessly stagnant and unproductive. This shows the separation of rhetoric from reality, however, for the nation I have just described was the United States during the presidency of Dwight D. Eisenhower: that is, during one of the most sustained periods of prosperity, innovation, economic development and international influence this nation has ever seen. Now of course there were other factors behind America's 1950s success, just as there were other factors behind the decline since then; still, it's worth noting that as the economic regulations of the 1950s have been dismantled – in every case, under the pretext of boosting American prosperity – the prosperity of most Americans has gone down, not up.

It makes a good measure of how far we have come as a nation – and not in a useful direction – that the economic policies of one of the most successful 20th century Republican administrations would be rejected by most of today's Democrats as too far to the left. A case could be made, in fact, that far and away the most sensible thing the US Congress could do today, in the face of an economy that has very nearly choked to death on its own bubbles, is to reenact the economic legislation in place in the 1950s, line for line. (When you're hiking in the woods, and discover that you've taken a trail that leads someplace you don't want to go, your best bet is normally to turn around and go back to the last place where you were still going in the right direction.)

Yet there's an interesting point that also ought to be made about the economic regulation of the 1950s. Outside of antitrust legislation, not that much of it applied to the economy of goods and services on any level, whether that of Mom and Pop grocery stores or big industrial conglomerates. The bulk of it, and very nearly all the strictest elements of it, focused on the financial industry. More broadly speaking, instead of regulating the production and consumption of goods and services, the economic policies of the Eisenhower era focused on regulating money: on ensuring that too much of it did not end up concentrated unproductively in too few hands, and on controlling its propensity to multiply as enthusiastically as rabbits on Viagra. The relative success of these measures points toward a distinction already made in these posts, and to practical steps that will be explored in next week's post.

Why Markets Fail

2009-10-28T19:15:00.000-07:00

It’s a safe bet that any public comment on the politics of peak oil, unless it sticks closely to one of a very few widely accepted opinions, will provide a good demonstration of the laws of thermodynamics by turning plenty of energy into waste heat. Last week’s Archdruid Report post was no exception. Between those who thought I was too hard on Cuba, those who thought I was too soft on Cuba, those who insisted America is already a fascist dictatorship, those who thought America would be better off as a fascist dictatorship, and a variety of less classifiable rants, I was well and truly denounced. My favorite for the week was a bit of online splutter that, having exhausted its author’s apparently limited vocabulary of profanity, wound up with the nastiest term he knew: “...you American!”

Those of my readers with a taste for wry humor may well have found all this as entertaining as I did. Still, this week’s essay will leave such amusements behind, and return to the theme I’ve been developing in recent posts, the reinvention of economics that will be necessary in an age of hard ecological limits and deindustrial decline. Vegetarians and animal rights activists take note: a certain number of sacred cows will have to be slaughtered and dissected in the course of that inquiry, and the process is unlikely to be either painless or clean.

Of the sanctified cattle facing a gruesome fate in the years ahead of us, perhaps the most important is that blue-ribbon heifer of modern economics, the belief in the infallibility of free markets. Back in 1776, Adam Smith’s The Wealth of Nations popularized the idea that free market exchanges offered a more efficient way of managing economic activity than custom or government regulation. The popularity of his arguments has waxed and waned over the years; it may come as no surprise that periods of general prosperity have seen the market’s alleged wisdom proclaimed to the skies, while periods of contraction have had the reverse effect.

The economic orthodoxy that has been welded in place in the western world since the 1950s, neoclassical economics, made a nuanced version of Smith’s theory central to its theories, arguing that aside from certain exceptions much discussed in the technical literature, people making rational decisions to maximize benefits to themselves will simultaneously maximize the benefits to everyone. The neoclassical synthesis has its virtues; you won’t find neoclassical economists claiming, as the free market fundamentalists of the Austrian school so often do, that the market is always right, even when its vagaries cause catastrophic human suffering. The concept of market failure is part of the neoclassical vocabulary, and some useful work has been done under the neoclassical umbrella to explain how it is that markets can fail to respond to crucial human needs, as they routinely do.

Still, the great problem with neoclassical economics is the one has already been discussed in these posts: its models have consistently failed to foresee devastating economic disasters that many people outside the economics profession could readily and accurately predict years in advance. The implosion of the world economy in 2008 is only the most recent case in point. One writer who surveyed the economics field in the aftermath of the crash noted with some asperity that fewer than two dozen economists anywhere in the world warned in advance of the gargantuan bubble of securitized debt that exploded that year.

On the contrary, economists by the score lined up during the bubble years to insist that the giddy financial innovations of the previous decade had banished risk from the market and prosperity was assured into the foreseeable future. They were of course quite wrong, and their failure to see disaster as it loomed up in front of them compares very poorly with the large number of people who used historical parallels to recognize what was happening and make uncomfortably precise forecasts of the results. (Keith Brand, who ran the lively HousingPanic blog straight through the bubble, memorably summarized those predictions: “Dear God, this is going to end so badly.”)

I have discussed in several earlier posts some of the reasons why the entire economics profession has been so prone to miss the obvious in such cases. Here, though, I want to focus on a reason for failure that’s specific to neoclassical economics. Since most of the economists who provide advice to governments come out of the neoclassical mainstream, this is hardly irrelevant to our prospects for the future, especially – as I intend to show – because the same blind spot that left so many pundits dining on a banquet of crow in recent months applies with even greater force to the crucial fact of our time, the arrival of peak oil.

The point I want to make here is a little different from the most common critique of neoclassical economics, though there is a connection. Many social critics have commented on the ease with which the neoclassical synthesis consistently ignores the interface between economic wealth and power. Even when people rationally seek to maximize benefits to themselves, after all, their options for doing so are very often tightly constrained by economic systems that have been manipulated to maximize the benefits going to someone else.

This is a pervasive problem in most human societies, and it’s worth noting that those societies that survive over the long term tend to be the ones that work out ways to keep too much wealth from piling up uselessly in the hands of those with more power than others. This is why hunter-gatherers have customary rules for sharing out the meat from a large kill, why chieftains in so many tribal societies maintain their positions of influence by lavish generosity, and why those nations that got through the last Great Depression intact did so by imposing sensible checks and balances on concentrated wealth – though most of those checks and balances in the United States were scrapped several decades ago, with utterly predictable results.

By neglecting and even arguing against these necessary redistributive processes, neoclassical economics has helped feed economic disparities, and these in turn have played a major role in driving cycles of boom and bust. It’s no accident that the most devastating speculative bubbles happen in places and times when the distribution of wealth is unusually lopsided, as it was in America, for example, in the 1920s and the period from 1990 to 2008. The connection here is simple: when wealth is widely distributed, more of it circulates in the productive economy of wages and consumer purchases; when wealth is concentrated in the hands of a few, more of it moves into the investment economy where the well-to-do keep their wealth, and a buildup of capital in the investment economy is one of the necessary preconditions for a speculative binge.

More broadly, concentrations of wealth can be cashed in for political influence, and political influence can be used to limit the economic choices available to others. Individuals can and do rationally choose to maximize the benefits available to them by exercising influence in this way, but the results can impose destructive inefficiencies on the whole economy. In effect, political manipulation of the economy by the rich for private gain does an end run around normal economic processes by way of the world of politics; what starts in the economic sphere, as a concentration of wealth, and ends there, as a distortion of the economic opportunities available to others, ducks through the political sphere in between.

A similar end run drives speculative bubbles, although here the noneconomic sphere involved is that of crowd psychology rather than politics. Very often, the choices made by participants in a bubble are not rational decisions that weigh costs against benefits; it’s not accidental that the first, and still one of the best, analyses of speculative binges and panics is titled Extraordinary Popular Delusions and the Madness of Crowds. Here again, a speculative bubble starts in the economic sphere, as a buildup of excessive wealth in the hands of investors, which drives the price of some favored class of assets out of its normal relationship with the rest of the economy, and it ends in the economic sphere, with the crater left by the assets in question as their price plunges roughly as far below the mean as it rose above it, dragging the rest of the economy with it. It’s the middle of the trajectory that passes through a particular form of crowd psychology, and since this is outside the economic sphere, neoclassical economics can’t deal with it.

This would be no problem if neoclassical economists by and large recognized these limitations. Unfortunately a great many of them do not, and the result is the classic type of myopia in which theory trumps reality. Since neoclassical theory claims that economic decisions are made by individuals acting freely and rationally to maximize the benefits accruing to them, it’s seemingly all too easy for economists to believe that any economic decision, no matter how harshly constrained by political power or wildly distorted by the delusional psychology of a bubble in full roar, must be a free and rational decision that will allow individuals to maximize their own benefits and benefit society as a whole.

Now of course, as mentioned in an earlier post, those who practice this sort of purblind thinking often find it very lucrative to do so. Economists who urged more free trade on the Third World at a time when “free trade” distorted by inequalities of power between nations was beggaring the Third World, like economists who urged people to buy houses at a time when houses were preposterously overpriced and facing an imminent price collapse, not uncommonly prospered by giving such appallingly bad advice. Still, it seems unreasonable to claim that all economists are motivated by greed, when the potent force of a fundamentally flawed economic paradigm also pushes them in the same direction.

That same pressure, with the same financial incentives to back it up, also drives the equally bad advice so many neoclassical economists are offering governments and businesses about the future of fossil fuels. The geological and thermodynamic limits to energy growth, like political power and the mob psychology of bubbles, lie outside the economic sphere. The interaction of economic processes with energy resources creates another end run: extraction of fossil fuels to run the world’s economies, an economic process, drives the depletion of oil and other fossil fuel reserves, a noneconomic process, and this promises to flow back into the economic sphere in the extended downward spiral of contraction and impoverishment I’ve called the Long Descent.

Here again, neoclassical economics is poorly equipped to deal with the reality of noneconomic constraints on economic processes. It thus comes as no surprise that when an economist enters the peak oil debate, it is almost always to claim that there is nothing to worry about, because the market will solve any shortfall that happens to emerge. As shortfalls emerge, expect to hear the claim – already floated by a few economists – that declining production is simply a sign that the demand for fossil fuel energy has decreased. No doubt when people are starving in the streets, we will hear claims that this is simply because the demand for food has dropped.

There are promising signs that the grip of neoclassical theory on modern economics is beginning to weaken. A recent conference on biophysical economics – a field which embraces the heretical concept that the laws of nature trump the laws of money – attracted many attendees and, in a shift of nearly seismic proportions, managed to get coverage in the New York Times. Other alternative viewpoints in economics are beginning to be heard, as they usually are in times of financial woe. Still, what’s needed now is something even more sweeping: an economics of whole systems, perhaps modeled on ecology, in which the entire world of noneconomic factors that influence economic processes is explicitly included in theories and practical analyses. Until that emerges, the advice governments and businesses receive from their paid economists may well continue to make matters worse rather than better.

Strange Bright Banners

2009-10-21T16:00:00.000-07:00

The transformation of money from a pragmatic measure of wealth to a metastatic abstraction that threatens to devour the economy of real wealth that created it – the theme of the last three posts here – has, as my readers have been quick to point out, political implications. The conventional wisdom these days ignores those implications; the consensus among alternative thinkers, which I suppose could be called the unconventional wisdom, deals with them in a stereotyped manner. I find it increasingly hard to accept either viewpoint.

The conventional wisdom, like most great fallacies, begins with a truth and stretches it until it becomes for all practical purposes a falsehood. The truth, one of the great achievements of the last three hundred years of thought, is the recognition that human life comprises a number of separate spheres that overlap solely in the life of the individual. Most of us have learned, for example, that when a religious leader makes statements concerning matters of scientific fact, those statements deserve no more (albeit no less) respect than those of any other interested layperson, and if the religious leader claims divine sanction for his opinions, he has overstepped the proper bounds of religion. (We are still in the process of learning that the reverse is also true, and a scientist who attempts to claim the prestige of science for an attack on religion is equally out of line.) Literature and the arts define another such sphere; so does politics; so does the realm of production and exchange of wealth summed up imperfectly in the word economics.

The separation of these spheres, important as it is, can never be total, because each human being participates in all of them and must balance their claims against one another. For this reason it’s entirely appropriate, say, for religious leaders to raise questions about the moral dimensions of the economy, or for a painter such as Picasso to deliver a devastating critique of a political act with his brush, and in the process create one of the great works of his career. In the same way, the political and economic spheres interpenetrate in significant ways, not least because money (the currency of economics) and power (the currency of politics) can often be traded in for one another. Thus it’s reasonable to discuss the ways that the distribution of wealth in a society intersects with its distribution of power.

This is what the conventional wisdom refuses to do. It’s acceptable nowadays to argue about whether government ought to regulate business, and in what minor ways; it’s very occasionally acceptable to talk about the corruption of government by business, though usually only when some egregious example of this standard practice is selected for pillorying in front of the public. It’s not acceptable anywhere in the American mainstream to talk about the extent to which the entire political process from top to bottom has been skewed by economic interests to the point of absurdity. The current “health care reform” farce is a case in point; most of the plans being discussed in Congress just now deal with the fact that half the American people can’t afford health insurance by forcing them to buy it anyway under penalty of law, funnelling tens of billions of dollars out of the pockets of struggling families – in the midst of a recession, no less – into the coffers of a health insurance industry that is already one of the most overfunded and corrupt institutions in American public life. (If this seems as wrongheaded to you as it does to me, dear reader, a letter to each of your congresspersons might be in order.)

It is to the credit of what I’ve called the unconventional wisdom, the consensus viewpoint of critics of the current system, that they recognize this overlap. What makes the unconventional wisdom problematic, here as elsewhere, is that so much of it redefines such overlaps in terms so extreme that a valid insight is once again falsified. It’s unquestionably true that business interests exert undue influence on the American political system, but this does not justify the wild claims so often made about the extent, centralization, and evil intentions of those interests and their influence.

Take the insistence, so often heard from radicals of the left and right alike, that America is a fascist state. If America were a fascist state, those on both sides of the political spectrum who currently exercise their freedom of speech to call it that would long since have been dragged from their beds in the middle of the night by uniformed thugs, never to be seen again – at least until their bones are pulled from a mass grave and identified by dental records decades from now. That is how things happen in a fascist state, and for today’s smug and pampered American radicals to wrap themselves in the mantle of victims of fascism, while relying on civil rights no fascist system grants its citizens, displays a profound disrespect for those who have actually suffered under totalitarian regimes.

To some extent this habit of flinging around extreme claims is simply the normal rhetorical extravagance of those who know they will not be held accountable for their words. Still, it is far from helpful to insist that because American democracy is troubled, corrupted by economic interests, and increasingly dysfunctional, it ought to be equated with the worst examples in our culture’s political demonology. It is even less helpful when this sort of thinking leads to the assumption that anything that replaces it must be better than the system we have now. That’s a common assumption in troubled times, but it’s also one to which history delivers a devastating reproof.

Imagine along these lines, dear reader, that sometime in the next year or so you start hearing media reports about a rising new figure in American politics. He’s young and charismatic, a military veteran who won the Distinguished Service Cross for bravery under fire, and heads a vigorous new third party that looks as though it might just be able to break the stranglehold of the established parties on the political system. Some of his ideas come straight from the fringes, and he’s been reported to have said very negative things about Arabs and Islam, but he’s nearly the only person in American public life willing to talk frankly about the difficulties Americans are facing in an era of economic collapse, and his party platform embodies many of the most innovative ideas of the left and right. Like him or not, he offers the one convincing alternative to business as usual in an increasingly troubled and corrupt system.

Would you vote for him? Millions of Germans did; replace the Distinguished Service Cross with the Iron Cross and Arabs with Jews, and the parallel should be self-explanatory. That parallel is anything but unique, for that matter; swap out a few details and you have the early careers of Mussolini, Salazar, Peron, or any number of other dictators of the same era. One of the problems with the continual use of fascism as a bogeyman by political extremists is that it becomes far too easy to forget how promising fascism looked in the 1920s and 1930s to many good people disgusted with the failings of their democratic governments. It’s not the “cornpone Hitler” James Howard Kunstler has predicted that we have to fear, much less the imaginary conspiracies that occupy so much space in today’s alternative discourse, but a suave, articulate, and charismatic figure who harnesses the widespread assumption that anything must be better than what we have today, and replaces a dysfunctional democracy with an all too functional tyranny.

Such a figure, it bears remembering, could as easily emerge from the left as from the right. One popular DVD that circulated widely in the peak oil scene a few years back was called The Power of Community, a documentary about how Cuba survived its own equivalent of peak oil when Soviet fuel subsidies stopped at the end of the Cold War. It’s a worthwhile case study of how a society can weather an extreme energy shortage, but it finessed one of the key points that enabled the Cuban response, namely, that Cuba is a dictatorship. To impose the draconian restrictions on energy use that got his country through its “Special Period,” Castro did not have to mobilize public opinion, placate powerful special interests, and shepherd legislation through a fractious Congress riven by ideological splits and determined to defend its prerogatives; he simply had to impose them, and those who disagreed were welcome to spend the next few years discussing the matter at length behind bars with their fellow political prisoners.

A great deal of the American left seems to have seen nothing wrong in this curious definition of “community.” This in itself is troubling, as is the enthusiastic reception of David Korten’s The Great Turning, among the most antidemocratic books of recent years, by the same circles. Korten argues that certain people – essentially, those who share his background and values – are at a superior “developmental stage” to others and are therefore better suited to rule, and the only way to survive the spiralling crises of the present and near future is to take power away from the “developmentally inferior” people who now hold it and give it to the gifted few. The idea that these few might need to be subject to checks and balances to keep them from abusing their power, it hardly need be said, finds no place in Korten’s book – a point that has done uncomfortably little to decrease its popularity.

It’s from sources like these that a neofascism of the left could quite readily emerge on American soil. Of course a neofascism of the right is equally possible, and the most dangerous possibility of all – because the most likely to slip past social critics unnoticed – might well be a movement that places itself in the abandoned middle ground of American politics. There is a great deal of empty space where common sense and compromise once bridged the gap between the major parties, and those parties themselves have become increasingly detached from the values and needs of the people they claim to represent. That space could offer an unparalleled opportunity to an astute and ambitious demagogue. It’s not exactly comforting that Nick Griffin, the head of Britain’s neofascist British Nationalist Party, is now using images of Churchill and the Battle of Britain in place of the Nazi regalia his followers once sported; Griffin is no fool, and where he goes, others will likely follow.

The crucial point that has to be recognized, and is too little recognized just now, is that it’s quite possible to replace a bad system with one that is much, much worse. Historians generally agree that the Weimar Republic was a failure, but I know of none who would suggest that the regime that followed it was an improvement. In the same way, those philosophes who criticized the Ancien Regime in its last years were quite correct to point out that the French monarchy and government were dysfunctional, corrupt, and wildly inefficient. Still, their guiding assumption – that what replaced it could only be better – was brutally betrayed by the Terror, the imperial tyranny of Napoleon, and a quarter century of bloody warfare, leading to no better end than the devastation of France and the restoration of an even more feckless monarch than the one they hoped to see overthrown.

The collapse of American democracy, or what is left of it, into one or another form of autocracy may be a foregone conclusion at this point. Certainly Oswald Spengler, whose ideas continue to land solid hits on a future his critics just as consistently miss, considered it that. He argued that the great struggle of the century or two ahead of his time would pit failing democracies corrupted by wealth in a long but ultimately losing struggle against the rising force of what he called Caesarism – the rise of charismatic leaders who would finish destroying crumbling democratic institutions and rule by a combination of force of personality and raw physical violence. The first round in that struggle began during Spengler’s own lifetime, though he did not live to see the first generation of Caesars fall; it seems unwise to dismiss the possibility of an imminent second round out of hand.

Still, the last word in all this probably belongs to an unlikely but eloquent spokesman, whose name I do not know. He was an elderly man, a Navy veteran with grandchildren, waiting for his laundry to finish at a laundromat here in Cumberland when I arrived there this morning on the same errand. Passing the time as the dryers tumbled, we talked about the weather and the misbehavior of politicians downriver in Washington DC. Then he shook his head and said, “I feel sorry for my grandkids. Me, I’ve had a good life, and my sons all did pretty well, but my grandkids and other people’s kids, they’ll never have what we had.”

For more than two centuries, the glue that has held American society together has been the hope – often falsified, but more often fulfilled – that each generation, no matter how difficult its own life might be, could hope for better things for its children. That faith is breaking apart where it has not already shattered. In its wake, strange bright banners are all too likely to be unfurled, and I suspect that a great many people who imagine themselves immune from the temptation of simple answers will end up marching beneath those banners toward some terrible destiny.

The Twilight of Money

2009-10-14T18:33:00.000-07:00

I’ve commented before in these essays that one of the least constructive habits of contemporary thought is its insistence on the uniqueness of the modern experience. It’s true, of course, that fossil fuels have allowed the world’s industrial societies to pursue their follies on a more grandiose scale than any past empire has managed, but the follies themselves closely parallel those of previous societies, and tracking the trajectories of these past examples is one of our few useful sources of guidance if we want to know where the current versions are headed.

The metastasis of money through every aspect of life in the modern industrial world is a good example. While no past society, as far as we know, took this process as far as we have, the replacement of wealth with its own abstract representations is no new thing. As Giambattista Vico pointed out back in the 18th century, complex societies move from the concrete to the abstract over their life cycles, and this influences economic life as much as anything else. Just as political power begins with raw violence and evolves toward progressively more subtle means of suasion, economic activity begins with the direct exchange of real wealth and evolves through a similar process of abstraction: first, one prized commodity becomes the standard measure for all other kinds of wealth; then, receipts that can be exchanged for some fixed sum of that commodity become a unit of exchange; finally, promises to pay some amount of these receipts on demand, or at a fixed point in the future, enter into circulation, and these may end up largely replacing the receipts themselves.

