Читать книгу The Wealth of Nature - John Michael Greer - Страница 8
ОглавлениеIMAGINE FOR A MOMENT that you are on board a sailing ship in the middle of the ocean. You wake in the middle of the night with an uneasy feeling, as if trouble is brewing. You get dressed and go on deck. It’s a clear night with a steady wind, and you can see some distance over the water; as you glance off to starboard, though there is no land in sight, you are horrified to see waves crashing over black jagged rocks not far from the ship, setting the sea afoam.
You hurry aft to the midship bridge to warn the crew members on watch, and find the first mate and several other crew members sitting there, calmly smoking their pipes and paying no attention to the rocks. When you ask them about the rocks, they deny that any such thing exists in that part of the ocean, and insist that what you’ve seen is an optical illusion common in those latitudes. One of the crew members takes you into the chart room and shows you a chart with the ship’s progress marked on it. Sure enough, there are no rocks anywhere near the ship’s course, but as you glance over the chart you realize that there are no rocks marked anywhere else, either, nor any reefs, shoals or other hazards to navigation.
You leave the chart room, shaking your head, and glance at the compass in the binnacle. This only increases your discomfort; its needle indicates that magnetic north ought to be off the port bow, but a glance up at the sky shows the Little Dipper dead astern. When you mention this to the crew members, though, they roll their eyes and tell you that you obviously haven’t studied navigation. You leave the midship bridge and walk forward, looking ahead to see where the ship is going, and sure enough, the pale gleam of rough water around rocks shows up in the distance.
It would be comforting if this scenario was just a nightmare; unfortunately, it mirrors one of the most troubling realities of contemporary life. The metaphoric charts and compass used nowadays to guide most of the important decisions made by the world’s nations come from the science of economics, and the policy recommendations presented by economists to decision makers and ordinary people alike consistently fail to provide useful guidance in the face of some of the most central challenges of our time.
This may seem like an extreme statement, but the facts to back it up are as close as the nearest Internet news site. Consider the way that economists responded — or, rather, failed to respond — to the gargantuan multinational housing boom that imploded so spectacularly in 2008, taking much of the global economy with it.1 This was as close to a perfect example of a runaway speculative bubble as you’ll find anywhere in recent history. The extensive literature on speculative bubbles, going back all the way to Rev. Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, made it no challenge at all to recognize that the housing boom was simply another example of this species. All the classic symptoms were present and accounted for: 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 more.
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, and by 2007 the final plunge into mass insolvency and depression was treated in many circles as a foregone conclusion — as indeed it was by that time. Keith Brand, who founded the lively Housing–Panic blog in 2005 to publicize the approaching disaster, and kept up a running stream of acerbic commentary straight through the bubble and bust, summarized those predictions with a tag line that could serve as the epitaph for the entire housing frenzy: “Dear God, this is going to end so badly.”2
Yet it’s a matter of public record that among those who issued these warnings, economists were as scarce as hen’s teeth. Rather, most economists at the time dismissed the idea that the housing boom could be what it patently was, a disastrous speculative bubble. Nouriel Roubini, one of the few exceptions, has written wryly about the way he was dismissed as a crank for pointing out what should have been obvious to everybody else in his profession.3 For whatever reason, it was not obvious at all; the vast majority of economists who expressed a public opinion on the bubble while it was inflating 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 should have known, while the words were still in their mouths, that they were wrong. No less an economic luminary than John Kenneth Galbraith pointed out many decades ago that in the financial world, the term “innovation” inevitably refers to the rediscovery of the same small collection of emotionally appealing bad ideas that always lead to economic disaster when they are applied to the real world.4 Galbraith’s books The Great Crash 1929 and A Short History of Financial Euphoria, which chronicle the repeated carnage caused by these same bad ideas in the past, can be found on the library shelves of 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 the housing bubble were an isolated instance of failure on the part of the economics profession, it might be pardonable, but the same pattern of reassurance has repeated itself as regularly as speculative bubbles themselves. The same assurances were offered — in some cases, by the same economists — during the last great speculative binge in American economic life, the tech-stock bubble of 1996–2000. Identical assurances have been offered by the great majority of professional economists during every other speculative binge since Adam Smith’s time. More than two hundred years of glaring mistakes would normally be considered an adequate basis for learning from one’s errors, but in this case it has apparently been insufficient.
The Illusion of Invincibility
The problem with contemporary economics can be generalized as a blindness to potential disaster. This can be traced well outside the realm of bubble economics. Consider the self-destruction of Long Term Capital Management (LTCM) in 1998.5 LTCM was one of the first high-profile hedge funds, and made money — for a while, quite a bit of it — by staking huge amounts of other people’s funds on complex transactions based on intricate computer algorithms. It prided itself on having two Nobel laureates in economics on staff. Claims circulating on Wall Street during the firm’s glory days had it that LTCM’s computer models were so good that they could not lose money in the lifetime of this universe or three more like it.