This movement toward abstraction has important advantages for complex societies, because abstractions can be deployed with a much smaller investment of resources than it takes to mobilize the concrete realities that back them up. We could have resolved last year’s debate about who should rule the United States the old-fashioned way, by having McCain and Obama call their supporters to arms, march to war, and settle the matter in battle amid a hail of bullets and cannon shot on a fine September day on some Iowa prairie. Still, the cost in lives, money, and collateral damage would have been far in excess of those involved in an election. In much the same way, the complexities involved in paying office workers in kind, or even in cash, make an economy of abstractions much less cumbersome for all concerned.

At the same time, there’s a trap hidden in the convenience of abstractions: the further you get from the concrete realities, the larger the chance becomes that the concrete realities may not actually be there when needed. History is littered with the corpses of regimes that let their power become so abstract that they could no longer counter a challenge on the fundamental level of raw violence; it’s been said of Chinese history, and could be said of any other civilization, that its basic rhythm is the tramp of hobnailed boots going up stairs, followed by the whisper of silk slippers going back down. In the same way, economic abstractions keep functioning only so long as actual goods and services exist to be bought and sold, and it’s only in the pipe dreams of economists that the abstractions guarantee the presence of the goods and services. Vico argued that this trap is a central driving force behind the decline and fall of civilizations; the movement toward abstraction goes so far that the concrete realities are neglected. In the end the realities trickle away unnoticed, until a shock of some kind strikes the tower of abstractions built atop the void the realities once filled, and the whole structure tumbles to the ground.

We are uncomfortably close to such a possibility just now, especially in our economic affairs. Over the last century, with the assistance of the economic hypercomplexity made possible by fossil fuels, the world’s industrial nations have taken the process of economic abstraction further than any previous civilization. On top of the usual levels of abstraction – a commodity used to measure value (gold), receipts that could be exchanged for that commodity (paper money), and promises to pay the receipts (checks and other financial paper) – contemporary societies have built an extraordinary pyramid of additional abstractions. Unlike the pyramids of Egypt, furthermore, this one has its narrow end on the ground, in the realm of actual goods and services, and widens as it goes up.

The consequence of all this pyramid building is that there are not enough goods and services on Earth to equal, at current prices, more than a small percentage of the face value of stocks, bonds, derivatives, and other fiscal exotica now in circulation. The vast majority of economic activity in today’s world consists purely of exchanges among these representations of representations of representations of wealth. This is why the real economy of goods and services can go into a freefall like the one now under way, without having more than a modest impact so far on an increasingly hallucinatory economy of fiscal abstractions.

Yet an impact it will have, if the freefall proceeds far enough. This is Vico’s point, and it’s a possibility that has been taken far too lightly both by the political classes of today’s industrial societies and by their critics on either end of the political spectrum. An economy of hallucinated wealth depends utterly on the willingness of all participants to pretend that the hallucinations have real value. When that willingness slackens, the pretense can evaporate in record time. This is how financial bubbles turn into financial panics: the collective fantasy of value that surrounds tulip bulbs, or stocks, or suburban tract housing, or any other speculative vehicle, dissolves into a mad rush for the exits. That rush has been peaceful to date; but it need not always be.

I’ve argued in previous posts here that the industrial age is in some sense the ultimate speculative bubble, a three-century-long binge driven by the fantasy of infinite economic growth on a finite planet with even more finite supplies of cheap abundant energy. Still, I am coming to think that this megabubble has spawned a second bubble on nearly the same scale. The vehicle for this secondary megabubble is money – meaning here the entire contents of what I’ve called the tertiary economy, the profusion of abstract representations of wealth that dominate our economic life and have all but smothered the real economy of goods and services, to say nothing of the primary economy of natural systems that keeps all of us alive.

Speculative bubbles are defined in various ways, but classic examples – the 1929 stock binge, say, or the late housing bubble – have certain standard features in common. First, the value of whatever item is at the center of the bubble shows a sustained rise in price not justified by changes in the wider economy, or in any concrete value the item might have. A speculative bubble in money functions a bit differently than other bubbles, because the speculative vehicle is also the measure of value; instead of one dollar increasing in value until it’s worth two, one dollar becomes two. Where stocks or tract houses go zooming up in price when a bubble focuses on them, then, what climbs in a money bubble is the total amount of paper wealth in circulation. That’s certainly happened in recent decades.

A second standard feature of speculative bubbles is that they absorb most of the fictive value they create, rather than spilling it back into the rest of the economy. In a stock bubble, for example, a majority of the money that comes from stock sales goes right back into the market; without this feedback loop, a bubble can’t sustain itself for long. In a money bubble, this same rule holds good; most of the paper earnings generated by the bubble end up being reinvested in some other form of paper wealth. Here again, this has certainly happened; the only reason we haven’t see thousand-percent inflation as a result of the vast manufacture of paper wealth in recent decades is that most of it has been used solely to buy even more newly manufactured paper wealth.

A third standard feature of speculative bubbles is that the number of people involved in them climbs steadily as the bubble proceeds. In 1929, the stock market was deluged by amateur investors who had never before bought a share of anything; in 2006, hundreds of thousands, perhaps millions, of people who previously thought of houses only as something to live in came to think of them as a ticket to overnight wealth, and sank their net worth in real estate as a result. The metastasis of the money economy discussed in previous posts here is another example of the same process at work.

Finally, of course, bubbles always pop. When that happens, the speculative vehicle du jour comes crashing back to earth, losing the great majority of its assumed value, and the mass of amateur investors, having lost anything they made and usually a great deal more, trickle away from the market. This has not yet happened to the current money bubble. It might be a good idea to start thinking about what might happen if it does so.

The effects of a money panic would be focused uncomfortably close to home, I suspect, because the bulk of the hyperexpansion of money in recent decades has focused on a single currency, the US dollar. That bomb might have been defused if last year’s collapse of the housing bubble had been allowed to run its course, because this would have eliminated no small amount of the dollar-denominated abstractions generated by the excesses of recent years. Unfortunately the US government chose instead to try to reinflate the bubble economy by spending money it doesn’t have through an orgy of borrowing and some very dubious fiscal gimmickry. A great many foreign governments are accordingly becoming reluctant to lend the US more money, and at least one rising power – China – has been quietly cashing in its dollar reserves for commodities and other forms of far less abstract wealth.

Up until now, it has been in the best interests of other industrial nations to prop up the United States with a steady stream of credit, so that it can bankrupt itself filling its self-imposed role as global policeman. It’s been a very comfortable arrangement, since other nations haven’t had to shoulder more than a tiny fraction of the costs of dealing with rogue states, keeping the Middle East divided against itself, or maintaining economic hegemony over an increasingly restive Third World, while receiving the benefits of all these policies. The end of the age of cheap fossil fuel, however, has thrown a wild card into the game. As world petroleum production falters, it must have occurred to the leaders of other nations that if the United States no longer consumed roughly a quarter of the world’s fossil fuel supply, there would be a great deal more for everyone else to share out. The possibility that other nations might decide that this potential gain outweighs the advantages of keeping the United States solvent may make the next decade or so interesting, in the sense of the famous Chinese curse.

Over the longer term, on the other hand, it’s safe to assume that the vast majority of paper assets now in circulation, whatever the currency in which they’re denominated, will lose essentially all their value. This might happen quickly, or it might unfold over decades, but the world’s supply of abstract representations of wealth is so much vaster than its supply of concrete wealth that something has to give sooner or later. Future economic growth won’t make up the difference; the end of the age of cheap fossil fuel makes growth in the real economy of goods and services a thing of the past, outside of rare and self-limiting situations. As the limits to growth tighten, and become first barriers to growth and then drivers of contraction, shrinkage in the real economy will become the rule, heightening the mismatch between money and wealth and increasing the pressure toward depreciation of the real value of paper assets.

Once again, though, all this has happened before. Just as increasing economic abstraction is a common feature of the history of complex societies, the unraveling of that abstraction is a common feature of their decline and fall. The desperate expedients now being pursued to expand the American money supply in a rapidly contracting economy have exact equivalents in, say, the equally desperate measures taken by the Roman Empire in its last years to expand its own money supply by debasing its coinage. The Roman economy achieved very high levels of complexity and an international reach; its moneylenders – we would call them financiers today – were a major economic force, and credit played a sizeable role in everyday economic life. In the decline and fall of the empire, all this went away. The farmers who pastured their sheep in the ruins of Rome’s forum during the Dark Ages lived in an economy of barter and feudal custom, in which coins were rare items more often used as jewelry than as a medium of exchange.

A similar trajectory almost certainly waits in the future of our own economic system, though what use the shepherds who pasture their flocks on the Mall in the ruins of a future Washington DC will find for vast stacks of Treasury bills is not exactly clear. How the trajectory will unfold is anyone’s guess, but the possibility that we may soon see sharp declines in the value of the dollar, and of dollar-denominated paper assets, probably should not be ignored, and cashing in abstract representations of wealth for things of more enduring value might well belong high on the list of sensible preparations for the future.

The Metastasis of Money

2009-10-07T18:55:00.000-07:00

The confusion between money and wealth, the theme of last week’s Archdruid Report post, has become almost impossible to avoid these days. Perhaps the most important reason is the extent to which money has metastasized so deeply into our economic life that it’s nearly impossible to do much of anything without it.

The economic textbooks you did your best not to read in school justify that ubiquity by a neat rhetorical trick. If you remember anything at all about the economics textbook you did your level best not to read back in your school days, it’s probably that bit of rhetoric; it can be found in the canned explanation for why we use money, somewhere around page 6. It runs something like this: there’s a plumber and a pig farmer who want to do business with one another, see, but the plumber’s Jewish and the pig farmer has nothing to trade but pork. Add money, and voila! The farmer sells his pork to other people and uses the proceeds to pay the plumber, who uses it to buy gefilte fish and matzoh meal. Everyone’s happy except, presumably, the pigs.

It all seems very logical until you think about it for ten seconds. Notice, to start with, how the explanation assumes that the plumber, the pig farmer, the purchasers of pork, the kosher deli, and everyone else are restricted to the specific kind of economic relationships that exist in, and only in, a money economy. The plumber doesn’t, as most people did as little as a hundred and fifty years ago, benefit from a household economy that provides a great deal of his food, including small livestock in the back garden. The pig farmer doesn’t, as most people did until as little as fifty years ago, do essentially all of his household repairs himself. Both of them are defined by a single function: the pig farmer can only produce pork, the plumber only plumbing.

Nor do the farmer, the plumber, or anyone else have access to any of the immense variety of nonmonetary systems of exchange human beings have used throughout history. !Kung hunter-gatherers sharing out a wildebeest among band members according to traditional rules, Haida chiefs distributing blankets and salmon to all comers at a potlatch, and medieval peasants working a baron’s demesne lands for a set number of days each year to maintain their feudal right to their own cottages and fields, all participated in flexible and effective systems of exchange that had nothing to do with money. Urban societies as complex as ancient Egypt got by entirely without money, and still managed to keep plumbers, pig farmers, and a great many other occupational specialties gainfully employed for millennia.

All that the textbook explanation proves, in other words, is that if you have a money economy, it does probably need some kind of money to make it work. This is not the conclusion the textbooks draw from the plumber and the pig farmer, of course; with very few exceptions, they leap from their canned example to the claim that money must be essential to any economy worth the name, and the rest of the textbook proceeds to focus on theories about the behavior of money under the false impression that those theories deal with the behavior of wealth.

The mistaken metaphysics discussed in last week’s post plays a large role in fostering this misunderstanding, but the sheer pervasiveness of money in today’s industrial economy has an even larger role. For most people in the modern industrial world, the only way to get access to any kind of wealth – that is, any good or service – is to get access to money first, and exchange the money for the wealth. This makes it all too easy to confuse money with wealth, and it also fosters the habit of thought that treats money as the driving force in economic life, and thinks of wealth as a product of money, rather than seeing money as an arbitrary measure of wealth.

The thought experiment of placing a hundred economists on a desert island with $1 million each but no food or water is a good corrective to this delusion. Unfortunately this same experiment is being tried on a much vaster scale by the world’s industrial economies right now. We have seven billion people on a planet with a finite and dwindling supply of the concentrated energy resources that are keeping most of them alive, and governments and businesses alike are acting as though the only possible difficulty in this situation is coming up with enough money to pay for investments in the energy industry.

It should be obvious that no amount of money can overcome the thermodynamic and statistical laws that have placed hard limits on the amount of highly concentrated energy resources that happen to exist on our planet. This is not obvious to most people nowadays, however, because the metastasis of money throughout the economy has trained nearly all of us to think that if you have enough money you can get whatever you want. The fact that the richest people in the world can put their entire fortunes into health care and still get old and die is one of the few persistent reminders that money cannot overcome the laws of nature, or provide access to goods and services that don’t exist.

So how did money get transformed from a convenient yardstick for real wealth to the be-all and end-all of contemporary economic life? At least three factors were involved, two of them common to complex urban societies throughout history, one unique to ours.

First, despite the drastic oversimplifications of the textbook example cited earlier, it reflects a reality: a complex society can gain significant advantages from a medium of exchange that can be traded for any form of wealth. Even in societies where most goods and services are distributed by way of social networks, a social consensus tends to establish certain trade goods – wampum shell strings among the First Nations of eastern North America, for instance – as a common measure for those goods and services that are exchanged in other ways. As a society becomes more complex and the division of labor among different crafts expands, some standard measure of wealth becomes more useful. While money itself was invented around 700 BCE by the ancient Greeks, other ways of measuring wealth for the sake of easy exchange had been in use in Old World urban societies for millennia before then, and it’s not inaccurate to include money or some equivalent system as part of the basic toolkit that makes complex urban societies possible.

Second, whenever common measures of wealth are controlled by institutions, those who manage those institutions become powerful, and can be counted on to maintain and expand their power whenever possible. In ancient Egypt, for example, grain in temple warehouses provided the basic measure of wealth; as a result the priests who controlled the stockpiled grain became a potent political force. In medieval Europe, when land was the basic measure of wealth – there’s a reason we still call it “real estate,” as though all other wealth is unreal – the power of the feudal nobility derived directly from their control of land. Today the governments that claim exclusive power to print and regulate money, and the banks and financial corporations that manage most of society’s money, derive much of their effective power from their control over the medium of economic exchange, and can be counted on to encourage the rest of society to rely ever more completely on the thing that gives them power.

These two factors can be traced in the history of most of the complex urban societies of the past. What makes our civilization something of an extreme case is a third factor – the extreme complexity of an economic system that has temporarily replaced the limited energy resources of other human societies with a torrent of cheap and abundant energy from fossil fuels.

Ilya Prigogine, one of the most innovative physicists of recent years, showed via a series of dizzyingly complex equations that the flow of energy through a system increases the complexity of the system. If there was ever any doubt of the accuracy of his claim, it was settled by the economic history of the western world from 1700 to the present. The societies over which the tsunami of the Industrial Revolution broke in the early 18th century were not unusually complex by the standards of past civilizations; their own contemporaries in the Chinese and Ottoman Empires considered western Europeans, and not without reason, to be grunting, smelly barbarians with few of the arts and graces of civilization.

Fossil fuels may not have done anything about the gracelessness and the smell, but it certainly made up for any shortage in complexity. Until the dawn of the industrial age, as a general rule of thumb, some 90% of the inhabitants of any complex society worked in agriculture, providing the food and raw materials that supported themselves as well as the 10% who could be spared for all other economic roles. By 1900, at the zenith of the age of coal, many nations in the industrial world had dropped the percentage of their work force in agriculture below 50%, and shifted the workers thus freed up into a broad assortment of new economic roles. By 2000, buoyed by the much higher concentration and efficiency of petroleum, many industrial nations had dropped the percentage of their work force in agriculture below 5%, with the other 95% filling newly invented roles in the most complex economies in the history of the planet.

One consequence of this swift and unprecedented surge in complexity was the triumph of money over all other systems of exchange. When the vast majority of workers at every income level labored at tasks so specialized that their efforts only produced value when combined with those of hundreds or thousands of other workers, money provided the only way they could receive a return on their labor. When most of the customers for any given product had money and nothing else to exchange for it, buying products for money became standard. Social networks of exchange – household economies, customary local exchanges, church and fraternal networks– shattered under the strain, and were replaced by purely economic relationships – wage labor, shopping, public assistance – that could be denominated entirely in cash. The last three centuries of social and economic history are largely a chronicle of the results.

If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.

In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.

Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.

This is another context in which a wider view of history than economists usually allow themselves to take could offer a useful warning. The dominance of money in complex societies has a distinctive trajectory over time, and next week’s post will discuss some of the ways in which that trajectory might unfold in the decades immediately before us.

The Metaphysics of Money

2009-09-30T20:13:00.000-07:00

To mention money and metaphysics in the same sentence, as I did at the close of last week’s post, is to invite any number of misunderstandings. The hoary habit of thinking that walls off philosophical questions in a ghetto of abstractions apart from the world of ordinary life gets in the way of clarity here as so often, but there’s an even more basic problem: most people these days have no clear notion of what the word “metaphysics” means in the first place.

The tangled history of the word probably makes that inevitable. A nameless librarian in ancient Alexandria first coined it out of sheer desperation while cataloging the works of Aristotle; most of the treatises got names based on their subject matter – Physics, Meteorology, Poetics, and so on – but one difficult treatise was labeled simply meta phusikoi, “the stuff that comes after the Physics.” Then, as the fourth-grade history paper put it, some other stuff happened – the library of Alexandria burned, Rome fell, what was left of the classical world got tipped into history’s dumpster by a band of helpful Visigoths, and so on. When the dust finally cleared, Aristotle was very nearly the only systematic ancient thinker whose works were still around, and so he became, in Dante’s words, “the master of those who know.”

That meant, among other things, that the labels assigned to his treatises by that anonymous Alexandrian savant became the basic categories of scholarship in the Middle Ages. (Most of them remain basic categories today, which is why your local university has departments of physics, meteorology, and so on.) Metaphysics was no exception, and the philosophical issues Aristotle tackled in that treatise have carried that label ever since.

Those issues are what Aristotle himself called “first philosophy:” an analysis of the basic terms that have to be sorted out before any kind of philosophy can be sure of its foundations. The medieval scholars who blew the dust off Aristotle’s treatise, however, interpreted his work in their own way, which meant that the basic issues of philosophy were redefined in terms of Christian, Muslim, or Jewish theology. By the time the 18th century rolled around, metaphysics as a discipline was almost entirely identified with the theological basis given it by the scholars of the Middle Ages, and so it got dropped like a hot potato as secularism swept the academic world.

By the end of the 19th century even theologians had stopped doing metaphysics in the old style, and most of the people practicing what used to be called metaphysics weren’t using the word. At that point, in a fine display of history’s twisted sense of humor, the word got picked up by the American folk religious movement ancestral to today’s New Age scene, and turned into a label for their own beliefs. The town in southern Oregon where I used to live has a Metaphysical Library, which even had a few books on metaphysics in the philosophical sense of the world, though how they got there I have no idea. The vast majority of the books were on past lives, channeled entities, flying saucers, evil conspiracies, and the rest of the mental furniture of contemporary alternative culture.

Thus it’s probably necessary to point out that when I mention the metaphysics of money, I ‘m not referring to claims that money was invented by a conspiracy of evil space lizards, or that you can get as much money as you want by convincing yourself that money really, really wants to bed down in your wallet. You can find books making both these claims at the library just mentioned, as it happens, but both beliefs – and a good many statements less obviously absurd – are in large part produced by a failure to engage in the other kind of metaphysics, the thoughtful consideration of the basic categories of thought itself.

That sort of analysis seems very abstruse and impractical, until you notice the consequences of ignoring it. Sweeping claims are being made these days about whether certain things exist or do not exist, for example, by people who never seem to have examined their own presuppositions about what it means to exist and how a thing can be known to exist. That’s the problem with the ghettoizing of philosophy mentioned earlier; the philosophical issues you ignore can still sneak up on you while you’re not looking, and turn your best attempts at thinking into gibberish.

This, finally, is where metaphysics and money come together. Last week’s post discussed some of the reasons why you can get better economic advice from a randomly chosen fortune cookie at your local Asian buffet than from the most prestigious contemporary economists. Part of it, as I pointed out, was the way that the boom-bust cycle makes giving bad advice the most lucrative career strategy for economists; another part is due to the attempts of economists to make their field a theoretical science without going to the trouble of grounding their theories in an adequate foundation of historical fact.

Still, there’s a third factor at work, and it’s even more pervasive than the two just named. It’s far from unique to economics – in one way or another, it underlies a great many of the mistakes that are tipping our own civilization into the same dumpster that received the ruins of Rome – but it stands out in the field of economics with particular clarity. Its roots are in a metaphysical error which might as well be called, after one of its most influential practitioners, Descartes’ fallacy.

Rene Descartes is famous nowadays for saying “I think, therefore I am.” Few people these days take the time to find out what he meant by that statement, and fewer still catch onto the radical project that underlay it. Without too much inaccuracy, Descartes can be called the first modern thinker. Certainly he was the first to embrace what has become an automatic presupposition of modern thought, the notion of the individual self as an isolated, independent witness whose thoughts and experiences are entirely its own. What existed, to Descartes, was limited to what he could know, and know precisely, with the same exactness as a geometrical proof.

Descartes was arguing, in effect, that “to be” means the same thing as “to be known,” and “to be known” in turn equals “to be precisely defined.” It’s clear that he recognized, and intended, the sweeping implications of this metaphysical stance. It’s equally clear that a great many of the people who unknowingly follow his lead nowadays either accept those implications uncritically or have never noticed their existence. In the hands of much of modern science, in particular, Descartes’ equation has been blended with a passion for quantitative measurement to produce an even more extreme form of the same logic. To a great many scientists today, what exists is limited to what can be known; what can be known is limited to what can be measured; and what can be measured is treated as though it was identical to its measurements.

You can get away with this in physics, and still do excellent science. The objects studied by physics follow patterns that can be modeled effectively by mathematics, and most of them are so remote from ordinary human experience that anything about them that doesn’t measure easily can be ignored without too much trouble. Try doing this in sciences closer to the realm of everyday human life, on the other hand, and you can count on running into trouble, because in that realm Descartes’ approach is usually a bad idea, and the modern scientific expansion of it an even worse one. What can be measured is only a subset of what can be known, and what can be known, at least in any given situation, is only a subset of what exists; nor does the fact that some properties of a thing can be measured according to some numerical scale prevent it from having other properties at least as important that are not subject to that kind of measurement.

The sort of bad logic that treats quantitative measurements as the only things that really exist is pervasive in the sciences, but its grip is even tighter on those fields of study that want to claim the prestige of science but can’t quite pass muster. Economics could be the poster child for this noxious effect. Down through the generations, against the sound advice of its best practitioners, economists have consistently treated the one thing in their field that can easily and consistently be measured with numbers – money – as though it was the one thing that matters. It’s easy to see how seductive this habit can be, since it seems to allow everything to be measured on a common scale; the problem, of course, is that everything that can’t be flattened out into that common scale gets mislaid, and as often as not these mislaid factors prove to be decisive.

In The Wealth of Nations, Adam Smith criticizes the notion – as common in his time as in ours – that money is the same thing as wealth. The wealth of a country, he points out, consists of the product of its natural resources and collective labor: in modern terms, it’s the sum total of the goods and services produced by a nation’s ecosystems and economy. In another place, though, he defines wealth as anything that can be valued in money. These definitions do not conflict with one another; rather, they make the crucial point that money is not wealth but the yardstick by which modern cultures measure wealth. This ought to be the first thing we teach children about money, though of course it isn’t.

It probably ought to be the first thing we teach economists about money, too, but the power of Descartes’ fallacy stands in the way. Money is a unit of measurement, so it’s inherently easy to define, understand, and quantify. Wealth is much less easy to force into the Procrustean bed of numbers; that’s why we use money as a rough and ready way of sorting out the relative value of different kinds of wealth so they can be exchanged without too much trouble. Money is so convenient as a way of measuring wealth that very often it ends up eclipsing wealth, and this is why most economists nowadays, even when they think they’re talking about wealth, are actually talking about money. This becomes especially problematic when, as so often happens, they start attributing to wealth characteristics that are only true of money.

This habit of thought pervades contemporary economics. For a relevant example, watch the way most economists these days brush aside the immense challenges of peak oil with the assurance that if oil ever does get scarce, the market will come up with alternatives. Implicit in this claim is the assumption that any energy source is as good as any other, and that the total amount in the system is effectively unlimited. This is true of money – one dollar bill is worth exactly the same amount as any other, and the total number of dollars in circulation is as close to limitless, these days, as the printing presses of the US Treasury can make it – but it is emphatically not true of energy resources, or of any other form of wealth.

Compare any two energy resources in practical terms and it’s clear that in most cases they’re not even apples and oranges; they’re apples and orangutans. Take petroleum and solar energy as good examples. A highly concentrated form of chemical energy and a rather diffuse form of electromagnetic energy have very little in common, and even when they can do the same things – you can heat a house with passive solar design, for example, or you can heat it with an oil-fired burner – the technologies are totally different. Easy talk about swapping one for the other thus evades the immense challenge and nearly unimaginable cost of scrapping multiple continent-wide infrastructures geared to oil and building new ones suited to solar energy. (There are plenty of other questions that it ducks, too, but this one will do for starters.)

Presumably an economist would notice something odd if he sat down at a lunch counter, ordered the daily special, and was handed instead a box of socket wrenches, even if the price of the wrenches was exactly the same as the daily special. If the economist was starving on a desert island and a crate that washed ashore proved to contain socket wrenches rather than food, the difference would be a matter of life or death. This latter is uncomfortably close to our position just now, as the world’s energy companies race each other and the clock to extract fossil fuels in nearly unimaginable volumes from the Earth’s dwindling supplies. If we allow ourselves to wait until those supplies start to run short, it will be much too late to start retooling our civilization for some other energy resource, even if one happens to turn up.

Because a subculture of erudite scholars in the economics departments of universities have made a metaphysical error, in other words, our civilization may have missed its chance to dodge disaster. It’s hard to think of a better argument for the importance of metaphysics than that. Still, the problem sketched in this post extends much further than I’ve had space to outline here, and the way in which money has metastatized in our society to become the measure of all things has become a massive though unrecognized barrier in the way of any attempt to improve a rapidly worsening situation. We’ll explore that in next week’s post.

Why Economists Fail

2009-09-23T19:36:00.000-07:00

The last two posts here on The Archdruid Report, while they dealt with issues that are becoming increasingly hard to avoid as industrial society begins its long slide down the slopes of Hubbert’s peak, were something of a distraction from the theme I’ve been trying to pursue for the last few months, the theme of deindustrial economics. I want to return to that theme here, and continue exploring the possibilities and risks of economic life in an age of decline.

Mind you, it may have occurred to many of my readers – and it has certainly occurred to me – that there’s something distinctly odd about an archdruid setting aside his white robe and oaken staff for the chalk and blackboard of the economics classroom. I am not an economist; I don’t even play one on television, and my background in economics consists mostly of extensive reading and study in what nowadays would be considered the fringes of the subject – most notably the writings of the late E.F. Schumacher, which set this sequence of posts in motion.

Yet there’s a case to be made for discussing economics from a standpoint distinct from that of today’s economists – in fact, from nearly any imaginable standpoint other than that of today’s economists. That case could draw its initial arguments from many points, but the most obvious one just now has to be the near-total failure of contemporary economic thought to provide meaningful guidance to the macroeconomic challenges of our time.

This may seem like an extreme statement, but the facts back it up. Consider the way that economists responded – or, rather, failed to respond – to the late housing boom. This was as close to a perfect textbook example of a speculative bubble as you’ll find in recent history. The very extensive literature on speculative bubbles, going back all the way to Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, made recognizing another example of the species easy enough. All the signs were there: the dizzying price increases, the huge influx of amateur investors, the giddy rhetoric insisting that prices could and would keep on rising forever, the soaring rate of speculation using borrowed money, and the rest of it.

By 2005, accordingly, a good many people outside the economics profession were commenting on parallels between the housing bubble and other speculative binges; by 2006 the blogosphere was abuzz with accurate predictions of the approaching crash; by 2007 the final plunge into mass insolvency and depression was treated in many circles as a foregone conclusion – as indeed it was by then. Yet it’s a matter of public record that among those who issued these warnings, economists – who should have caught onto the bubble faster than anyone – could very nearly be counted on the fingers of one foot. On the contrary, the vast majority of the economists who expressed a public opinion on the subject insisted that the delirious rise in real estate prices was justified and that the exotic financial innovations that drove the bubble would keep banks and mortgage companies safe from harm.

These comforting announcements were wrong. Those who made them had every reason to know at the time that they were wrong. No less an economic luminary than John Kenneth Galbraith pointed out decades ago that in the financial world, the term “innovation” usually refers to the rediscovery of the same limited set of bad ideas that always, without exception, lead to economic disaster. Galbraith’s books The Great Crash 1929 and A Short History of Financial Panics, which chronicle the carnage caused by the same gimmicks in the past, can be found on the library shelves in every school of economics in North America, and anyone who reads either one can find every rhetorical excess and fiscal idiocy of the housing bubble faithfully duplicated in the great speculative binges of the past.

If this were an isolated instance of failure, it might be pardonable, but the same pattern repeats itself as regularly as speculative bubbles themselves. Identical assurances were offered – in some cases, by the identical economists – during the last great speculative binge in American economic life, the tech-stock bubble of 1996-2000. They have been offered by professional economists during every other speculative binge since the profession of economics came into being. Take a wider view, and you’ll find that whenever a professional economist assures the public that some apparently risky course of action is perfectly safe, he is usually wrong.

A colorful recent example was the self-destruction of Long Term Capital Management (LTCM) in the early 1990s. One of the two Nobel laureates in economics on LTCM’s staff announced publicly that the computer models the company used for its hugely leveraged trades were so good that they could not lose money in the lifetime of the universe. Have you ever noticed that villains in bad movies very often get blown to smithereens a few seconds after saying “I am invincible”? Apparently the same principle applies to economists, though the time lag is longer; it was, as I recall, some five years after this announcement that LTCM got blindsided by a Russian foreign-loan default that many other people saw coming, and failed catastrophically. The US government had to arrange a hurried rescue package to keep the implosion from causing a general financial panic.

Economists are not, by and large, stupid people. Those who work in some of the less glamorous subsets of the field have worked out a great many useful tools for businesses and individuals, and the level of mathematical skill to be found among today’s “quants” rivals that of many university physics departments. Yet the profession seems to have become incapable of learning from its most glaring and highly publicized mistakes. This is all the more troubling in that you’ll find many economists among the pundits who insist that industrial economies need not trouble themselves about the impact of limitless economic growth on the biosphere that supports all our lives. If they’re as wrong about that as so many other economists were about the housing bubble, they’ve made a fateful leap from risking billions of dollars to risking billions of lives.

What lies behind this startling blindness to the evidence of history and the reality of the downside? Plenty of factors doubtless play a part, but three seem most important to me.

First of all, for professional economists, being wrong is much more lucrative than being right. During the runup to a speculative binge, and even more so during the binge itself, a great many people are willing to pay handsomely to be told that throwing their money into the speculation du jour is the right thing to do. Very few people are willing to pay to be told that they might as well flush it down the toilet, even – indeed, especially – when this is the case. During and after the crash, by contrast, most people have enough calls on their remaining money that paying economists to say anything at all is low on the priority list.

The same rule applies to professorships at universities, positions at brokerages, and many of the other sources of income open to economists. When markets are rising, those who encourage people to indulge their fantasies of overnight wealth will be far more popular, and thus more employable, than those who warn them of the inevitable outcome of pursuing such fantasies; when markets are plunging, and the reverse might be true, nobody’s hiring. Apply the same logic to the fate of industrial society and the results are much the same; those who promote policies that allow people to get rich and live extravagantly today can count on an enthusiastic response, even if those same policies condemn industrial society to a death spiral in the decades ahead. Posterity, it’s worth remembering, pays nobody’s salaries today.

Second, like many contemporary fields of study, economics suffers from a bad case of premature scientification. The dazzling achievements of science have encouraged scholars in a great many fields to ape science’s methods in the hope of duplicating its successes, or at least cashing in on its prestige. Before Isaac Newton could make sense of the planets in their courses, though, thousands of observational astronomers had to amass the raw data with which he worked. The same thing is true of any successful science: what used to be called “natural history,” the systematic recording of what nature actually does, builds the foundation on which science erects structures of hypothesis and experiment.

A great many fields of study have attempted to skip the preliminaries and fling themselves straight into scientific research. The results are not good, because there’s a boobytrap hidden inside the scientific method. The fact that you can get some fraction of nature to behave in a certain way under arbitrary conditions in the artificial setting of a laboratory does not mean that nature behaves that way left to herself. If all you want to know is what you can force a given fraction of nature to do, this is well and good, but if you want to understand how the world works, the fact that you can often force nature to conform to your theory is not exactly helpful.

Economics is particularly vulnerable to this sort of malign feedback because its raw material – human beings making economic decisions – is so complex that the only way to control all the variables is to impose conditions so arbitrary and rigid that the results have only the most distant relation to the real world. The logical way out of this trap is to concentrate on the equivalent of natural history, which is economic history: the record of what has actually happened in human communities under different economic conditions. This is exactly what those who predicted the housing crash did: they noted that a set of conditions in the past (a bubble) consistently led to a common result (a crash) and used that knowledge to make accurate predictions about the future.

Yet this is not, on the whole, what successful economists do nowadays. Instead, a great many of them spend their careers generating elaborate theories and quantitative models that are rarely tested against the evidence of economic history. The result is that when those theories are tested against the evidence of today’s economic realities, they often fail.

The Nobel laureates whose computer models brought LTCM crashing down in flames, for example, created what amounted to extremely complex hypotheses about economic behavior, and put those hypotheses to a very expensive test, which they failed. If they had taken the time to study economic history first, they might well have noticed that politically unstable countries tolerably often default on their debts, that moneymaking schemes involving huge amounts of other people’s money usually end up imploding messily, and that every previous attempt to profit by modeling the market’s vagaries had come to grief when confronted by the sheer cussedness of human beings making decisions about their money. They did not notice these things, and so they and their investors ended up losing astronomical amounts of money.

The third factor driving the economic profession’s blindness to its own mistakes is more complex, and will demand a post of its own. Few things seem less related than the abstractions of metaphysics and the gritty realities of money, but there’s a crucial connection. Underlying today’s economic thought is a specific set of metaphysical assumptions, and those assumptions form the foundation of sand underneath the proud and unsteady towers of today’s economic theories. In next week’s post I plan on taking a hard look at the metaphysics of money, in the hope of finding a less problematic basis for economic life in the approaching deindustrial age.

Daydreams of Destruction

2009-09-16T19:43:00.000-07:00

Last week's post on The Archdruid Report got rather more than the usual number of responses. Most of the comment – no surprises there – focused on my suggestion that the hopes for a better future retailed so freely by all sides in today’s cultural conversations face certain disappointment. At first glance, this may not seem like a controversial statement; one of the crucial facts about the future, after all, is that the fossil fuels that prop up current lifestyles across the industrial world, and provide the basis for survival for hundreds of millions in the Third World, are depleting rapidly with no adequate replacements in sight.

That hard fact pretty much guarantees a future in which poverty, hunger, warfare, and early death will be vastly more common than their opposites, and in which a great many of the comforts and opportunities we now take for granted will no longer be available. That, in turn, would certainly seem to define the future ahead of us as worse than the present, in ways sweeping enough that any benefits to be gained from the changes in store could be considered consolation prizes at best. Still, so straightforward an assessment of our prospects is profoundly unwelcome in many circles these days.

The difficulty here is that faith in the prospect of a better future has been so deeply ingrained in all of us that trying to argue against it is a bit like trying to tell a medieval peasant that heaven with all its saints and angels isn’t there any more. The hope that tomorrow will be, or can be, or at the very least ought to be better than today is hardwired into the collective imagination of the modern world. Behind that faith lies the immense example of three hundred years of industrial expansion, which cashed in the cheaply accessible fraction of the Earth’s fossil fuel reserves for a brief interval of abundance so extreme that garbage collectors in today’s America have access to things that emperors could not get before the industrial revolution dawned.

That age of extravagance has profoundly reshaped – in terms of the realities of human life before and after our age, a better word might be “distorted” – the way people nowadays think about very nearly anything you care to name. In particular, it has blinded us to the ecological realities that provide the fundamental context to our lives. It’s made nearly all of us think, for example, that unlimited exponential growth is possible, normal, and good, and so even as the disastrous consequences of unlimited exponential growth slam into our society one after another like waves hitting a sand castle, the vast majority of people nowadays still build their visions of the future on the fantasy that problems caused by growth can be solved by still more growth.

The distorted thinking we have inherited from three centuries of unsustainable growth crops up in full force even among many of those who think they’re reacting against it. Activists at every point on the political spectrum have waxed rhetorical for generations about the horrors the future has in store, to be sure, but they always offer a way out – the adoption of whatever agenda they happen to be promoting – and it leads straight to a bright new tomorrow, in which the hard limits of the present somehow no longer seem to apply. (Take away the trope of “the only way to rescue a better future from the jaws of imminent disaster” from today’s activist rhetoric, for that matter, and in most cases there’s very little left.)

Still, the bright new tomorrow we’ve all been promised is not going to arrive. This is the bad news brought to us by the unfolding collision between industrial society and the unyielding limits of the planetary biosphere. Peak oil, global warming, and all the other crises gathering around the world are all manifestations of a single root cause: the impossibility of infinite growth on a finite planet. They are warning signals telling us that we have gone into full-blown overshoot – the state, familiar to ecologists, in which a species outruns the resource base that supports it – and they tell us also that growth is not merely going to stop; it’s going to reverse, and that reversal will continue until our population, resource use, and waste production drop to levels that can be sustained over the long term by a damaged planetary ecosystem.

That bitter outcome might have been prevented if we had collectively taken decisive action before we went into overshoot. We did not do so, and at this point the window of opportunity is firmly shut. Nearly all the proposals currently being floated to deal with the symptoms of our planetary overshoot assume, tacitly or otherwise, that this is not the case and we still have as much time as we need. Such proposals are wasted breath, and if any of them are enacted – and some of them very likely will be enacted, once today’s complacency gives way to tomorrow’s stark panic – the resources poured into them will be wasted as well.

This is one of the reasons it seems crucial to me to keep coming back to the hard facts of our predicament: our limited resources and even more limited time need to be directed toward projects that might actually do some good. Still, there’s another side to this repeated insistence on an unwelcome reality, and the best way to explore that is to glance back at one of the responses to last week’s post.

The comment in question came from a reader who signed himself “Tony.” I trust he won’t feel unduly picked on, as I’ve chosen his response as a thoughtful and eloquent expression of a common feeling that many readers of mine, and countless others as well, have expressed in their own ways. While acknowledging the ghastly human toll that will be inflicted by the ending of the industrial age, he argues that life in the modern world, while materially prosperous, is empty and meaningless, and hopes that life after industrialism will be more fulfilling. He comments:

My life is EASY now, but I do not LIKE it. My body may have ease, but not my soul. I also find no soul’s ease in the prospects for many, say, who need modern health care to live. I nonetheless find excitement in the thought that current power structures may soon crumble, finally giving those like myself, and others in my generation, a chance to really live.

Any of my readers who have been in contact with the peak oil scene, or any of the other movements that have predicted the decline and fall of our present civilization, will have heard these same feelings expressed many times. Some of my readers may have had such feelings themselves. The idea that a future of material deprivation and suffering may nonetheless be better in some psychological or spiritual sense echoes tropes deeply rooted in the narratives of our culture. Who among us hasn’t daydreamed about fleeing from the complexities and moral compromises of modern existence to some simpler and more strenuous life where, at least in our imaginations, the sources of life and meaning are closer?

It’s a very old fantasy. The Roman poet Horace, in his Second Epode, put the same sentiments in the mouth of a moneylender, who imagined himself living the simple life of a poor farmer off in the Italian hill country, then turned from such daydreams back to the work of managing his investments. No doubt there were plenty of poor farmers in Horace’s time whose daydreams fixated instead on the high life of a wealthy moneylender in Rome.

Still, there’s a crucial difference. Neither Alfius the moneylender nor the poor farmers of the Italian hinterlands, as far as we know, ever harnessed their daydreams of a better life to fantasies of global catastrophe. Nowadays, by contrast, a great many people do exactly that. From fundamentalist Christians who pin their hopes on the Rapture – “He’s tooting, and I’m scooting,” to quote a popular bumper sticker – straight through to the current crop of utopian true believers who insist that the implosion of the industrial world will be followed by the inevitable triumph of whatever ideology they favor, a great many people nowadays pin their hopes of a better life onto whatever convenient cataclysm comes to mind. Tony’s hope that the fall of current power structures will allow him “a chance to really live” is simply another variation on this theme.

The irony here would be worth savoring if it weren’t so potentially explosive. I’m normally unsympathetic to claims that our civilization is a unique case, but in this context it may just have accomplished something that no other society in all of history can match. Certainly I can’t think of another case in which people faced with the tolerably common human experience of a less than fulfilling life have had so few inner resources to hand, and so little knowledge of past thought about the same problem, that the only option a great many of them seem to be able to find is to sit around and wait for the world to end.

I try to wear my archdruid’s hat lightly in discussions in this blog, but it’s hard to think of any way to speak to this situation that doesn’t wade fairly deep into the waters of philosophy, not to mention spirituality. The fact that a life lived in material comfort can be unsatisfying does not mean that the comfort is what makes it unsatisfying. Life can be every bit as barren of meaning to someone who is starving to death in a burned-out basement, or scratching out a bare living from a few acres of mud and manure around a squalid hovel. The choices we make in response to our surroundings affect our relationship to the sources of meaning far more powerfully than the surroundings themselves, and those choices depend on the quality and content of our inner lives, not on outer factors. None of this ought to be news to anyone; it can be found in every tradition of human wisdom and spiritual teaching from the dawn of history right up to the present, and it remains as valid today as it ever was.

If Tony and his countless equivalents want “a chance to really live,” in other words, nothing is holding them back. If they feel their present comforts are obstacles to a better life, nothing prevents them from getting rid of those comforts. If they feel that danger and deprivation would make life more real for them, those can also be had easily enough by those who actually want them. Of course that’s the rub. Alfius could have gotten out of the moneylending business, donated his wealth to charity, moved to a farm and made his rural fantasy real, but of course he didn’t actually want to do that; he simply wanted to daydream about it. I admit to a strong suspicion that the same is true of Tony and his peers.

Alfius’ daydreams, mind you, were relatively harmless. I am not sure the same thing can be said of the fantasy of redemption through catastrophe that underlies Tony’s comments and the feelings of a great many other people just now. As industrial civilization begins to come apart around us in the decades ahead, the mismatch between that fantasy and the bitter realities of life in a dying civilization will stand out in increasingly stark colors, but in the meantime those who indulge in daydreams of destruction are a good deal less likely to take the practical, positive steps that could make the time of troubles ahead of us less harrowing than it could be.