Have you ever noticed that villains in bad science fiction movies usually get blown to kingdom come a few seconds after saying “I am invincible”? Apparently the same principle applies in economics, though the time lag is longer. It was some five years after LTCM launched its computer-driven strategy that the universe ended, slightly ahead of schedule. 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. Many of them are extraordinarily talented; the level of mathematical skill displayed by the number-crunching “quants” in today’s brokerages and investment banks routinely rivals that in leading university physics departments. Somehow, though, many of these extremely clever people have not managed to apply their intelligence to the task of learning from a sequence of glaring and highly publicized mistakes. This is troubling for any number of reasons, but the reason most relevant just now is that economists play a leading role among those who insist that industrial economies need not trouble themselves about the impact of limitless economic growth on the biosphere and the resource base that supports all our lives. If they turn out to be as wrong about that as so many economists were about the housing bubble, they will have made a fateful leap from risking billions of dollars to risking billions of lives.
Thus it’s urgent to talk about the reasons why the economic mainstream has so often been unable to anticipate the downside. Like most of the oddities of contemporary life, this blindness to trouble has many causes. Two important ones result from peculiarities in the profession of economics as presently practiced; a third and more important reason is rooted in the fundamental assumptions that professional economists apply to the challenges of their field. The first two deserve discussion, but it’s the third that will lead into the central project of this book: the quest for economic insights that will help make sense of the challenges of industrial society’s future.
The first of the factors peculiar to the profession is that, for professional economists, being wrong is usually much more lucrative than being right. During the run-up to a speculative binge, and even more so during the binge itself, 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 their life’s savings down the toilet, even — indeed, especially — when this is the case. During and after the crash, by contrast, most people have enough demands on their remaining money that paying economists to say anything at all is low on the priority list.
This 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 unearned wealth will be far more popular, and thus more employable, than those who warn them of the inevitable outcome of such fantasies; when markets are plunging, and the reverse might be true, nobody’s hiring. Apply the same logic to the future 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 pays nobody’s salaries today.
The second of the forces driving bad economic advice is shared with many other contemporary fields of study: economics suffers from a bad case of premature mathematization. The dazzling achievements of the natural sciences have encouraged scholars in a great many fields to ape scientific methods in the hope of duplicating their successes, or at least cashing in on their prestige. Before Isaac Newton could make sense of planetary movements, 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 later scientists erect structures of hypothesis and experiment.
Too many fields of study have attempted to skip these preliminaries and fling themselves straight into the creation of complex mathematical formulas, on the presumption that this is what real scientists do. The results have not been good, because there’s a booby trap 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 when 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. Theories that are not checked against the evidence of observation reliably fail to predict events in the real world.
Economics is particularly vulnerable to the negative impact of premature mathematization because its raw material — the collective choices of human beings making economic decisions — involves so many variables that the only way to control them all is to impose conditions so arbitrary 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 societies 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 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 often default on their debts, that moneymaking schemes involving huge amounts of other people’s money normally implode 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 inability of economics to produce meaningful predictions has become proverbial even within the profession. Even so mainstream an economic thinker as David A. Moss, a Harvard Business School professor and author of the widely quoted and utterly orthodox A Concise Guide to Macroeconomics, warns:
Unfortunately, some students of macroeconomics are so confident about what they have learned that they refuse to see departures at all, preferring to believe that the economic relationships defined in their textbooks are inviolable rules. This sort of arrogance (or narrow-mindedness) becomes a true hazard to society when it infects macroeconomic policy making. The policy maker who believes he or she knows exactly how the economy will respond to a particular stimulus is a very dangerous policy maker indeed.6
Yet this understates the problem by a significant margin, because a great many of the pronouncements made these days by economists are not merely full of uncertainties; they are quite simply wrong. The quest to turn economics into a quantitative science in advance of the necessary data collection has produced far too many elegant theories that not only fail to model the real world, but consistently make inaccurate predictions. This would be bad enough if these theories were safely locked away in the ivory towers of academe; unfortunately this is far from the case nowadays. Much too often, theories that have no relation to the realities of economic life are used to guide business decisions and government policies, with disastrous results.
The Failure of Markets
The third force driving the economic profession’s blindness to the downside is more complex than the two just discussed, because it deals not with the professional habits of economists but with the fundamental assumptions about the world that underlie economics as practiced today. Perhaps the most important of those is the belief in the infallibility of free markets. 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 Adam Smith’s arguments on this subject 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 depression and impoverishment have had the reverse effect.
The economic orthodoxy in place in the Western world since the 1950s, neoclassical economics, has made a nuanced version of Smith’s theory central to its approach to market phenomena. Neoclassical economists argue that, aside from certain exceptions discussed in the technical literature, people make rational decisions to maximize benefits to themselves, and the sum total of these decisions maximizes the benefits to everyone. 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 so often do. Still, as already pointed out, neoclassical economists have consistently failed to foresee the most devastating examples of market failure, the speculative booms and busts that have rocked the global economy to its foundations, or even to recognize them while they were happening.