Thus I think it’s crucial to come back to the hard fact that we are not heading toward a happier future in any sense that matters. We are moving into a troubled, difficult, dangerous age in which most of us stand to lose a great many of the things that matter to us. Those troubles may encourage some of us to pursue a relationship with the sources of meaning in our lives, granted, but they are at least as likely to keep others too busy scrambling for survival or grieving over their losses to find time for that challenging process. When we project our fantasies of a better life onto the inkblot patterns of catastrophe, then, we’re kidding ourselves, and the sooner we grasp that – the sooner we come to terms with the bleak predicament facing us, and turn our attention to figuring out what might still be saved and then trying to save it – the more likely we are to make a positive difference in a bitter time.

A Terrible Ambivalence

2009-09-09T19:25:00.000-07:00

I’d meant to spend this week’s report talking about scarcity industrialism, the kind of economy that will be defined for us in the near future by the conjunction of resource scarcity with the immense mass of embodied energy we call an industrial civilization. There’s a great deal to be said about the forms such an economy will likely take, and the harsh challenges and unexpected opportunities that it will bring to a world still far too used to getting as much energy as it wants whenever it happens to want it.

Still, that necessary theme will have to wait a week or two. Last month the online edition of The Guardian, one of the leading (or at least surviving) British newspapers, featured a debate about the future of industrial society between journalist, poet and cofounder of The Dark Mountain Project Paul Kingsnorth, and the sturdy radical George Monbiot, who's most recently made a name for himself as a tireless advocate for drastic measures to counter global warming. It was refreshing to see the possibility of the collapse of our civilization debated on so public a forum, and of course it didn't hurt my feelings any to be cited as an authority of sorts by one of the participants. Still, the debate left me with a deep sense of disquiet, which has only become stronger. in the days that followed and finally made this point unavoidable.

At some risk of oversimplification, the argument between Monbiot and Kingsnorth may be summed up more or less as follows. Both agree that industrial civilization faces imminent collapse. Monbiot argues that collapse might still be prevented if we all pull together, that the only alternative is letting total collapse happen, and that this is unthinkable because billions of people will die horribly. He argues that the only alternative to preserving modern society in some improved form is a cataclysmic process of mass dieoff ending in a new dark age ruled by petty warlords, with some new earth-ravaging society likely to rise on the ruins of the old unless his preferred political solution gets put in place to control our species' ecocidal tendencies.

Kingsnorth rejects all this. He insists that collapse can't be prevented, and in any case should be allowed to happen, because industrial civilization is a "planetary weapon of mass destruction" and letting it collapse is less destructive than allowing it to continue. He cites my concept of the Long Descent to argue that the end of industrial civilization could be a lot less traumatic than Monbiot thinks it must be, insists that ecocide is inherent in our present society rather than in humanity as a whole, and suggests that whatever replaces our society is bound to be less dreadful than what we have now.

Anyone who has listened to debates about the future of industrial society at any point in the last fifty years or so will surely find both these arguments familiar. Since the limits to growth first became visible on the horizon of our civilization's future, the great majority of those who took the time to notice them either insisted that humanity can and must do something about them, and offered some plan for reaching a better future, or insisted that nothing at all could be done about them, and claimed that the arrival of those limits would bring a better future.

To be fair to Monbiot and Kingsnorth, their stances in the debate expressed moderate and nuanced versions of these common tropes. It wouldn't be hard at all to find examples much further out in either direction – out well past Monbiot, say, one of the current technofantasists or political zealots who believe that a world teetering on the edge of doom can be transformed into Utopia if only their pet project were to be adopted by all; out well past Kingsnorth, perhaps, one of the neoprimitivists who daydream about the carefree life in the bountiful lap of nature that would surely arrive if only six billion inconvenient people would hurry up and die.

The arguments in the Guardian debate are far less extreme, and far more reasonable, than these. So why do they leave me shaking my head, convinced that neither one has grasped what's most essential about the predicament before us?

The places where Monbiot misses the turning, as I see it, stand out clearly, and longtime readers of this blog will likely have no difficulty at all anticipating my disagreements with his views. To begin with, his call to arms is an epic case of locking the barn door when the horse has not only left but mailed back a forwarding address from another state. The end of industrial civilization would almost certainly have been forestalled if sensible policies had been put in place in the 1950s; there was arguably still some hope of success if all-out efforts had been launched in the 1970s; at this point, with Hubbert's peak already past, CO2 piling up in the atmosphere and the world's human population approaching seven billion, the chances of preventing collapse compare unfavorably with those of a snowball in Beelzebub's back yard.

Now it could be argued that any possibility is worth pursuing if the alternative is dire enough, and this is basically the argument Monbiot makes. Unfortunately his plan of action is simply to dust off the same toolkit of protest methods that activists have been using with diminishing returns, and governments have been brushing aside with increasing success, since the dawn of the twentieth century. The handful of successes achieved by those methods many decades ago have imposed a bizarre astigmatism of the imagination on the left; the stereotyped methods of protest have become so sacrosanct, or so automatic, that the mere fact that they have failed consistently for years never quite seems to register.

All this invites comparison with Don Quixote, even if Monbiot is fighting for windmills rather than against them. Woeful countenances aside, though, insisting on the pursuit of an unreachable goal through ineffective methods is not normally a productive way to prepare for a difficult future. There's nothing in Monbiot's proposal that hasn't been tried repeatedly since the 1950s without having the least impact on the trajectory of industrial society, and as the saying has it, if you always do what you've always done, you'll always get what you've always gotten.

All this may seem like support for Paul Kingsnorth's side of the argument, and of course it parallels a number of the points he makes in the debate and elsewhere in his writings. It seems fair to say that my views are much more in sympathy with his than with Monbiot's, and I suspect that Kingsnorth would agree with that assessment, as he's the one who cited me to support one of his arguments. Yet there's a sour note running through his contributions to the debate, and it comes out forcefully every time he finesses the human cost of the transformation ahead of us.

Monbiot, to give him his due, calls him on this repeatedly. A deindustrial world, as Monbiot correctly points out, will be able to support maybe two billion people at most – my working guess, for what it's worth, is that this is too optimistic by a factor of four – and this means that in any future that doesn't include the survival of the industrial system, a lot of people are going to die. Now of course he goes from there to imply, more or less, that yet another round of protest marches is the only way to keep five billion human corpses from hitting the ground in a single planetwide thud, and this doesn't exactly follow. Still, the basic point is valid, and Kingsnorth's efforts to evade it are troubling.

Yet that evasion is inseparable from a central theme of Kingsnorth's argument, which is that a better world can be expected to rise out of the wreckage of the present. That Monbiot's argument also hinges on his hopes for a bright new tomorrow adds a rich irony to the debate. Both men are proclaiming the gospel of a better future; their disagreements are simply about what form that future will take and how we will get there. Both assume that we can have, and ought to have, a future that's even shinier than the present. It's a very common assumption, so common that many of those who are reading these words may share it, but it's also the place where the worm gets in and rots the apple to the core.

We are not going to have a future better than the present: not in our lifetimes, and not in those of our grandchildren's grandchildren. We collectively closed the door on that possibility decades ago, and none of the rapidly narrowing range of choices still open to us now offers any way of changing that. If this sounds like fatalism, it may be worth remembering that once a car goes skidding off a mountain road into empty air, it requires neither a crystal ball nor a faith in predestination to recognize that nothing anybody can do is going to prevent a terrific crash.

It's nonsense to claim, as some inevitably do, that this realization makes taking action pointless. Our efforts, given hard work, wisdom, and a substantial dollop of luck, may well succeed in making the future less difficult than it will otherwise be. It may be possible for us to save a few things worth saving that would otherwise be lost, to stem some little of what will be an immense tide of human suffering, to do what we can to help stabilize a damaged biosphere so Nature doesn't have to rebuild it entirely from scratch. All of these things are profoundly worth doing. None of them will change the fact that the future ahead of us will be a profoundly difficult time in which many of the things that are most meaningful to each of us will inevitably be lost.

We do no one a favor, least of all ourselves, by trying to sugarcoat that very unpalatable reality. Nor do we gain anything by playing the fox to industrial civilization's grapes, and insisting that the extraordinary gifts the recent past has given us are sour because they are about to pass out of our reach. During the age that is coming to an end, the billion or so of us who have lived in the industrial world have enjoyed comforts and opportunities that our species had never known before and almost certainly will never know again. Those could never have been anything but temporary, they were distributed no more fairly than anything else passed around by human hands, and a wiser species would likely have had more common sense than to launch itself on the trajectory we followed, but it's as distorting to dismiss the extraordinary achievements of our age as it would be to ignore the terrible cost for those achievements that will be paid by us and our descendants.

So many of us want things all one way or the other, all good or all evil, without the terrible ambivalence that pulses through all things human as inescapably as blood. So many of us want to see today's civilization as humanity's only hope or as ecocide incarnate, and long for a future that will be either the apotheosis or the final refutation of the present. It's far less popular, and arguably far more difficult, to embrace that ambivalence and accept both the wonder and the immense tragedy of our time. Still, it seems to me that if we are to face up to the challenges of the future that's bearing down on us, that difficult realization is an essential starting point.

The Dawn of Scarcity Industrialism

2009-09-02T19:12:00.001-07:00

Two bits of news circulating on the internet in the last week or so offer a useful glimpse at some of the currents of change that are setting the future into motion around us. One of them caused a modest flutter in the dovecotes of the internet and the mass media, and the other passed almost unnoticed. So far, though, the sweeping implications of both of these news items seem to have been missed by most observers.

The first bit of news was a report that the Chinese government is planning to ban the export of rare earth elements. Those of my readers who don’t track the latest fads in technology may not know that these have become crucial to many cutting edge technologies. Lanthanum, for example, is used in high-tech batteries, and neodymium goes into the permanent magnets used in electric motors and wind turbines. The innards of the Prius and other hybrids, to say nothing of the as-yet-imaginary electric cars being hyped by what’s left of the American auto industry, depend on rare earth elements, and China currently produces well over 90% of the world’s supply of most of them. The report thus sparked claims of an imminent shortage in these minerals and, predictably, a flurry of speculative interest in (and hype-ridden articles about) mines outside of China that can produce the same minerals

A couple of details of the proposed restrictions somehow failed to make it into most media and internet accounts, and they are by no means minor issues. The first is that there’s nothing that new about this news; in each of the last three years, the Chinese government has cut the export quotas for rare earth elements from China’s mines. More important is the fact that the Chinese are not preventing the export of products containing rare earth elements; they are simply moving to ban the export of the raw materials. In effect, what the Chinese are saying is that they are no longer willing to accept the Third World’s designated role as a source of raw materials and cheap labor to be exploited for the benefit of somebody else; if the future is going to run on technologies based on rare earth elements, those technologies are going to come out of Chinese factories, and the wealth produced by them is going to be concentrated in Chinese hands.

As this reality sinks in, we will doubtless hear more denunciations of “resource nationalism.” You’ll notice that nobody denounces “resource nationalism” when the United States imposes political controls on the control of its own strategic resources, as of course it does. The problem arises, as some wag or other put it, because a lot of our resources these days have unaccountably turned up underneath somebody else’s real estate.

Now to some extent the rise of “resource nationalism” is simply one of the consequences of the decline of America’s global empire. Page back a century or so to the time when Britain was the global superpower, with troops garrisoned around the globe, and the same debates took place in very nearly the same terms. Britain’s Parliament and press trumpeted the virtues of free trade, meaning by that comfortably vague phrase a system of unequal exchanges that concentrated the bulk of the world’s wealth in London, while other countries – among them, ironically, the United States – used politically imposed trade barriers and tariffs to nurture their emerging industrial economies at Britain’s expense. As the British Empire waned, so did the global economy of the late 19th century, until the First World War finally pushed it over the brink into oblivion.

We are arguably in a similar situation now, with America playing the role of declining empire and China, among other countries, imposing strategic trade barriers by political fiat as a means of building up its own industrial might at our expense. All other things being equal, we might reasonably expect a troubled transition lasting several decades and punctuated by a series of spectacular wars, not unlike the 1914-1945 transition period that saw Britain’s global empire replaced by America’s. Still, all other things are not equal, and the second bit of news I want to discuss here points up one of the differences.

This was the announcement a few days back that the world derivative market has now reached a total paper value in excess of one quadrillion dollars. The conventional wisdom has it that such sums are beyond the capacity of the human mind to grasp, and in this case, the conventional wisdom may well be right. (If you have the sort of fashionable lifestyle that costs you $2000 a day, for example, and you started spending it when multicellular life first evolved on Earth, you wouldn’t yet have spent one quadrillion dollars.) Still, it’s important to grapple with such figures if only to grasp the fantastic absurdities that have created them.

In thinking about this particular version of the unthinkable, two things should be obvious. The first is that there isn’t a quadrillion dollars worth of nonfinancial goods and services anywhere on our planet. The second, which derives necessarily from the first, is that those derivatives aren’t actually worth a quadrillion dollars in any meaningful sense, since it’s impossible to cash them in for anything other than more financial paper. In terms introduced in an earlier Archdruid Report post, derivatives exist solely in the tertiary economy, the economy of abstract numbers that started out as a representation of real wealth and has now gone spinning off into a hallucinatory Wonderland of its own.

As I am not sure how many of my readers understand derivatives, a few words on the subject might be useful. A derivative is essentially a bet regarding some asset, index, cash flow, or the like, which is called the “underlying.” In the early days of derivatives, cash changed hands when the bet was settled – for example, a derivatives contract might obligate me to buy a hundred carloads of steel next October at a price fixed in advance, and the price of steel when the contract came due determined who profited and who lost. More recently, though, derivative contracts themselves have become hot speculative properties, subject to all the usual vagaries of bubble economics. Since they can quite literally be conjured out of thin air when needed, with no cash down, they are in many ways the perfect speculative instrument.

It will be interesting to see just how long the current bubble in derivatives – for that is what it is, of course – can continue to run. Substantial gaps already exist between the speculative economy and that other, dowdier economy where nonfinancial goods and services are produced and consumed; nowadays the main connection between these two economies is credit, which is manufactured in the speculative economy but partly exported to the real economy. The late housing bubble and its aftermath offers a good demonstration of this; vast amounts of credit produced in the speculative economy flooded the real economy until 2007 or so, causing apparent prosperity; when the speculative economy crashed and all that credit dried up, so did the real economy’s prospects. Derivatives have less contact with the real economy than mortgage-backed securities did, and since nearly all the quadrillions of dollars in the derivatives bubble have been minted out of twinkle dust by processes even more arbitrary than those used by the US government to conjure the funds for its recent stimulus programs – and that is saying something – it’s not completely impossible that the bubble will go zooming off into a realm of pure abstraction full of quintillion-dollar deals as irrelevant to the real economy as the money traded in a game of Monopoly.

Yet there is another potential connection between the etherial realms of speculative finance and the gritty world of matter where goods and services are produced and consumed, and China’s tightening grip on its rare earth elements points toward that connection. Economics does not exist in a vacuum, and the power of high finance can find itself suddenly overmatched when it has to contend with the sort of power that grows out of the barrel of a gun.

This is the mostly unlearned lesson behind the collapse of Long Term Capital Management (LTCM), that poster child of 1990s speculative hubris. Founded by some of the brightest minds in the market, with two Nobel laureates on its staff, LTCM made money – for a while, lots of it – by a set of complex mathematical models that, according to one of its founders, could not fail within the lifetime of this universe or two more like it. The universe ended early; LTCM had been in business for all of five years when the Russian government unilaterally suspended payments on its foreign loans. LTCM had a lot of money in Russian loans, but the prospect of a default wasn’t included in the models, and by the time the rubble stopped bouncing LTCM was so deep in the red that a consortium of banks had to be strongarmed by US government officials into stumping up billions of dollars to prevent a run on securities markets.

The lesson the founders of LTCM learned the hard way is that politics trumps economics. It’s a lesson that has been repeated many times over the last century, but it’s one that very few people seem willing to notice. If I’m right, though, it may just be the key to understanding the next fifty years or so of history.

In previous posts here, I’ve suggested that the world is in the midst of a transformation between the kind of society and economy familiar to us over the last century or so, which I’ve called “abundance industrialism,” and a new kind that may as well be called “scarcity industrialism.” Where abundance industrialism was defined by the ready availability of cheap abundant natural resources, especially but not only fossil fuels, scarcity industrialism will be defined by the scarcity of such resources. One of the implications of this shift is that those nations and regions that control significant amounts of important resources will find those resources becoming a potent source of political leverage. The same sort of clout OPEC gained from its oil reserves in the Seventies, and may reclaim in the not too distant future, will become accessible to countries or cartels of countries with large amounts of any economically vital resource.

If this is correct, the Chinese are not just using trade barriers to build their industrial plant at America’s expense; they’re doing that, of course, but it’s not all they’re doing. They are also taking advantage of the opportunities opening up as the age of scarcity industrialism dawns. They may well have recognized that in a world that will increasingly be shaped by resource scarcities, those who act to secure their own resource bases can thrive while others falter. It’s a lesson that Russia has already learned – witness the successful efforts of the Russian government to seize Russia’s fossil fuel assets from the handful of American- and British-backed billionaires who walked off with them during the chaos and corruption of the Yeltsin years – and other nations are beginning to learn it as well.

The dawn of the age of scarcity industrialism thus promises to stand many of the assumptions of the recent past on their heads. It may not be out of place, therefore, to discuss some of the ways that societies might, if they were minded to do so, deal with some of these new realities, and next week’s post will try to peer ahead into this territory.

Entropy Gets No Respect

2009-08-26T16:26:00.000-07:00

The relation between modern industrial society and the scientific ideas that supposedly guide it is more complex than a casual glance will necessarily reveal. The ideology a society believes that it embraces and the assumptions about the world that actually underlie its actions and institutions are not uncommonly at odds with one another. It often takes the most strenuous sort of willed inattention to fail to notice the gap, but efforts toward that end can count on the support of public opinion as well as the more tangible backing provided by economic interests.

Consider the clash between the Christian and liberal values allegedly embraced by the great powers of 19th century Europe and the ruthless political and economic exploitation imposed by these same powers on the subject peoples of their huge colonial empires. The result was a rush to find some justification for European empires other than the obvious one, which was simply that Europeans wanted the wealth and power they could get by exploiting the rest of the planet. As Stephen Jay Gould chronicled in his engaging The Mismeasure of Man, generations of scientists thus spent their careers trying to argue that the “white race,” that imaginary and variously defined beast, was biologically superior to the other “races” on the planet.

These efforts fell afoul of a minor detail of anthropology. It so happens that people of European descent fall toward the middle range of a great many biological indices; people of African descent tend toward one end of most of these indices, and people of East Asian descent tend toward the other. Thus it proved impossible to argue, say, that Britons were superior to Africans without providing evidence that Chinese were superior to Britons, and claims that Britons were superior to Chinese ended up just as effectively proving that Africans were superior to Britons. Still, these efforts continued right up into the first half of the 20th century, because the alternative was to admit that European domination of the planet was a straightforward act of piracy backed by nothing more edifying than a temporary advantage in military technology.

The industrial nations of the early 21st century are in a very similar predicament – or, more precisely, in two very similar predicaments. On the one hand, the relationship between the industrial nations and their Third World client states is very little more equitable than that between the British, say, and the quarter or so of the Earth’s land surface that was occupied by British troops and exploited by British economic interests in the 19th century. Claims of racial superiority having fallen out of fashion, the industrial nations nowadays justify their position by claiming that their political and economic institutions are superior, and the rest of the world’s nations can share exactly the same lifestyles of abundance if they only adopt these.

Today’s industrial societies treat this claim as a self-evident truth. Of course the colonial powers of the 19th century treated the claim of European racial superiority as a self-evident truth, too, and the two claims are equally bogus. The abundance enjoyed by the world’s industrial nations just now, after all, is the result of the fact that those same industrial nations use the great majority of the world’s fossil fuel production. Given that the current industrial nations have burnt around half the planet’s fossil fuel resources themselves, leaving the remaining half to fuel themselves and the rest of the world in the future, dangling the carrot of industrial prosperity in the faces of Third World countries at this point in the historical process is dishonest at best.

Of course it does seem to be true that representative governments and corporate-capitalist economies are more efficient than the competition at turning abundant fossil fuels into suburban lifestyles. This does not make representative governments and corporate-capitalist economies the cause of the prosperity of today’s industrial nations, any more than the skin color of people from Europe was the cause of Europe’s ascendancy during its age of empire. Still, just as the unmentionable realities behind European imperialism made it inevitable that there would be attempts to justify it via bad science, the equally awkward realities behind the ascendancy of today’s industrial powers provide the push behind well-meaning attempts to package the industrial world’s institutions for export to the Third World.

The same sort of logic, on an even deeper level, governs the relationship between the nations of the modern industrial world and the foundation of those nations’ present prosperity – the Earth’s fossil fuel reserves themselves. The hard reality is that the minority of us who happened to have been born in a few powerful countries squandered half a billion years of stored photosynthesis to give ourselves a brief period of spectacular economic abundance, and by doing so, foreclosed the chance that anybody else would enjoy that same abundance in the future. Fossil fuels are not renewable resources in any time frame accessible to our species. Every barrel and ton and cubic foot of fossil fuel we use now is subtracted from the total available to our descendants; despite an orgy of handwaving, no other resource can provide anything approaching the glut of cheap abundant energy on which our lifestyles of relative privilege depend.

Yet this point of view is at least as unmentionable in polite society just now as were the gritty realities of European colonialism in its time, or the equally gritty facts underlying the ascendancy of the world’s industrial nations over the Third World today. The strenuous efforts to find a racial basis for European supremacy a century ago, and the equally vigorous efforts to hold up contemporary Western institutions as the key to prosperity and peace in the Third World today, thus have precise equivalents in the enthusiasm with which every imaginable alternative energy resource gets treated by government officials and media pundits throughout the industrial world.

None of these resources can actually provide the cheap abundant energy needed to maintain the kind of society we have today. I know that this is a controversial statement just now. Still, it’s worth noting that every alternative energy resource that’s actually been brought into production has turned out, at best, to provide a modest increment to existing energy supplies, and that only if you don’t keep track of the energy subsidy the new resource gets from fossil fuels. Of course technologies that haven’t been put into production look more promising, and the further they are from implementation, the more impressive they look; hype, often geared to the very practical goal of selling shares in IPOs, is at least as abundant in the energy field as anywhere else.

And this, dear reader, is where the gap between our society’s official respect for science and its real attitudes toward the world shows up with remarkable clarity.

Once again, the role of the B-movie heavy in this drama is played by the second law of thermodynamics, better known as the law of entropy. As mentioned in a previous post, this is the gold standard of physics, the law you can’t break without, as Sir Arthur Eddington put it, collapsing in deepest humiliation. Everybody in the industrial world with the least smattering of a scientific education knows about it, or at least was introduced to it, and yet next to nobody wants to talk about how it affects the emerging energy crisis of our time.

The crucial implication of the law of entropy, for our purposes, is that it’s not energy as such, but a difference in energy potential, that allows work to be done. Imagine two smooth round boulders of equal weight, one of them sitting on a flat plateau and the other sitting on the slope of a steep hill. If the two are at the same distance from the center of the Earth, gravitation gives them exactly the same amount of potential energy. Still, if you give the one on the plateau a push, you aren’t likely to do anything but strain your muscles, while if you give an equal push to the one on the slope, you may send it rolling down the hill, squashing everything in its path.

The difference is that every part of the plateau has the same energy potential due to gravity, while every part of the slope does not have the same potential, and the boulder rolling down the slope can cash in some of the difference in potential to keep itself moving. The greater the difference in potential, the greater the payoff in terms of energy released. Notice, though, what happens when the boulder on the slope finally lurches to a stop at the bottom of the valley below: it stops, and another push won’t get it going again. It still has a lot of potential energy in that position – it has, in theory, 4500 miles to fall until it reaches the center of the earth – but there’s nowhere it can go to release any of that energy. Without a difference in potential, how much energy you’ve got is a meaningless statistic. (This is, incidentally, why the quest for zero point energy is an exercise in absurdity; by definition, zero point energy is at the lowest possible potential state, and therefore cannot be made to do any work at all.)

The same rule applies to every energy resource: there has to be a difference in potential that allows energy to be released, and the bigger the difference, the bigger the benefit. With petroleum, the difference is in chemical energy. Those long chains of carbon and hydrogen atoms have a lot of energy to release when they come apart and combine with highly reactive oxygen instead; the short chains that form natural gas have less, and the carbon in coal has less still, though it’s still a lot by the standards of other energy sources. All the extraordinary things our species has done with fossil fuels over the last three hundred years are functions, in effect, of the difference in chemical potential energy between a barrel of oil and a cloud of smoke.

Why are these reflections as welcome in the collective conversation of our time as a slug in a fresh green salad? Because they point up the profoundly shortsighted nature of the decisions that made the world in which all of us now live. The immense potential energy locked up in fossil fuels was put there by millions of years of photosynthesis. It’s as though, to return to our metaphor, living things down through the ages rolled boulders uphill and perched them high above the valley floor. After a half billion years or so, our species came along, and figured out how to roll those boulders downhill. As long as there are still plenty of boulders in place, we can continue using them, but when the rate at which we want to send boulders rolling downhill outstrips the boulder supply, it’s a waste of breath to insist that we can get the same results by bouncing pebbles across the valley floor.

This is basically what the more enthusiastic proponents of alternative energy are saying. By the time sunlight gets to us, after traversing 93 million miles of empty space, it’s simply not that concentrated an energy source; that’s why it took the Earth’s photosynthetic organisms so many millions of years to build up the energy reserves we now squander so freely. Wind and hydroelectric power are both secondhand sunlight, the product of natural cycles driven by the sun; the same is true of every kind of biofuel, of course. Nuclear energy is the one nonsolar energy resource we’ve got, but it has severe problems and limitations of its own, not least the fact that the fossil fuel inputs needed to build, run, and decommission a nuclear reactor are so vast that there’s a real question whether nuclear power is a net energy source at all. (Of course the further a nuclear technology is from actual implementation, the better it looks, and the ones that are still vaporware look best of all.)

Does this mean alternative energy is a waste of time? Of course not. Modest as the energy outputs from alternative sources are, they’re what we’ll have to work with when the fossil fuel is gone. What it means, rather, is that the particular kind of civilization we’ve built in the last three centuries will not survive the end of cheap abundant fossil fuels. A society that is used to getting things done by rolling huge boulders down steep slopes is going to have to learn to make do on the much less lavish results of bouncing pebbles across the flat.

The problem here is that very few people want to deal with that reality. The great majority will make themselves believe in zero point energy and evil space lizards and any other absurdity you care to name, rather than gulp and take a deep breath and admit that the prosperity we’ve enjoyed for the last three centuries was bought at our grandchildren’s expense. I sometimes suspect that one of the reasons so many people like to imagine an apocalyptic end to the industrial age is that sudden extinction is easier to contemplate than the experience of slowly waking up to the full extent of our own collective stupidity.

And that, dear reader, is why entropy has become the Rodney Dangerfield of the contemporary energy debate. It may be the gold standard of physics, but in the collective conversation about our future, it don’t get no respect.

******************

I’m pleased to report that both the new projects mentioned in last week’s post are moving ahead. Readers who are following “Star’s Reach,” my online blog-novel about the world after peak oil, will want to know that a new episode has been posted at http://starsreach.blogspot.com.

The Cultural Conservers Foundation is also moving forward. Those interested in participating in a more focused discussion of the subject are invited to join me on a newly founded email list, cultural_conservers@yahoogroups.com. The list is moderated, and the same rules apply there as here – no spam, no flaming, no trolls, etc. The fast way to join is to send an email to cultural_conservers-subscribe@yahoogroups.com, with “subscribe” as the subject line.

The process of starting a nonprofit also takes a certain amount of cash; I’m putting my own money into it, but would welcome help with the startup costs. We were originally planning on using PayPal for donations, but PayPal policies make it impossible for a nonprofit to use their services until after tax exempt status has been obtained. Those interested in donating to help with startup costs may contact me offlist at info (at) aoda (dot) com. Many thanks in advance for your help!

Betting on the Rust Belt

2009-08-19T16:09:00.000-07:00

I owe, I think, an apology as well as a few words of explanation to the regular readers of this blog. The weeks I’ve taken off from posting here this summer have not been as innocent as they seemed, and those of you who may have imagined me basking in the mostly theoretical sun on some gray and rainy Oregon beach are about to be sadly disillusioned. Conspiracy fans take note: a plot has been afoot.

Over the last few weeks, my spouse and I have relocated to the other side of North America and are now settling into a new home in Cumberland, an old mill town of 20,000 people tucked away in the north-central Appalachians, up in the panhandle of western Maryland. The Amish country of Pennsylvania begins not that many miles north of us, and West Virginia’s a stone’s throw across the river to the south; the big cities of the east coast are only a few hours away by train, but you wouldn’t guess that from the rural ambience and the dense forest blanketing the hills. It’s a pleasant place, with old brick buildings and pretty scenery, and it’s becoming a regional hub for the arts, with the help of very low rents and the enthusiasm of the local arts council. Still, none of those are the primary reason why we moved here.

Readers of this blog who remember an earlier post, “Rethinking the Rust Belt,” may have already guessed at some of the deeper motives behind the move. Though it flowered earlier than most, Cumberland is a quintessential Rust Belt town. Founded in the 18th century along one of the most important transport routes linking the east coast to the interior, it became by turns a canal center, a railroad hub, and a thriving industrial town where factories powered first by water and then by local coal anchored an economy lively enough to make Cumberland the second largest city in Maryland. From its red brick factories and faux-medieval county courthouse to its distinctive local beers – Queen City Brewery was the big name here until it went under in the Seventies – it’s hard to think of a detail of the old American industrial heartland that wasn’t present and accounted for.

As America’s manufacturing economy ebbed, in turn, Cumberland suffered accordingly, and its population today is little more than half what it was forty years ago. Most of the old mansions on Washington Street have been subdivided, the once fabulously busy C&O Canal that ran from here to Chesapeake Bay has not been used in many decades, the last factories closed long ago, and half a century of struggle for survival has left visible wounds across the city. The railroad still runs through the middle of town, and there’s daily passenger service west to Pittsburgh and east to Washington DC, but the splendid old station that once graced the town was torn down decades ago and replaced with a bleak little cinderblock building about the size of a suburban three-car garage. The tourist brochures call Cumberland scenic and friendly, and not without reason, but not even the most imaginative publicist would think of calling it prosperous.

The conventional wisdom these days holds that towns like Cumberland have a future only if they can find some way to catch the coattails of the booming (well, formerly booming) economies of the two coasts. Cumberland city boosters have done their level best to follow that lead in recent years, with tourism and the arts scene as focal points, and they’ve had modest success so far. If I’m right about the future of America and the rest of the industrial world, though, they might want to consider raising their sights a bit, because the tide of history that left Cumberland and so many towns like it high and dry may just be turning.

I don’t know how many readers of this blog remember, as I do, the headlines that came out of the Rust Belt in the 1970s, when the economic collapse of America’s industrial hinterland first really became visible on the large scale. Anyone who needs a refresher, though, can get one easily enough by reading the equivalent headlines coming right now out of California. The political gridlock, the sclerotic economy, the slumping quality-of-life indices, the special interests clinging to oversized shares of a shrinking pie – it’s all there, made all the more poignant by the anguished yelps of California politicians insisting that the rest of the country can’t just sit by and let the formerly Golden State finish circling the drain. (A hint to Sacramento might be in order here: state governments from Pennsylvania to Illinois tried that gambit repeatedly forty-odd years ago,and it didn’t work then, either.)

The underlying cause is essentially the same, too. The collapse of America’s industrial heartland into the Rust Belt was part of the price, as I’ve pointed out in previous posts, of the economic shift that turned America from an industrial economy that produced most of its own goods and services at home to a global power that imported most of its manufactured goods from overseas. Since so much of the resulting flood of products came from Asia, the great ports of the west coast boomed – for decades now, the Los Angeles-Long Beach complex has been the single busiest port in America – and the resulting flows of wealth turned the entire west coast from a mildly exotic region on the nation’s periphery to one of its core economic hubs.

Yet it’s only in the imaginations of believers in linear progress that such shifts are permanent. America is learning the hard way, as Britain did a century ago and Spain a century and a half before that, that the sheer economic burden of maintaining a global military presence is quite capable of pushing even the richest nation into bankruptcy. The Asian industrial powers that once churned out consumer goods for American stores are calmly retooling, using the billions we send them each year, to produce goods to meet the desires of their own newly prosperous people. Meanwhile the age of cheap abundant energy that made 20th century-style globalism possible in the first place is coming to an end around us. The economic model that built California’s past prosperity, in other words, is done enough to poke with a fork.

As far as I can tell, very few people on the west coast – or anywhere else – have begun to think through the implications of that troubling fact. I wonder, for example, how many states within driving range of California have drawn up plans to deal with the massive influx of economic refugees that will likely follow once California’s relatively lavish entitlement programs are slashed to the bone or shut down completely. I wonder whether any of the other west coast states, for that matter, have faced up to the possibility that the import-driven gravy train they’ve been riding for the last half century may just have run off the rails. If that’s the case – if Los Angeles, San Francisco, Portland and Seattle play the same role in coming decades that towns such as Pittsburgh, Cleveland, Buffalo and Gary played in the recent past – some of the most basic assumptions of American social geography are headed for the dumpster.

Sussing out the geography of the future in advance is no easy task, but the constraints bearing down on what’s left of the American economy offer a few hints worth noting. Now that we’re on the downslope of Hubbert’s peak – world production of conventional petroleum peaked in 2005 – energy costs will, on average, take a larger bite out of economies around the world with each passing year. One of the implications is that transport costs will no longer be a negligible part of the cost of goods shipped over long distances. More energy-efficient transport modalities will tend to replace less efficient ones because they, and thus the goods they ship, will be more affordable; equally, diseconomies of distance will tend to outweigh economies of scale and foster the reemergence of regional economies. Among the likely beneficiaries of these changes are the towns that thrived best in an earlier, more regional economy -- those that are well served by rail and water transport, surrounded by farming regions that don’t depend on irrigation, not too far from major markets, and provided with ample and inexpensive real estate for the factories and warehouses of a downscaled and relocalizing industrial economy.

Welcome to the Rust Belt – and, among many other towns, to Cumberland.

Now of course our move here is a gamble, and a distinctly contrarian gamble at that. According to the conventional wisdom, we’re nuts. If the believers in perpetual progress are right, and America leaps out of the current Great Recession into some glossy future full of even higher high tech gimcracks than we have today, Sara and I have consigned ourselves to a dying economic backwater that will survive, if at all, only by whoring itself out to some futuristic tourist trade. If the believers in imminent apocalypse are right, equally, those starving mobs who are supposed to pour out of the big cities on cue to provide target practice for survivalists could very well head this way. Still, my guess is that neither of these very popular tropes about the future is at all likely to reflect what will actually happen – and in most other possible futures, including those I consider most likely, Cumberland and places like it are likely to do at least as well as anywhere else in this country, and quite probably better than most. One way or another, though, we’re betting on the Rust Belt.

*****

Over the last few weeks, while I’ve been packing and unpacking boxes and waiting to get my internet access up and running again, I’ve set some projects in motion. A couple of them may be of interest to this blog’s readers.

First, I finally have something to offer those of you who wrote hoping for more of my fictional explorations of the deindustrial future. I’ve begun work on an online novel titled Star’s Reach; you’ll find it just a click away at http://starsreach.blogspot.com. It’s set in Dark Age America about five hundred years from now; longtime readers will likely recognize the setting as the latter years of the salvage society phase I’ve discussed in past posts. I expect to add a new section to the tale every couple of weeks, but we’ll see.

Second, I’ve begun laying the groundwork for a nonprofit organization to help bring about what I’m convinced will be one of the most crucial initiatives of the next few decades. The Cultural Conservers Foundation will support the hard but vital work of preserving the legacies of the past and present into the future. It will be nonpartisan, nonpolitical, nondenominational, and as independent of any other source of unhelpful interference as I can manage. Expect further posts on this project as it comes together.

The Archdruid Takes A Break

2009-08-03T22:01:00.000-07:00

Once again The Archdruid Report will be on a brief hiatus until the middle of August, s I'll have essentially no internet access until then. Once I'm back online, I'll have some announcements to make, and something new to offer that I think longtime readers will find entertaining. In the meantime, The Ecotechnic Future, which is the sequel to The Long Descent and discusses many of the concepts introduced here over the last couple of years, can now be preordered from New Society. Thank you all for contributing to the ongoing conversation!

The Economics of Entropy

2009-07-29T18:20:00.000-07:00

Over the last few weeks, my posts here on The Archdruid Report have tried to sketch out a way of understanding economics that doesn’t contradict the laws of physics or the evidence of history. Perhaps the central concept I’ve been developing along these lines is the sense that there is no such thing as “the” economy in any human society; there are, rather, three economies, each of which follows distinctive rules.

The primary economy, in this way of looking at things, is the natural world itself, which produces something like three-quarters of the goods and services on which human beings rely for survival. The secondary economy, which depends on the primary one, is the collocation of labor, capital plant, and resources extracted from the primary economy that produces the other quarter or so of the goods and services human beings use. The tertiary economy, finally, is the system of social processes by which the products of the first two economies are allocated to people. This can take many different forms, of which the one most familiar to us is money.

The differences between these three economies run deep, and so do the differences in the way they are treated in conventional economic thinking. Unfortunately these two sets of differences do not run in parallel. One way to explore the resulting mismatch is to look at how the three economies, in reality and theory, are affected by the least popular of all the laws of physics: the second law of thermodynamics, more popularly known as the law of entropy.

To call this law unpopular is not to say that it suffers from any lack of recognition by scientists. The comment of Sir Arthur Eddington, one of the twentieth century’s greatest physicists, is typical: “If your theory is found to be against the second law of thermodynamics, there is nothing for it but to collapse in deepest humiliation” – a summing-up so useful that it probably deserves to be called Eddington’s Law. Entropy is the gold standard of physics, the one thing you can count on even when the rest of the cosmos seems to be going haywire. What makes it unpopular, rather, is that it stands in stark conflict with some of the most deeply and passionately held convictions of modern industrial humanity.

For all that, it’s a simple concept to grasp. Pour a cup of hot coffee on a cold morning and you can watch entropy in action. The coffee will gradually get colder and the air around it will get very slightly warmer. All energy everywhere, left to itself, always moves from higher to lower concentrations: that’s the second law of thermodynamics. On the way from higher to lower, the energy can be made to do useful work, and you can even force some energy to a higher concentration by allowing a larger amount of energy to go to a lower one, but one way or another entropy’s price must be paid.

We don’t like thinking in these terms, and for the last three hundred years, most of us in the industrial world haven’t had to. The 18th-century breakthroughs that allowed coal to be turned into steam power, and gave human beings command over amounts of highly concentrated energy never before wielded by our species, convinced most people in the western world that energy was basically free for the taking. In the halcyon days of industrialism, it was all too easy to forget that this vast abundance of energy was a cosmic rarity, a minor and finite backwash in the flow of energies on a scale almost too great for human beings to comprehend.

As far as we know, there are two and only two phenomena in the cosmos that naturally produce high concentrations of energy. The first is gravity. Unlike most physical phenomena, gravity has robust positive feedback: the more mass a body has, the more gravitational attraction it exerts, the more additional mass it can attract, and the more its gravitational attraction increases. This is why what starts as an eddy in an interstellar cloud of hydrogen gas, set in motion perhaps by the shockwave from a distant supernova, can attract steadily more hydrogen to itself until its gravity is strong enough to achieve the fantastic pressures needed for nuclear fusion, and a newborn star flares into life. Even so, entropy still rules; the light and heat that flows out from our Sun over the course of its ten billion year lifespan is still only a fraction of the potential energy of the gravitational collapse that brought it into being and keeps it going.

The second phenomenon that produces concentrated energy is biological life. Life combines positive and negative feedback loops, and so it’s much more fitful and fragile than gravity, but it can still surf the entropy of its neighboring star, tapping a small part of the vast streams of energy that flow entropically from the Sun’s core to the near-absolute-zero cold of interstellar space to concentrate chemical energy for its own use. Over the ages, the resulting concentrations of energy have transformed our planet, pumping oxygen into its atmosphere and burying trillions of tons of carbon underneath the ground in the form of coal, oil, and natural gas. Once that carbon was buried, gravity got to work on it, concentrating it further through heat and pressure. The energy stored in today’s fossil fuel deposits, in turn, is still only a fraction of the energy lost to entropy in the long slow process that brought those deposits into being.

This is why, as I’ve tried to point out in previous posts, those who expect to get some new and even more concentrated energy source to replace our dwindling reserves of fossil fuels are basically smoking their shorts. It took an extraordinarily complex series of processes, more time than the human mind has evolved the ability to grasp, and an equally unimaginable amount of energy lost to entropy, to produce the highly concentrated fossil fuels we’ve wasted so profligately over the last three hundred years. There are plenty of diffuse energy sources left, but raising them to concentrations that will allow them to power our current civilization would require huge amounts of additional energy to be sacrificed to entropy – and once you subtract the entropy costs of concentration from the modest energy supplies available to a deindustrial world, there isn’t much left. Try telling that to most people, though, and you’ll get a blank look, because we’ve lived with abundant concentrated energy for so long that very few people recognize just how rare it is in the broader picture.

Economics, once again, feeds this blindness. Most economic models, interestingly enough, admit entropy into what I’ve called the secondary economy: there’s a clear sense that producing goods and services consumes resources and produces waste, and that energy fed into the process is lost to entropy in one way or another. Most of them, however, explicitly reject the role of entropy in the primary economy, insisting that resources are always available by definition if you only invest enough labor and capital. As for the tertiary economy, most economic theories accept it as given that money is anti-entropic – it produces a steady increase in value over time, which is the theoretical justification for interest.

In the real world, by contrast, the primary economy is just as subject to entropy as the secondary one. Oil that has been pumped out of the ground and burned is no longer available to use as an energy resource, and if enough of it has been pumped out, the oil field runs dry and it stops being a resource too. Natural cycles can keep some resources available at a steady level by surfing the entropy of the Sun, but only if human action doesn’t mess up those cycles – something we are doing a great deal too much of just now. By ignoring the reality of entropy in the primary economy of nature, we are setting ourselves up for a very awkward future.

And the tertiary economy? This is where things get interesting, because the anti-entropic nature of money posited by mainstream economic theories has been accepted even by most critics of those theories. There’s accordingly been a flurry of proposals for changing the way money works so that it loses value over time. This is understandable, but it’s also unnecessary, because money as it exists today has an exquisitely subtle mechanism for losing value over time. The only difficulty is that mainstream economists and the general public alike treat it with the same shudder of dread and indignation their Victorian ancestors directed toward sex.

We’re talking, of course, about inflation.

I’ve come to think of inflation as the primary way that the tertiary economy resolves the distortions caused by the mismatch between the limitless expansion of the tertiary economy and the hard limits ecology and entropy place on the primary and secondary economies. When the amount of paper wealth in the tertiary economy outstrips the production of actual, nonfinancial goods and services in the other two economies, inflation balances the books by making money lose part of its value. I suspect – though it would take a good econometrician to put this to the test – that in the long run, the paper value lost to inflation equals the paper value manufactured by interest on money, once the figures are adjusted for actual increases or decreases in the production of goods and services.

It’s instructive to note what happens when governments attempt to stop the natural balancing process of inflation. In American economic history, there are two good examples – between the Civil War and the First World War, on the one hand, and between 1978 and 2008 on the other. In the first of these periods, the US treasury reacted against the inflation of the Civil War years by imposing a strict gold standard on the currency, and since the pace at which new gold entered the economy was less than the rate at which the production of goods and services expanded. The result was the longest sustained bout of deflation in the history of the country.

Despite the claims of precious-metal advocates today, this did not produce economic stability and prosperity. Quite the contrary, the economic terrain of the second half of the 19th century was a moonscape cratered by disastrous stock market collapses and recurrent depressions. The resulting bank and business failures probably eliminated as much paper value from the economy as inflation would have, but did so in a chaotic and unpredictable way: instead of everybody’s corporate bonds losing 5% of their value due to inflation, for example, some bonds were paid in full while others became worthless when the companies backing them went out of existence. The same calculus has come into play since the beginning of the Volcker era at the Federal Reserve Board, when “fighting inflation” became the mantra of the day; since then we’ve had a succession of crashes as colorful as anything the 19th century produced.

Thirty years of economic policy dedicated to minimizing inflation have guaranteed a sizable second helping of economic collapse in the years to come – it’s only in the imaginations of politicians and publicists that the recent “dead cat bounce” in the stock market, and various modest decreases in the rate at which economic statistics are getting worse, add up to a recovery of any kind, much less a return to the unsustainable pseudoprosperity of the years just past. Still, in the longer term, I suspect inflation will also play a major role in the unraveling of the current mess. With the end of the age of cheap abundant fossil fuels, the world faces a very substantial decrease in the amount of primary and secondary wealth in the world, and the notional wealth of the tertiary economy will have to lose value even faster to make up for that decline. Just how this will play out is anyone’s guess, but one way or another it’s unlikely to be pretty.

The Anti-Ecology of Money

2009-07-22T21:49:00.000-07:00

Last week’s Archdruid Report post built on one of E.F. Schumacher’s more trenchant insights to propose a controversial way of making sense of modern economics. Schumacher, in Small Is Beautiful, drew a distinction between primary goods produced by natural processes, and secondary goods produced by human labor, and pointed out that secondary goods can’t be produced at all unless you have the necessary primary goods on hand.

This is quite true, though it’s a point often missed by today’s economists. There is at least an equal difference, though, between either of these classes of goods and a third class produced neither by nature nor by labor. These are tertiary or, more descriptively, financial goods; they form the largest single class of goods in the world today, in terms of dollar value, and the markets in which they are bought and sold dominate the economies of the industrial nations. To call this unfortunate is a drastic understatement, because the biases imposed on our societies by the domination of financial goods are among the most potent forces dragging the world to ruin.

A specific example of a tertiary good may be useful here to help clarify the concept. Consider a corporate bond with a face value of $1000. This is a good in the economic sense – that is, it can be bought for money, it can be sold for money, there are people who want to buy it and people who are able to produce and sell it. Compare it to any more tangible item of value, though, and the bond is clearly a very strange sort of good. It consists of nothing more than a promise, on the part of some corporation, to pay $1000 at some future date. That promise may or may not be honored – junk bonds are bought and sold, for example, in full knowledge of the fact that the chances the issuers will pay up are not good – but even then the chance of collecting on it is treated as an object of value.

The differences between a tertiary good and a primary or secondary one reach further than this. Tangible goods produced by natural cycles or human labor are available in amounts limited by the supply. If there’s only so much water in a river, for example, that’s how much water there is; the fact that people want more, if such is the case, does not produce any more water than the hydrologic cycle is already willing to provide. Equally, if a country’s labor force, capital plant, and resource base are fully engaged in making a certain quantity of secondary goods, producing more requires a good deal more than an agreement to do so; the country must increase its labor pool, its capital plant, its access to resources, or some combination of these, in order to increase the supply of goods.

Yet tertiary goods are available in amounts limited only by the demand. How many bonds can a corporation print? For all practical purposes, as many as people are willing to buy. A good number of the colorful bankruptcies that have enlivened the business pages in recent months, for example, took out firms that mistook a temporary bubble for permanent prosperity, issued bonds far beyond their ability to pay, and crashed and burned when all that debt started to come due. On an even more gargantuan scale, the United States government is currently trying to restart its economy by spending money it doesn’t have, selling bonds to cover the difference, and amassing debt on a scale that makes the most extravagant Third World kleptocracies look like a bunch of pikers. It’s hard to imagine any way in which the results of this absurd extravagance will be anything but ugly, and yet buyers around the world are still snapping up US treasury bonds as though there’s a scintilla of hope they will see their money again.

The difference between supply-limited and demand-limited goods, as this suggests, is among other things a difference between kinds of feedback. Think about a thermostat and it’s easy to understand the principle at work. When the temperature in the house goes below a certain threshold, the heat comes on and brings the temperature back up; when the temperature goes above a higher threshold, the heat shuts off and the temperature goes back down. This is called negative feedback.

In a market economy, all secondary goods are subject to negative feedback. That’s the secret of Adam Smith’s invisible hand: since the supply of any secondary good is limited by the available natural inputs, labor pool, and capital stock, increased demand pushes up the price of the good, forcing some potential buyers out of the market, while decreased demand causes the good to become less expensive and allows more buyers back into the market. Equally, rising prices for a good encourage manufacturers to allocate more resources, labor, and capital plant to producing that good, helping to meet additional demand, while falling prices make other uses of resources, labor and capital plant more lucrative and curb supply.

Negative feedback loops of a very similar kind control the production of primary goods by the Earth’s natural systems. Every primary good from the water levels in a river and the fertility of a given patch of soil, to more specialized examples such as the pollination services provided by bees to agricultural crops, is regulated by delicately balanced processes of negative feedback working through some subset of the planetary biosphere. The parallel is close enough that ecologists have drawn on metaphors from economics to make sense of their field, and it’s quite possible that an ecological economics using natural systems as metaphors for the secondary economy could return the favor and create an economics that makes sense in the real world.

It’s when we get to the tertiary economy of financial goods that things change, because the feedback loops governing tertiary goods are not negative but positive. Imagine a thermostat designed by a sadist. In the summer, whenever the temperature goes up above a certain level, the sadothermostat makes the heat come on and the house gets even hotter; in the winter, when the temperature goes below another threshold, the temperature shuts off and the house gets so cold the pipes freeze. That’s positive feedback, and it’s the way the tertiary economy works when it’s not constrained by limits imposed by the primary or secondary economies.

The late and loudly lamented housing bubble is a case in point. It’s a remarkable case, not least because houses – which are usually part of the secondary economy, being tangible goods created by human labor – were briefly and disastrously converted into tertiary goods, whose value consisted primarily in the implied promise that they could be cashed in for more than their sales price at some future time. (As a tertiary good, their physical structure had no more to do with their value than does the paper used to print a bond.) When the price of a secondary good goes up, demand decreases, but this is not what happened in the housing bubble; instead, the demand increased, since the rising price made further appreciation appear more likely, and the mis-, mal- and nonfeasance of banks and mortgage companies willing to make six- and seven-figure loans to anyone with a pulse removed all limits from the supply.

The limits, rather, were on the demand side, where they always are in a speculative bubble: eventually the supply of buyers runs out because everyone who is willing to plunge into the bubble has already done so. Once this happened, prices began to sink, and once again positive feedback came into play. Since the sole value of these homes to most purchasers consisted, again, of the implied promise that they could be cashed in someday for more than their sales price, each decline in price convinced more people that this would not happen, and drove waves of selling that forced the price down further. This process typically bottoms out around the time that prices are as far below the median as they were above it at the peak, and for a similar reason: as a demand-limited process, a speculative bubble peaks when everyone willing to buy has bought, and bottoms when everyone capable of selling has sold.

It’s important to note that in this case, as in many others, the positive feedback in the tertiary economy disrupted the workings of the secondary economy. Long before the housing boom came to its messy and inevitable end, there was a massive oversupply of housing in many markets – there are, for example, well over 50,000 empty houses in Phoenix, Arizona right now. Absent a speculative bubble, the mismatch between supply and demand would have brought the production of new houses to a gentle halt. Instead, due to the positive feedback of the tertiary economy, supply massively overshot demand, leading to a drastic misallocation of resources in the secondary economy, and thus to an equally massive recession.

It’s long been popular to compare the tertiary economy to gambling, but the role of positive feedback in the tertiary economy introduces an instructive difference. When four poker players sit down at a table and the cards come out, their game has negative feedback. The limiting factor is the ability of the players to make good on their bets; the amount of wealth in play at the start of the game is exactly equal to the amount at the end, though it’s likely to go through quite a bit of redistribution. For every winner, in other words, there is an equal and opposite loser.

The tertiary economy does not work this way. When a market is going up, everyone invested in it gains; when it goes down, everyone invested in it loses. Paper wealth appears out of thin air on the way up, and vanishes into thin air on the way down. The difference between this and the supply-limited negative feedback cycles of the environment could not be more marked. In this sense it’s not unreasonable to call the tertiary economy a kind of anti-ecology, a system in which all the laws that govern ecology are stood on their heads – until, that is, the delusional patterns of behavior generated by the tertiary economy collide with the hard limits of ecological reality.

It’s not all that controversial to describe financial bubbles in this way, though you can safely bet that during any given bubble, a bumper crop of economists and pundits will spring up to insist that the bubble isn’t a bubble and that rising prices for whatever the speculation du jour happens to be are perfectly justified by future prospects. On the other hand, it’s very controversial just now to suggest that the entire tertiary economy is driven by positive feedback. Still, I suggest that this is a fair assessment of the financial economy of the industrial world, and the only reason that it’s controversial is simply that we, our great-grandparents’ great-grandparents, and all the generations in between have lived during the upward arc of the mother of all speculative bubbles.

The vehicle for that bubble has not been stocks, bonds, real estate, derivatives, or what have you, but industrialism itself: the entire project of increasing the production of goods and services to historically unprecedented levels by amplifying human labor with energy drawn from the natural world, first from wind and water, and then from fossil fuels in ever-increasing amounts. Like the real estate at the core of the recent boom and bust, this project had its roots in the secondary economy, but quickly got transformed into a vehicle for the tertiary economy: people invested their money in in industrial projects because of the promise of more money later on.

Like every other speculative bubble, the megabubble of industrialism paid off spectacularly along its upward arc. It’s inaccurate to claim, as some of its cheerleaders have, that everybody benefited from it; one important consequence of the industrial system was a massive distortion of patterns of exchange in favor of the major industrial nations, to the massive detriment of the rest of the planet. (It’s rarely understood just how much of today’s Third World poverty is a modern phenomenon, the mirror image and necessary product of the soaring prosperity of the industrial nations.) Still, for some three hundred years, standards of living across the industrial world soared so high that people of relatively modest means in America or western Europe had access to goods and services not even emperors could command a few centuries before.

In the absence of ecological limits, it’s conceivable that such a process could have continued until demand was exhausted, and then unraveled in the usual way. The joker in the deck, though, was the dependence of the industrial project on the extraction of fossil fuels at an ever-increasing pace. Beneath the giddy surface of industrialism’s bubble, in other words, lay the hard reality of the tertiary economy’s dependence on resources from the primary economy. The positive feedback loop driving the industrial bubble can’t make resources out of thin air – only money can be invented so casually – but it has proven quite successful at preventing industrial economies from responding to the depletion of their fossil fuel supplies fast enough to stave off what promises to be the great-grandmother of all speculative busts.

The results of this failure are beginning to come home to roost in our own time. To understand the economics of the resulting collision, though, it’s necessary to note the relationship between economics and the least popular law of physics – a subject central to next week’s post.

Nature, Wealth, and Money

2009-07-15T16:24:00.000-07:00

Since the beginning of the current series of Archdruid Report posts on economics, I’ve wondered in an idle sort of way if it might come to the attention of a professional economist or two. Last week’s post, though, seems to have settled that issue. I deliberately begged a question in that post, one that cuts to the core of conventional economic theory, and it would have taken a degree of self-control exceedingly rare in any profession for a mainstream economist to read the discussion and not rise to the bait.

I’m referring, of course, to the cavalier way in which the concept of money was treated in last week’s post. In terms of mainstream economics, it’s nonsense to talk about wealth or value without discussing how those things are reflected in some form of pricing mechanism – that is, how they’re measured in money. The widely held belief that the wealth produced by nature is valueless until it’s transformed into something else by human labor, in fact, bases itself largely on the fact that nobody has to pay the nonhuman world for that wealth, and so figuring out its price poses a major challenge – not insoluble, but significant enough that few economists have been willing to take it up.

Since Adam Smith launched modern economics in 1776 with The Wealth of Nations, unresolved disputes over the nature of money have formed a fault line running straight through the heartland of economic thought. Some economists – these days, the majority – treat wealth and money as interchangeable concepts. Others – the minority nowadays – draw a sharp distinction between them. Those who accept the identity of money and wealth seem most often to think of the rules governing money as something akin to laws of nature, untainted by human purposes and agendas; those who draw a distinction between them tend to see those rules as social constructs that benefit some people at the expense of others.

Longtime readers of The Archdruid Report will probably have little trouble guessing where along this spectrum of debate I can be found. It’s simple cultural chauvinism to insist that the particular, and peculiar, form of money used in contemporary Western societies is the only one that matters. Over the span of human history, money is a fairly late invention, and until very recently it played only a small part in the lives of most people even in the societies that used it; until the eighteenth century, even in the Western world, a majority of all goods and services were produced and exchanged within the household economy, or in local customary economies that made no use of money, and only the well off could expect to handle money on a daily basis.

Every human society has had some social mechanism for distributing goods and services. Paleoanthropologists have argued that it was precisely the evolution of food sharing within bands of ancestral humans that gave our species the evolutionary edge to expand across the globe in the face of wide variations in habitat and the rigors of ice age climates. Hunting and gathering societies around the world have intricate arrangements for sorting out who gets how much of the various natural sources of wealth available to them; so do the horticultural and pastoral human ecologies that evolved out of the hunter-gatherer pattern. Some of these latter use a particular trade good in certain contexts as a general marker for value – think of the shell-bead wampum strands used by the First Nations in eastern North America, for example – but these get used only in a restricted class of prestige exchanges, and play no role in everyday exchanges of goods and services. The same thing was true of gold and silver coinage in many ancient and medieval societies; most of the population of medieval England, for example, could expect to go from one winter to the next without seeing more than a handful of silver coins.

From a broader perspective, then, a money system of the sort we use today is simply one way of managing the distribution of goods and services within a particular kind of human society. Modern economics textbooks dodge this point by comparing money to only one other form of exchange – simple barter, in which (let’s say) a physician and a farmer have to negotiate how many bushels of wheat are worth a cure for an illness – and insisting on that basis that money is inevitable because the alternative is so clumsy. Surely, though, this puts the cart before the horse. It’s only when exchanges have already become subject to a market system that exchanges are conceptualized in such terms, and that presupposes that some standard measure of abstract value – that is, money – already exists. It’s worth mentioning that such great civilizations as Egypt of the pharaohs had farmers and physicians aplenty for tens of centuries before anybody thought of money.

What sets money apart from other systems is not its convenience – quite the contrary, as such alternatives as household production of goods and services, or traditional economies of gift and customary exchange, are quite a bit more convenient for most purposes, since the extra steps imposed by the need to bring money into the situation can be done without. Rather, money has three distinctive features relevant to the present discussion. First, to the extent that it can replace other forms of distribution and exchange, it draws all economic activity into its own ambit. That can (and very often is) used for political control, but this is a side effect. The principal effect of this property of money is to turn a society into an economic monoculture.

This elimination of economic diversity has been discussed in previous posts, but it deserves more attention than I’ve given it so far. Diversity is the basis of stability in any ecosystem, human or otherwise; when a significant proportion of goods and services are produced in the household economy, for example, the vagaries of the market economy have a limited influence on everyday life; that limitation goes away once goods once made at home have to be purchased in the market with money. Thus it’s no accident that over the last four centuries, as the market has supplanted the household economy and other patterns of production and distribution of wealth, economic crises have become progressively more frequent, more severe, and more widely felt. The effects of the Dutch tulip mania and the South Sea bubble were restricted to a relatively small proportion of their respective societies; this was hardly true of the Great Depression of the 1930s, and seems to be turning out even less true of the Great Recession now under way.

The second distinctive feature of a money economy is that it makes it harder, not easier, to value certain classes of goods. What E.F. Schumacher called primary goods – goods produced directly by nature without human intervention – are perhaps the best examples. Most traditional societies around the world, it bears noticing, have no trouble whatever recognizing the value of primary goods and finding ways to integrate that value into their own systems of exchange. The salmon ceremonies of First Nations along the northwest coast of North America are good cases in point.

These societies have a gift economy in which rank and social influence are gained by giving away goods – a system that once provided a very efficient means of distributing wealth of many kinds through their societies – and they treat the arrival of the annual salmon runs in exactly the same spirit, as a mighty gift from the Salmon People that must receive an appropriate response. Anthropologists who treat these arrangements purely under the heading of religion (or, less politely, superstition) are missing one of their central points; they are, among other things, ways of integrating relationships between human communities and the natural world into the traditional economy, so that the value of the salmon harvest is always weighed in decisions that might affect it, and traditional practices that preserve salmon runs are given potent economic sanction.

Such arrangements are common – indeed, very nearly universal – in moneyless economies. They can also be found in money economies; one of these days I ought to devote a post to the elegant ways in which the classical Greeks, who had money and weren’t at all afraid to use it, set up lively economic exchanges with their own fragile ecosystem. (Like the salmon ceremonies, these are normally treated purely in terms of religion or superstition, and their economic and ecological dimensions have thus rarely been noticed.) Still, the more completely an economy becomes subject to money, the more difficult it becomes to include primary goods in economic calculations. The Salmon People are perfectly capable of participating in a gift economy, one might say, but there’s no way they can cash a check – or, for that matter, write one.

The third distinctive feature of money is subtler, and very often misunderstood. Unlike other systems of distributing goods and services, money functions as a good in its own right, and the right to use it functions as a service. To some extent this is a legacy of the time when money was made of some culturally valued substance – wampum strings in eastern Native North America, say, or gold and silver in medieval Europe – but it opens the door to unexpected developments.

If money is treated as a good in its own right, and the use of money is treated as a service in its own right, then instead of exchanging money for ordinary goods and services and ordinary goods and services for money, it becomes possible and profitable to exchange money for money. The entire world of finance, from savings accounts and installment loans up through the dizzying abstractions of today’s derivative markets, unfolds from this third property of money. When money plays a relatively minor role in a society, this dimension is correspondingly small; as the volume and pervasiveness of money expands, so does the scale and impact of the arrangements by which money makes money; when money dominates a society, so does the world of finance, and the amount of money being traded for money can exceed by several orders of magnitude the amount of money being traded for goods and services.

What makes this problematic is that the rules governing money are not the same as those governing other goods and services. Unlike goods and services that have their own value, money is only worth what it can buy; unlike goods and services that must be produced by labor from resources, money can be conjured from thin air by dozens of different kinds of financial alchemy, or by the momentary whim of a government. Nor does the amount of money in circulation have to have anything at all to do with the amount of other goods and services available. All these differences mean that the economy of money can very easily slip out of balance with the economy of nonfinancial goods and services.

It’s useful, in fact, to extend one of E.F. Schumacher’s insights further than he did, and speak of the economy of money as the tertiary economy of the modern world. If the primary economy consists of the natural processes that provide goods and services to human beings without human labor, and the secondary economy consists of the conjunction of human labor and natural goods that produces those goods and services nature itself doesn’t provide, the tertiary economy consists of the circulation of monetary goods and financial services that, at least in theory, fosters the distribution of the products of the secondary economy.

Last week’s post pointed out that the secondary economy depends on the primary economy. In the same sense, the tertiary economy depends on the secondary economy – all the money in the world, it’s fair to say, won’t allow you to buy a good or a service that the secondary economy doesn’t produce. Perhaps the greatest problem with contemporary economic thought is that it inverts this relationship, treating the tertiary economy of money as the prime mover, with the secondary and primary economies dependent on the world of money. This odd and disastrous inversion, and its implications in a world of rapidly depleting natural resources, will be the theme of next week’s post.

The Wealth of Nature

2009-07-08T19:55:00.000-07:00

Last week’s Archdruid Report pointed out that modern economic thought, through its lasting difficulties in coming to terms with the dependence of human economic activity on the world of nature, has played a very large role in backing industrial civilization into its present difficulties. It probably would have been wise, though, to point out that the word “modern” here is being used in a historical sense, for these difficulties date straight back to the beginning of economics as a distinct field of study.

Adam Smith, who set the whole ball rolling with his The Wealth of Nations, started that book with the following sentence: “The annual labor of every nation is the fund which originally supplies it with all the necessities and conveniences of life.” It does not seem to have occurred to Smith that the annual labor of a nation would be utterly useless without the natural raw materials, goods, and services – in the language suggested in last week’s post, the primary goods – that enable labor to be done at all, by making human life possible in the first place and by providing all that labor with something to labor on. Certainly it has occurred to very few of his successors.

The classic example is David Ricardo, who remains an influential figure in economics, not least because his theories – he was a vocal proponent of free trade, and provided what are still the standard arguments in its favor – proved to be highly useful to the British Empire in its time, and of course to the American empire in ours. Ricardo is famous for, among other things, building a significant part of his economic theories on the claim that land retains its “original and indestructible” economic value no matter what economic use is made of it.

This is an odd claim. Even in the early 19th century, when Ricardo originally made it, plenty of people could have set him straight. Bad farming practices that led to soil sterility were known in Ricardo’s time, and so was the impact of industrial pollution – though of course we have gotten much better at both since then. It may be relevant that Ricardo was born and raised in London, as far from the realities of agricultural life as you could get in his time; it is at least as relevant that his theories show the habit of dodging inconvenient facts for what look uncomfortably like ideological reasons – his arguments in favor of free trade, for example, only work if you grant the unstated assumption that international trade and its supporting infrastructure cost nothing in terms of labor, materials, or money, and also dodge the extent to which control of the transport routes and exchange processes determine who profits from the trade.

What is far more interesting, though, is that his definition of land prefigured the way that natural resources have been treated by most economists ever since. This is as true of radical economists as of their capitalist rivals; recent proponents of “green socialism,” for example, might want to reread Marx, who explicitly rejected the idea that the “free gifts of nature” could have any value at all. (The disastrous mistreatment of the environment common under Marxist regimes in the 20th century was not accidental, but a natural outgrowth of Marxist theory.) Nearly the only concession made to the ecological dimensions of economics in the mainstream, and it’s a fairly recent one, is the concept of “externalities” – the recognition that if somebody does something that fouls the environment, other people may suffer a loss of economic value as a result, and might deserve compensation for that.

Now of course this is true, and Garrett Hardin’s famous essay “The Tragedy of the Commons” built on that insight to remind us that a society that permits the advantages of ecological abuse to go to individuals, while the costs are shared by the whole society, is effectively subsidizing the destruction of its environment. Still, both the “externalities” argument and the structure Hardin built on it miss the central issues raised by the interface between environment and economics. Both tacitly accept Ricardo’s fantasy of invulnerable land as the normal state of affairs, apply it to the entire environment, and then focus attention on the exceptional situation when somebody does manage to make land (or some other environmental resource) less valuable.

Let’s take a closer look at the land whose value Ricardo considered “indestructible.” He was talking primarily about land as an economic factor in agriculture, and so shall we. What he apparently did not realize, but ecologists have shown in exact detail since his time, is that fertile land suitable for growing crops does not simply happen. Like anything else of value, it must be made, and once made, it must be maintained; the only difference is that the laborers that make and maintain it do not happen to be human beings.

Soil suitable for crops, after all, is not simply rock dust. A large part of it – sometimes more than half – is organic matter, some living, some dead but not yet wholly decayed, some dissolved into organic colloids complex enough to give analytical chemists sleepless nights, and all of it is put there by the activity of living things over long periods of time. Energy and raw materials flow through soil, uniting bacteria, fungi, algae, worms, insects, and many other living things into one of the most intricate ecosystems on Earth. Plants participate in and depend on this bewilderingly complex world; they draw water and mineral nutrients from it, and cycle leaves and a wide range of chemical compounds back into it.

The farmer who wants to grow crops is attempting to extract wealth from the underground ecosystem of the soil. She can ignore that, and simply plant and harvest with no attention to the needs of the soil, but the soil will be depleted of nutrients in a few years and her crops will fail. Alternatively, she can replace nutrients with chemical fertilizers, predators with pesticides, and so on; if she does this she will have to use steadily larger doses of chemicals to get the same yields, and when the chemical feedstocks run out – as they eventually will – she will be left with soil too sterile and pest-ridden to grow much of anything. If she wants to fulfill Ricardo’s promise and hand the land on to her grandchildren in the same condition that it came from her grandparents, she will have to provide the things the soil needs for its long-term health. Put another way, she will have to barter with the soil, giving it the things it will accept in exchange for crops.

This is the premise of organic agriculture, of course. It’s a premise that has proven itself over millennia, in the Asian farming regions that inspired the organic pioneers of the early 20th century to devise a more general way of doing the same thing, and over decades, in the farms now using organic methods to get yields roughly comparable to those of chemical agriculture. The organic approach has many dimensions, but one may not have received the importance it deserves. To an organic farmer, land is not a commodity that can be owned but a community with which she interacts, and that community has its own economy on which the farmer’s own economy depends.

Imagine, to develop this concept into a metaphor, that our farmer got crops, not from the fields, but from a village of some indigenous tribe near her home. The inhabitants of the village are deeply conservative, and their own economy follows traditional patterns not subject to change. If the farmer wants crops, she must find out what the villagers are willing to take in exchange for them, and that will be determined by the internal dynamics of the village economy: what is already produced in surplus amounts, what is scarce, what is desired and what is detested by the villagers. Her relations with the village, in other words, would be exactly the same in outline as those of an organic farmer with her land.

The same thing is true of every other form of economic activity, though the dependence on nature may be less obvious in some cases than in others. Behind the human activities that produce secondary goods lie nonhuman activities that produce primary goods – the biological cycles that yield soil fertility, crop pollination, and countless other things; the hydrological cycles that put fresh water into reservoirs and taps; the tectonic processes in the crust that put economically useful metals and minerals into veins in the rocks; and, of central importance just now, the extraordinarily complex interplay of biological and geological processes that stored away countless billions of tons of carbon under the earth’s surface in the form of fossil fuels.

Conventional economics assumes that these things get there by some materialist equivalent of divine fiat. This misstates the situation disastrously. Primary goods are produced by an exact analogue of the way that secondary goods are produced: raw materials are transformed, through labor, using existing capital and energy, to produce goods and services of value. The difference is simply that all this takes place in the nonhuman world. Human beings do not manage the production of primary goods, and the disastrous results of trying to do so suggest that we probably never will; on the other hand, in at least some cases – maltreated farmland is a good example – we can interfere with the production of primary goods, and suffer the consequences.

E.F. Schumacher’s insight, that goods produced by nature are the primary goods in any economy, and those produced by human labor are secondary goods, thus needs to be extended further. There is also a primary and secondary economy. The cycles of nature that produce goods needed by human beings constitute the primary economy, while the process by which human beings produce goods is the secondary economy. The secondary economy depends utterly on the primary in at least two ways. First, as discussed last week, something like three-quarters of all economic value in today’s world is produced by nature – that is, by the primary economy – and only around a quarter is produced by human labor. Second, even that quarter is made directly or indirectly from primary goods, and cannot be made at all if the necessary primary goods aren’t there. This is why the attempt to replace a depleted natural resource with something else always involves substitution costs: human labor must be brought in to replace some part of the work previously done by nature, and the costs of that part of the work thus end up having to be paid out of the secondary economy.

We have become so used to thinking of economics as a matter of human labor that it’s probably best to point out that what are sometimes called “primary industries” – farming, mining, and the like – belong to the secondary economy, not the primary one. The primary economy consists wholly of those nonhuman processes that yield economic goods to human beings. Thus a farm and the crops grown on it are part of the secondary economy, while the soil, water, sun, and genetic potential in the seed stock that make the farm and its crops possible are part of the primary economy. In the same way, a mine is part of the secondary economy, while the slow geological processes that put ore in the ground where it can be mined are part of the primary economy. If you examine any human economic activity, you’ll find behind it natural processes that make that activity possible; those processes are the inputs from the primary economy that make the secondary economy possible.

Thus Adam Smith’s dictum cited earlier badly needs reformulation. The product of the natural environment of every nation is the fund which originally supplies it with all the necessities and conveniences of life; the annual human labor is simply the energy input required to turn some of that product into forms useful for human beings. The wealth of nations, it turns out, is ultimately the wealth of nature, and the sooner the value of natural cycles and primary goods is taken into account, the better chance our descendants will have of avoiding the self-defeating habits that are pushing modern industrial system down the long road to collapse. To do so, however, will require a clear sense of the difference between value and price, or to put matters another way, between wealth and money – the theme of next week’s post.

Where Economics Fails

2009-07-01T23:36:00.000-07:00

It’s occurred to me more than once that we might be wise to set aside an annual weekend to mourn the death of Osiris or Persephone or Bladud the wind-god or some other divinity, as our pagan ancestors did, or as those Christians who still take the narratives of their faith seriously do each year on Good Friday. It might at least put a merciful end to the media’s frantic and macabre efforts to bestow a belated sainthood on each new member of the dead celebrities’ club, no matter how far from sanctity the trajectory of their lives might have been.

Thus you’d be correct in guessing that I didn’t put much time this past weekend into paying attention to the media furore over the death of Michael Jackson. I was, instead, busy with my usual research. While tens of millions of people spent the weekend glued to their TVs reviewing the catastrophic fall from grace of an undeniably brilliant cultural phenomenon that achieved unparalleled success, and then was brought down by a supertanker-sized load of unresolved inner conflicts heated to crisis by a disastrous mismatch between an extravagant lifestyle and faltering income – well, I suppose that’s a fair description of what I was doing, too.

Still, the decline and fall of industrial civilization, that troubled and dysfunctional superstar still wobbling across the historical stage, can’t be tracked that effectively by taking in music videos or soundbite interviews. Instead, I spent the weekend reading through economics textbooks. “Thriller” is not exactly the word I’d use to describe these hefty tomes, but I’d recommend that anyone concerned with the future of our society ought to read at least one. This is not because current economic textbooks offer useful guidance to the challenges of our time. Quite the contrary; the world they describe is as imaginary as Oz, and rather less relevant to contemporary life. What makes them important is precisely that so many of the decision makers of our time treat this fantasy as reality.

Understand current economic thought and you understand most of the mistakes that are dragging industrial civilization down to ruin. The Energy Information Administration (EIA), a branch of the US government, has become infamous in the peak oil scene over the last decade or so for publishing estimates of future petroleum production that have no relationship to geological reality. Their methodology, as described in EIA publications, was simply to estimate probable increases in demand, and then to assume that increased demand would automatically be met with a corresponding increase in supply. Quite a few peak oil writers have suggested some dark conspiracy behind this blithe disregard for the limits of a finite planet, but it takes only a few minutes’ worth of reading to identify the real culprit as the standard notion of the law of supply and demand taught in every first-year economics textbook today.

According to this model of the world, the amount of any commodity available in a free market is controlled by the demand for that commodity. When consumers want more of a commodity than is available on the market, and are willing to pay more for it, the price of the commodity goes up; this provides an economic incentive for producers to produce more of the commodity, and so the amount of the commodity on the market goes up. Increased production sets an upper limit on price increases, since producers competing against one another will cut prices to gain market share, and the willingness of consumers to pay rising prices is also limited. Thus, in theory, the production and price of a commodity are set by a shifting balance between the desire of consumers to buy it and the desire of producers to make a profit from producing it.

What makes the theory so seductive is that within certain limits, and in certain circumstances, it works tolerably well. The problem creeps in when economists lose track of the existence of those limits and circumstances, and this, to a remarkable degree, is exactly what they have done. To be fair, they had good reason to do so, because during the three-hundred-year boom that created the industrial world following the successful harnessing of fossil fuels, the limits rarely applied and the circumstances were far more often present than not. Among the most important roots of the current crisis, in turn, are the hard facts that the limits have begun to come into play, and the circumstances no longer exist.

Let’s start with the obvious. Imagine that a plane full of investment bankers makes a forced landing in the Pacific close to a desert island. The island has no food, no water, and no shelter; it’s just a bare lump of rock and sand with a few salt-tolerant grasses on it. As the bankers struggle ashore from the sinking plane, the need for food, water, and shelter on that island is going to be considerable, but even if each of the bankers have a suitcase full of $134 billion dollars in bearer bonds – like those guys who were caught trying to enter Switzerland a little while back – that need is going to go unfilled, until and unless a ship arrives from somewhere else. The lesson here is simple: economics doesn’t trump physical reality.

More generally, the theoretical relationship between supply and demand functions only when supply is not constrained by factors outside the economic sphere. The constraints in question can be physical: no matter how much money you’re willing to pay for a perpetual motion machine, for instance, you can’t have one, because the laws of thermodynamics don’t take bribes. They may be political: Nazi Germany had a large demand for oil from 1943 to 1945, for example, and the Allies had plenty of oil to sell, but anyone who assumed on that basis that a deal would be cut was in for a big disappointment. They may be technical: no matter how much you spend on health care, for instance, sooner or later it’s going to fail, because nobody’s yet been able to develop an effective treatment for death. Economists have come up with various workarounds to deal with external factors of this sort, some more convincing than others.

Another set of factors that can crumple up the law of supply and demand and toss it into the wastebasket, though, has received far less attention. These are constraints that we might as well call “ecological,” and they unfold from the awkward fact that human economic activity is far less independent of the natural world than economists often try to pretend. The scale of this dependence is as rarely recognized as it is hard to overstate. One of the few attempts to quantify it, an attempt to work out the replacement costs for natural services carried out a few years back by a team headed by heretical economist Robert Costanza, came up with a midrange figure equal to around three times the gross domestic product of all human economic activity on earth.

Out of every dollar of value circulating in the world’s economy, in other words, something like 75 cents were provided by natural processes rather than human labor. What’s more, most if not all of that 75 cents of value had to be there in advance in order for the production of the other 25 cents to be possible at all. Before you can begin farming, for example, you need to have arable soil, water, and an adequate growing season, as well as more specialized natural services such as pollination. These are nonnegotiable requirements; if you don’t have them, you can’t farm. The same is true of every other kind of productive work in the human economy: nature’s contribution comes first, and generally determines how much the human economy can produce.

It’s for this reason that E.F. Schumacher, the maverick economist whose ideas are the launching pad for this series of posts, drew a hard distinction between what he called primary goods and secondary goods. Secondary goods are the goods and services provided by human labor, the ordinary subject of economic theory. Primary goods are the goods and services provided by nature, and they make the production of secondary goods possible. The difference between the two is very much like the difference between income and profit in a business: you have to have income in order to have profit, and if you neglect income while maximizing your profit, sooner or later you go bust.

A failure to distinguish between primary and secondary goods is at the root of a great deal of current economic nonsense. It’s usually possible, for example, to substitute one secondary good for another if the supply runs short or the price gets too high, and for this reason it’s a standard assumption of economics – and one of the foundations of the law of supply and demand – that consumers can meet their needs equally well with many different goods. Yet this assumption does not apply to natural goods. In the world of nature, a different rule – Liebig’s law of the minimum – applies instead: production is limited by the scarcest necessary resource. Thus if you have a farm and can’t get water for your crops, it doesn’t matter if you have excellent soil and all the other requisites of farming; you can’t grow anything.

In certain limited situations, to be sure, it’s possible to substitute one primary good for another – for instance, to use low-grade iron ores such as taconite when the high-grade ores have been exhausted. Even when this can be done, though, a law of diminishing returns always applies. You can get iron out of low-grade ore, but the extraction process is less efficient and takes much larger inputs of energy. When energy is cheap, you can ignore this – and this is exactly what happened over the course of the 20th century, as the iron industry retooled itself to use steadily lower grades of ore and steadily larger inputs of energy – but that in itself simply passes costs onto the future, since the fossil fuels that provided the energy inputs are themselves subject to depletion, and to a law of diminishing returns. One way or another, the substitution imposes additional costs without providing any additional economic benefit.

This same rule also applies to every other natural good. Consider the valuable service provided to the world’s economies by the honeybees that pollinate most nongrain food crops. If we succeed in adding the honeybee to the already long list of the world’s extinct life forms, it would doubtless be possible to replace their pollination services by other means, whether that took the form of huge pollinating machines rumbling across the fields or the simpler and probably more economical approach of migrant workers using little brushes to wipe pollen from a bag onto the stamen of every single flower. Note, though, that no farmer in his or her right mind would hire a thousand laborers with brushes instead of calling up the local beekeeper and arranging for a few hives to be left in the fields; substituting some other pollination method for bees would add a huge additional cost to farming, without yielding any additional benefit.

I’ve come to think that the unrecognized difference between secondary goods, which can be readily replaced by other goods without additional cost, and primary goods, which cannot, is among the most important forces driving our current crisis. For the last three centuries, the industrial economies of the world have been using up every primary good that can be converted into secondary goods at extravagant and steadily increasing rates. Think of any good or service provided by nature – from topsoil to oceanic fish stocks, from the pollution-absorbing capacities of rivers to the storm-buffering properties of wetlands, from breathable air and drinkable water to the mineral stocks and fossil fuel reserves that keep the entire system running – and you’ve just identified something that’s being used up rapidly by industrial societies, with no thought of the potential costs of substituting something else for it, much less of the hard fact that nothing we can possibly do can provide a substitute for some of them once they’re gone.

The mismatch between this hopelessly shortsighted approach and the unforgiving limits of nature is imposing a rising toll of substitution costs on industrial economies around the world. Of course there are other factors involved. Still, as I hope to show in a future post, the best explanation for the “stagflation” that beset economies and baffled economists in the 1970s was the unrecognized burden of substitution costs for a range of natural goods depleted or damaged during the previous decades. Equally, the economic dysfunctions that led central banks around 2002 to flood financial markets with cheap credit – a disastrous decision that ended up powering the boom and bust that landed us in the current Great Recession – were driven by mounting substitution costs for another range of natural goods that had been depleted or overused in the previous decades of prosperity. As peak oil adds a new round of substitution costs to those already in play, this same process is likely to have even more dramatic impacts on the future.

The Thermodynamic Economy

2009-06-24T16:19:00.000-07:00

The last twelve months or so of economic chaos has taught those of us in the peak oil community some useful lessons. Perhaps the most valuable of these lessons is extent to which conventional economic ideas have failed to make sense of the way that the twilight of fossil fuels is working out in practice.

Not too long ago, it bears remembering, most people on all sides of the peak oil debate – believers, skeptics, and everyone in between – assumed that the law of supply and demand would necessarily define the world’s response to the end of cheap oil. As existing reserves depleted, nearly everyone agreed, the intersection of decreasing supply and rising demand would drive prices up. Common or garden variety cornucopians insisted that this would lead to more drilling, more secondary extraction, and other measures that would produce more oil and bring the price back down; techno-cornucopians insisted that this would lead to the discovery of new energy resources, which would produce more energy and bring the price back down; green cornucopians insisted that this would finally make renewable energy cost-effective, and at least keep the price from rising further; and pessimists argued that none of these things would happen, and the price of oil would rise steadily on up into the stratosphere.

None of them were right. Instead, as the world crossed the bumpy plateau surrounding its 2005 production peak, oil prices moved up and down in waves of increasing violence, culminating in a drastic price spike driven in part by speculative greed, and followed by an equally drastic crash driven in part by speculative panic. The shockwaves from that spike and crash were not solely responsible for the economic power dive that followed – most of a decade of hopelessly misguided fiscal policy, criminal negligence in the banking and business sectors, and a popular psychology of entitlement extreme even by the standards of past speculative disasters, all had their own parts to play – but even a financial world less shaky than the house of cards that imploded last year would have had a hard time dealing with the body blow inflicted on it by the oil spike and its aftermath.

The rubble from that collapse is still bouncing, even as politicians and pundits insist that the worst is over and a recovery will follow shortly. (This is not exactly comforting; the politicians and pundits of an earlier day said exactly the same thing during the “sucker’s rally” of 1930, when stock markets and other economic indicators regained much of the ground lost in 1929 before plunging catastrophically in the years that followed.) One thing that’s already become clear amid the dust and rubble, though, is that models of the future that assumed a steady upward rise in prices don’t apply to the much more complex reality of spike and crash that is shaping our energy future.

Somewhere in the midwest, perhaps, where a half-completed ethanol plant whose parent company has gone bankrupt is being sold for scrap, and oil leases bought for high prices last June sit unused because the current price of oil won’t justify their development, the dream of a smooth market-driven transition to a different energy system is rolling across a field with the tumbleweeds. Meanwhile the price of oil is continuing its stubborn refusal to obey the laws of supply and demand. Demand has dropped, as consumers and businesses caught in the economic downdraft cut costs, and stockpiles are ample, but the price of oil has doubled since its post-spike low, following a slow, ragged, but unmistakable upward trend.

What makes this all the more fascinating is that oil has shown the same habit of standing economic rules on their heads before. Back in the 1970s, one of the great challenges facing the economics profession was the riddle of stagflation. According to one of the most widely accepted rules of macroeconomics, inflation and deflation – which can be defined precisely as expansion and contraction, respectively, of the money supply – form two ends of a continuum of economic behavior. Rising prices, rising wages, and increased economic activity leading to overproduction are all signs of inflation, while flat or declining prices and wages and diminished economic activity leading to recession are all signs of deflation. In the wake of the Seventies oil shocks, though, the industrial world found itself in the theoretically impossible situation of an inflationary recession: prices were rising, but wages struggled to keep pace, and economic activity declined sharply.

That was stagflation. For more than a decade, economists tried to make sense of the riddle it posed, before finally giving up with a certain amount of relief in the Reagan years, and deciding that it was an anomaly that had gone away and so didn’t matter any more. To many of the economists who tried to make sense of stagflation, it was clear enough that the oil crises had had something to do with it, but this in itself posed its own awkward questions. The economics of commodity prices had been studied exhaustively since the time of Adam Smith, but the behavior of the world economy in the face of rising oil prices violated everything economists thought they knew.

Only a few economists at the time, and even fewer since then, realized that these perplexities pointed to weaknesses in the most basic assumptions of economics itself. E.F. Schumacher was one of these. He pointed out that for a modern industrial society, energy resources are not simply one set of commodities among many others. They are the ur-commodities, the fundamental resources that make economic activity possible at all, and the rules that govern the behavior of other commodities cannot be applied to energy resources in a simplistic fashion. Commented Schumacher in Small is Beautiful:

“I have already alluded to the energy problem in some of the other chapters. It is impossible to get away from it. It is impossible to overemphasize its centrality. [...] As long as there is enough primary energy – at tolerable prices – there is no reason to believe that bottlenecks in any other primary materials cannot be either broken or circumvented. On the other hand, a shortage of primary energy would mean that the demand for most other primary products would be so curtailed that a question of shortage with regard to them would be unlikely to arise” (p. 123).

If Schumacher is right – and events certainly seem to be pointing that way – at least one of the basic flaws of contemporary economic thought comes into sight. The attempt to make sense of energy resources as ordinary commodities misses the crucial point that energy follows laws of its own that are distinct from the rules governing economic activities. Trying to predict the economics of energy without paying attention to the laws governing energy on its own terms – the laws of thermodynamics – yields high-grade nonsense.

Look at the way that rules governing the availability of other resources go haywire when applied to energy. When North America’s deposits of high-grade iron ore were exhausted, for example, the iron industry switched over to progressively lower grades of ore; these contain less iron per ton than the high-grade ores but are much more abundant, and improved technology for extracting the iron makes up the difference. In theory, at least, the supply of iron ore can never run out, since industry can simply keep on retooling to use ever more abundant supplies of ever lower-grade ores, right down to iron salts dissolved in the sea.

Try to do the same thing with energy, by contrast, and two awkward facts emerge. First, the only reason the iron industry can use progressively lower grades of ore is by using increasingly large amounts of energy per ton of iron produced, and the same rule applies across the board; the lower the concentration of the resource in its natural form, the more energy has to be used to extract it and turn it into useful forms. Second, when you try to apply this principle to energy, you very quickly reach the point at which the energy needed to extract and process the resource is greater than the energy you get out the other end. Once this point arrives, the resource is no longer useful in energy terms; you might as well try to support yourself by buying $1 bills for $2 each.

This difficulty can be generalized: where energy is concerned, concentration counts for much more than quantity. That’s a function of the second law of thermodynamics: energy in a whole system always moves from high concentrations to low. Within the system, you can get energy moving against the flow of entropy, but only at the cost of reducing a larger amount or higher concentration of energy to waste heat. That’s how fossil fuels came into existence in the first place; the vast majority of hundreds of millions of years of energy from sunlight falling on prehistoric plants were degraded to waste heat and radiated into outer space, and in the process a very small fraction of that sunlight was concentrated in the form of carbon compounds and buried underground.

The same rule of concentration explains a great many things that current economic ideas miss. Consider the claims made every few years that we can power the world off some relatively low-grade energy source. Latent heat stored in the waters of the world’s oceans, for example, could theoretically provide enough power for the world’s economy to keep it running for some preposterously long period of time, and any number of inventions have tried to tap that energy. They’ve all failed, because it takes more energy to concentrate that heat to a useful temperature than you get back from the process. The same is true a fortiriori of “zero point energy,” the energy potential that according to current physics exists in the fabric of spacetime itself. It doesn’t matter in the least that there’s an infinite amount of it, or something close to that; it’s at the lowest possible level of concentration, and thus utterly useless as a power source for human society.

The same limits apply, if less strictly, to many of today’s renewable energy sources. Solar energy, for example, is very abundant, but it’s also very diffuse. As with any other energy resource, you can concentrate some of it, but only by letting a larger quantity of it turn into waste heat. It’s quite common to hear the claim that because solar energy’s so abundant, our society can easily power itself by the sun, but this shows a failure to grasp thermodynamic reality. Today’s industrial societies require very highly concentrated energy sources; our transportation networks, our power grids, and most of the other ways we use energy, all work by degrading very high concentrations of energy all at once into waste heat, and without those highly concentrated resources, those things won’t work at all.

Now of course there are plenty of productive things that can be done with more diffuse energy sources. Once again, solar energy provides a good example. Passive solar heating for buildings is a mature and highly successful technology; so is solar hot water heating; so are a good many other specialized uses, such as using solar ovens for cooking, water purification, and the like. All these can contribute mightily to the satisfaction of human needs and wants, but they presuppose very different social and economic arrangements than the centralized energy economy of power plants, refineries, pipelines and power grids we have today. As concentrated energy from fossil fuels becomes scarce, in other words, and more diffuse energy from the sun and other renewable sources has to take up the slack, many of the ground rules shaping today’s economic decisions will no longer apply.

What this implies, in turn, is that economics does not exist in a vacuum. The ground rules just mentioned took shape, after all, in an age where economic processes were dominated – one might even say “distorted” – by our species’ temporary access to extravagant supplies of cheap and highly concentrated fossil fuel energy. The new ground rules of economics that will take shape in the twilight of the age of cheap energy, in turn, will be shaped by the fact that energy is once again scarce, costly, and diffuse. More generally, it’s necessary once again to pay attention to the myriad ways that human economic systems are rooted in the wider processes of the natural world – a theme that will be central to next week’s post.

Survival Isn't Cost-Effective

2009-06-17T17:11:00.000-07:00

I trust my readers won’t be unduly distressed by an extended safari through the tangled jungles of the “dismal science” of economics. As suggested in several recent Archdruid Report posts, economic factors have played a massive role in putting the industrial world in its current predicament, and an even more substantial role in blocking any constructive attempt to get out of the corner into which we’ve painted ourselves. There’s an all too real sense in which, if modern industrial civilization perishes, it will be because the steps necessary for its survival weren’t cost-effective enough.

Mind you, this can be interpreted in at least two different ways, and both of them are relevant to the crisis of the industrial world. Like any other science, economics is a set of hypothetical models that reflect, with more or less exactness, the observed behavior of the world. Too often the models get confused with the reality, and understanding suffers.

In a different context, that of the physics of vacuum tubes, Philip Partner commented in his classic textbook Electronics (1950): “The theory speaks of ions, atoms, and electrons, and of collisions between them; but these are figments of the mind, props for its understanding. [...] The electron, like the atom, is a concept; it is part of a mental shorthand which we have invented to summarize our knowledge of Nature. So when we say, for example, that an electron collides with an atom, we should bear in mind that we have never seen it happen. The use of the present indicative does not turn hypothesis into fact” (p. 569). Unfortunately this level of clarity is hard to achieve and harder to maintain.

This has to be kept in mind when trying to make sense of the economic dimension of industrial civilization’s decline and fall, because both sides of the equation – the models and the reality – throw up challenges in the way of constructive action, and so do economic policies that are based on the models, and thus function at a second remove from the reality. It’s true, and will be a central theme of future posts, that current economic theory has lost touch with reality in critical ways, and a revision of some of the basic ideas of modern economics is essential if we’re to make sense of our predicament and do anything constructive in response to it. It’s equally true that government policies based on today’s misguided economic notions have become massive liabilities to societies struggling to deal with today’s crisis, and even this late in the game, changes in these policies might still do a great deal of good. Still, it’s also true that economic factors in the real world, independent of theory, impose hard limits on what can be done.

The classic example has to be the plethora of projects for “lifeboat communities” floated in recent years. The basic idea seems plausible enough at first glance: to preserve lives and knowledge through the decline and fall of the industrial age, establish a network of self-sufficient communities in isolated rural areas, equipped with the tools and technology they will need to maintain a tolerable standard of living in difficult times. The trouble comes, as it usually does, when it’s time to tot up the bill. The average lifeboat community project I’ve seen would cost well over $10 million to establish – many would cost a great deal more – and I have yet to see such a project that provides any means for its inhabitants to cover those costs and pay their bills in the years before industrial civilization goes away.

The unstated assumption seems to be that as soon as the intrepid residents of such a community move into their solar-heated cohousing units, start up the wind turbines and the methane generators, and get to work harvesting tree crops from the permacultured landscaping all around, industrial civilization will disappear in a puff of smoke and take its taxes, debts, and miscellaneous expenses with it. Pleasant though the prospect might seem, I am sorry to say that this isn’t going to happen. The residents of any lifeboat community founded today will not only have to come up somehow with the very substantial sums needed to buy the land, build the cohousing units, wind turbines and so on, and plant all that permaculture landscaping; they will also have to earn a living during the long transitional process that leads from the world we inhabit today to the conditions that will pertain at the bottom of the curve of decline. Some awareness of these difficulties may go a long way to explain why, of the great number of lifeboat communities that have been proposed over the last decade or two, the number that have actually been built can be counted on the fingers of one foot.

Economic forces constrain the future in more global ways as well. Not many people seem to have noticed, for instance, that the grim scenario traced out in the seminal 1973 study The Limits to Growth – still the most plausible map of the future ahead of us, and thus inevitably the most bitterly vilified – is driven by simple economics. As resources deplete, that study pointed out, the cost of keeping resources flowing into to the economy will increase in real terms, as more labor and capital have to be invested to extract a given amount of each resource; as pollution levels rise, in turn, the costs of mitigating their impacts on public health, agricultural productivity, and other core economic factors go up in the same way, and for the same reasons. Those costs have to be paid out of current economic output, leaving less and less for other uses, until economic output itself begins to fall and the industrial world begins its terminal decline.

Now it’s easy to insist, if you ignore the economic dimension, that a society facing this sort of crisis can save itself by launching a massive program to build nuclear reactors, solar thermal power plants, algal biodiesel, or what have you, and of course this sort of claim has seen endless rehashing over the last couple of decades. The problem is that massive programs of this sort pile additional demands on an already faltering economy. Any such program has to be paid for, after all, and by this I don’t mean that money has to be found for it; in today’s mostly hallucinatory economic climate, conjuring money out of thin air is easy enough. No, it has to be paid out of current economic output, which is much less flexible, and already has to cover the rising costs of resource depletion and pollution. This is the trap hidden in the limits to growth; once those limits begin to bite, the spare economic capacity that would be needed to build one’s way out of trouble no longer exists.

Thus there are limits hardwired into our situation by the inflexible realities that surround us, and we have already strayed far enough over those limits that the payback will inevitably be harsh. At the same time, other forces pushing us in the same direction are a product of economic misunderstandings, and in the way these misunderstandings are reflected in public policy. Those could conceivably be changed in time to matter.

Resource depletion and pollution, the driving forces behind the Limits to Growth scenario, are particularly vexed issues in today’s economic thought. As we’ve seen, both of these factors impose costs, potentially drastic ones, on the economy. Under current economic arrangements, however, those costs are not charged to the people who benefit from the activities in question. The owner of an oil well gets the economic benefits of pumping oil out of the ground, but does not have to pay for the impact today’s extraction will have on tomorrow’s economy. (For many years, in fact, government policies in most of the world’s industrial nations have actually rewarded oil well owners for accelerating the depletion of this nonrenewable resource and imposing massive costs on the future.) In the same way, the owner of a smokestack that dumps pollution into the atmosphere gets the economic benefits of whatever activity produces the pollution, but does not have to pay for the costs incurred as a result of the pollution. This asymmetry has at least two results. First and most obviously, neither the oil well owner nor the smokestack owner has any incentive to decrease the negative impacts of his or her activities. Still, the second and in some ways more important result is that the long-term economic burdens of depletion and pollution are not included in measures of the relative economic costs and benefits of the well or the smokestack.

The result is a massive distortion in our understanding of the realities that shape our lives. It’s generally not considered a viable business plan – outside of the financial industry, that is – to make large profits in the short term by running up debts so large the business will have to declare bankruptcy in the not too distant future. Yet this is exactly what an economic system that ignores the cumulative costs of resource depletion and pollution mitigation is doing, and on an even larger scale. The future costs of extracting resources from depleted reserves and mitigating the impacts of a polluted environment have the same effect as the future costs of debt service on excessive borrowing; they buy temporary prosperity in the near future at the cost of impoverishment or collapse further down the road.

Garret Hardin’s famous essay “The Tragedy of the Commons” addressed this issue some years back. Hardin showed that in a situation where the benefits from exploiting a resource went to individuals, but the costs were spread throughout the community, individuals intent on maximizing their own individual benefit would overexploit the resource and suffer drastic losses in the longer run. His logic was impeccable, and there are plenty of real-world examples of resource exhaustion driven by this very process, but it has been pointed out by his critics with equal relevance that resources held in common have in fact been managed sustainably in countless cases around the world and throughout history. The question that has to be asked is where the difference comes in.

This is where the divide pointed up earlier in this essay – the gap between economic realities and the models our society uses to understand them and predict their effects – comes into play. Hardin was quite correct that when individuals got the benefits of resource exploitation without paying their fair share of the costs to the community, exhaustion of the resource follows. Those societies that have managed resources in common successfully, in turn, found ways to make those who gained the benefits of resource exploitation pay a commensurate share of the costs. The collective understanding of economics in these societies, in other words, and the social policies that shaped economic behavior, took the tragedy of the commons into account and adjusted the customs and laws governing economic exchanges accordingly.

As we make the transition from what I’ve called the abundance economies of the first half of the industrial age to the scarcity industrialism of the near and middle future, it’s entirely possible that such adjustments could be put into place in our own societies. The accumulated burdens of past mistakes weigh heavily enough on the future that changes of this sort won’t stave off a great deal of trouble and suffering, but it’s entirely possible that a shift to saner policies backed by more realistic economic ideas could cushion the descent into the deindustrial age, and make it easier to allocate resources to projects that will actually do some good, instead of pursuing policies which – like nearly all the economic policies currently in place in the industrial world – will simply make matters worse.

On The Road

2009-06-01T23:30:00.000-07:00

I'd hoped to be able to write a couple of posts in advance to keep The Archdruid Report going over the next two weeks, during most of which I'll be on the road and out of reach of the internet. Unfortunately the time hasn't worked out, so the next regular post will be on Wednesday, June 17. In the meantime, I'm pleased to report that The Ecotechnic Future, the sequel to The Long Descent, is on track for a September release and can be preordered now. Thank you all for contributing to the conversation that has made both these books possible -- and, with a little luck. might just enable us to cushion the descent into the deindustrial age.

A Guide for the Perplexed

2009-05-27T13:51:00.000-07:00

An irony endured, and occasionally relished, by those of us whose concerns about peak oil have found their way into print is the awkward fact that it’s difficult to talk publicly about using less fossil fuel energy without using more of it. The networks of transportation and communication left to us by the collective decisions of the recent past demand a great deal of energy input, and social habits evolved during the heyday of cheap energy amplify that, making long-distance trips a practical necessity for the working writer. These days, that usually means air travel.

A passage in Theodore Roszak’s Where the Wasteland Ends explores the chasm between the old romantic dreams of human flight and the utterly unromantic reality that replaced them. More than once, after a few hours packed like sardines in a metal can breathing the same stale air a hundred times over, it’s occurred to me that the crabby oldsters who insisted that humanity was not meant to fly may have had more of a point than most of us suspect. The one consolation I’ve found is that the hours of enforced inactivity on planes and in airports provide some of the few chances an increasingly busy schedule allows me for sustained reading. And that, dear reader, is how I ended up sitting in a tacky restaurant in the even more tacky Dallas-Fort Worth airport a few weeks back, killing time between one flight and the next, with a copy of E.F. Schumacher’s book Small Is Beautiful in my hands.

This was by no means my first encounter with Schumacher. Back in the 1970s, when I first began studying the ways that energy, ecology, and history were weaving our future, his name was one to conjure with throughout the environmental and appropriate-tech movements; you could expect to see Small is Beautiful on any bookshelf that also held The Whole Earth Catalog, say, or The Book of the New Alchemists. Still, by the time I stuffed a copy in my carry-on bag and headed to the airport, close to thirty years had passed since the last time I’d opened it. I suspect many other people have neglected it to at least the same degree.

This is unfortunate, because Schumacher’s insights have not lost any of their force with the passing years. Quite the contrary; he was decades ahead of his time in recognizing the imminence of peak oil and sketching the outlines of an economics that could make sense of a world facing the twilight of the age of cheap abundant energy. It’s fair to say that in many ways, the peak oil scene has not yet caught up with him. For this reason among others, a review of the man and his ideas may be timely just now.

Ernst Friedrich Schumacher was born in Bonn in 1911 and attended universities there and in Berlin before going to Oxford in 1930 as a Rhodes Scholar, and then to Columbia University in New York, where he graduated with a doctorate in economics. When the Second World War broke out he was living in Britain, and was interned for a time as an enemy alien, until fellow economist John Maynard Keynes arranged for his release. After the war, he worked for the British Control Commission, helping to rebuild the West German economy, and then began a twenty-year stint as chief economist and head of planning for the British National Coal Board, at the time one of the world’s largest energy firms.

He also served as an economic adviser to the governments of India, Burma, and Zambia, and these experiences turned his attention to the economic challenges of development in the Third World. Recognizing that attempts to import the industrial model into nonindustrial countries usually failed due to shortages of infrastructure and resources, he pioneered the concept of intermediate technology – an approach to development that focuses on finding and using the technology best suited to the resources available – and founded the Intermediate Technology Development Group in 1966. His interest in resource issues also led to an involvement in the organic agriculture movement, and he served for many years as a director of the Soil Association, Britain’s largest organic farming group.

I suspect it was precisely these practical involvements that predisposed him to see past the haze of unrecognized ideology that makes so much contemporary economic thought so useless when applied to the real world. Economics as an academic field is notoriously forgiving of even the most embarrassingly inaccurate predictions, and a professor of economics can still count on being taken seriously even when every public statement he has made about future economic conditions has been flatly disconfirmed by events. This is much less true in the business world, where predictions can have results measured in quarterly profits or losses. Working in a setting where consistently failed predictions would have cost him his job, Schumacher was not at liberty to put ideology ahead of evidence, and the conflict between what standard economic theory said, then as now, and the realities Schumacher observed all around him must have had a role in making him the foremost economic heretic of his time.

His economic ideas cover a great deal of ground, not all of it relevant to the project of this blog; readers interested in the overall shape of his ideas should certainly pick up a copy of Small Is Beautiful and find them there. Four of his propositions, however, struck me as core assets in any attempt to make sense of the economic dimensions of the end of the industrial age.

First, Schumacher drew a hard distinction between primary goods and secondary goods. The latter of these includes everything dealt with by conventional economics: the goods and services produced by human labor and exchanged among human beings. The former includes all those things necessary for human life and economic activity that are produced not by human beings, but by nature. Schumacher pointed out that primary goods, as the phrase implies, need to come first in any economic analysis because they supply the preconditions for the production of secondary goods. Renewable resources, he proposed, form the equivalent of income in the primary economy, while nonrenewable resources are the equivalent of capital; to insist that an economic system is sound when it is burning through nonrenewable resources at a rate that will lead to rapid depletion is thus as silly as claiming that a business is breaking even if it’s covering up huge losses by drawing down its bank accounts.

Second, Schumacher stressed the central role of energy among primary goods. He argued that energy cannot be treated as one commodity among many; rather, it is the gateway resource that allows all other resources to be accessed. Given enough energy, shortages of any other resource can be made good one way or another; if energy runs short, though, abundant supplies of other resources won’t make up the difference, because energy is needed to bring those resources into the realm of secondary goods and make them available for human needs. Thus the amount of energy available per person puts an upper limit on the level of economic development possible in a society, though other forms of development – social, intellectual, spiritual – can still be pursued in a setting where hard limits on energy restrict economic life.

Third, Schumacher stressed the importance of a variable left out of most economic analyses – the cost per worker of establishing and maintaining a workplace. Only the abundant capital, ample energy supplies, and established infrastructure of the world’s industrial nations, he argued, made it functional for businesses in those nations to concentrate on replacing human labor with technology. In the nonindustrial world, where the most urgent economic task was not the production of specialty goods for global markets but the provision of paid employment and basic necessities to the local population, attempts at industrialization far more often than not proved to be costly mistakes. Schumacher’s involvement in intermediate technology unfolded from this realization; he pointed out that in a great many situations, a relatively simple technology that relied on human hands and minds to meet local needs with local resources was the most viable response to the economic needs of nonindustrial nations. Since the end of the age of cheap abundant energy bids fair to place the world’s industrial nations on something like a par with today’s Third World, struggling to feed large populations with sharply limited resources and disintegrating infrastructures, the same logic will much more likely than not apply to our own future as well.

Finally, and most centrally, Schumacher pointed out that the failures of contemporary economics could not be solved by improved mathematical models or more detailed statistics, because they were hardwired into the assumptions underlying economics itself. Every way of thinking about the world rests ultimately on presuppositions that are, strictly speaking, metaphysical in nature: that is, they deal with fundamental questions about what exists and what has value. Trying to ignore the metaphysical dimension does not make it go away, but rather simply insures that those who make this attempt will be blindsided whenever the real world fails to behave according to their unexamined assumptions. Contemporary economics fails so consistently to predict the behavior of the economy because it has lost the capacity, or the willingness, to criticize its own underlying metaphysics, and thus a hard look at those basic assumptions is an unavoidable part of straightening out the mess into which current economic ideas have helped land us.

All of these four points deserve more development than Schumacher, in the course of a busy and active life, was able to give them. All four also can be applied constructively to the specific economic questions surrounding the end of the age of cheap energy and the coming of deindustrial society. Over the weeks and months to come, subject to the usual interruptions, I want to explore this latter task in some detail, and propose a few potential lines of approach toward the former. As last week’s post pointed out, the economic dimension is perhaps the least understood aspect of the crisis of industrial civilization, and a good part of that lack of understanding can be traced to the chasm that has opened up between current ideas and economic reality. Anything that can help bridge that gap could be crucial in navigating the challenging future ahead of us.