This is not the only repeated failure that can be chalked up to the discredit of the neoclassical consensus. Social critics have commented, for example, on the ease with which neoclassical economics 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 traditional mores in so many tribal societies force chieftains to 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.
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 not an 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. 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.
At the same time, 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, and the results impose destructive inefficiencies on the whole economy; the result is one type of market failure. 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. 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 smoking 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 the particular form of crowd psychology that drives speculative bubbles, and since this is outside the economic sphere, neoclassical economics fails to deal with it.
This would be no problem if neoclassical economists by and large recognized these limitations. A great many of them do not, and the result is the type of intellectual 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, many economists seem to have convinced themselves that any economic decision, no matter how harshly constrained by political power or wildly distorted by the mob psychology of a speculative bubble in full roar, must be a free and rational decision that will allow individuals to maximize their own benefits, and will thus benefit society as a whole.
As mentioned earlier, 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, commonly 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 habit of thinking that fails to deal with the economic impact of non-economic forces 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 non-economic process, and this has already proven its power to flow back into the economic sphere in the form of disastrous economic troubles. Once again, the inability to make sense of the interactions between economic activity and the rest of the world consistently blindsides contemporary economic thought.
Harnessing Hippogriffs
This same blindness to non-economic factors also affects another of the fundamental assumptions of modern economics, the law of supply and demand. According to this law, the supply of any commodity available in a free market is controlled by the demand for that commodity.
The law is supposed to work like this: 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 entirely determined by the balance between the desire of consumers to buy it and the desire of producers to make a profit from producing it.
This process is the “invisible hand” of Adam Smith’s economic theory, the summing up of individual economic decisions to guide the market as a whole. Within certain limits, and in certain circumstances, the law of supply and demand 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 most contemporary economists have done.
As a result, even those branches of economic thinking that ought to take physical limits into account have come to treat money as a supernatural force that can conjure resources out of thin air. The most important example just now, as already suggested, is the way conventional economics treats energy. It’s an article of faith among the great majority of today’s economists that the supply of energy in the industrial world is purely a function of the law of supply and demand. This article of faith has remained fixed in place even as world energy supplies have plateaued in recent years, and the most crucial of all energy supplies — the supply of petroleum, which provides some 40 percent of the world’s energy and effectively all its transportation fuel — peaked in 2005 and has been slowly declining ever since.7
The resulting mismatch between theory and practice can approach the surreal. Consider the estimates of future petroleum production circulated by the Energy Information Administration (EIA), a branch of the US government. Those estimates have consistently predicted that petroleum production would go up indefinitely. The logic behind these predictions, stated in so many words in EIA publications, is the assumption that as demand for petroleum goes up, supply will automatically keep pace with it. The most recent estimates have kept the supply of petroleum in step with rising demand, despite the decline in known sources, by inserting a category labeled “unidentified projects” — predicting by 2030 no less than 43 million barrels a day of “unidentified projects,” comprising around a half of total world production by that date.8 These “unidentified projects” are nowhere to be seen in the real world; their sole purpose is to make reality fit the requirements of economic theory, at least on paper. Energy blogger Kurt Cobb has aptly labeled this sort of thinking “faith-based economics.”9
The faith in question remains cemented in place across most of contemporary economic thought. Whenever an economist enters the debate about the future of world energy supplies, it’s a safe bet that he or she will claim that geological limits to the world’s petroleum supply don’t matter, because the invisible hand of the market will inevitably solve any shortfall that happens to emerge. There’s a rich irony here, for shortfalls began to emerge promptly after the world passed its peak of conventional petroleum production in 2005; economists responded to those shortfalls by insisting 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 a reflection of the fact that the demand for food has dropped.
It may be worth exploring an extreme counterexample in order to clarify the limits to the law of supply and demand. Imagine that a plane full of economists 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 economists struggle ashore from the sinking plane, the demand for food, water, and shelter on that island is going to be considerable, but even if each of the economists has a million dollars in his or her briefcase, that demand is going to go unfilled, until and unless a ship arrives with supplies from somewhere else. The lesson here is simple: economics does not 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 providing health care for an individual, for instance, sooner or later it will be of no use, because nobody’s yet been able to develop an effective cure for death.
Economists have come up with various workarounds to deal with external factors of this sort, some more convincing than others, but an inability to see economics as a subset of a much larger world governed by non-economic forces remains endemic to the discipline, and has caused some of its more spectacular failures. That inability undermines the theory of free markets governed by supply and demand: however pleasant free markets look on paper, they 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. For those who lack so basic an element of 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 Lodovico Ariosto’s great poem Orlando Fu-rioso. Their only disadvantage, really, is the minor point that they don’t happen to exist, and planning to use them as a new, energy-efficient means of air transport, for instance, will inevitably come to grief on that annoying little detail.
Free markets are subject to the same 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 at all, and if one were to be set up, it would remain a free market for maybe a week at most. Adam Smith himself explained why, in memorable language: “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.”10 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 always 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 today’s economic troubles.
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 a form of commons, and a great many people who claim to be advocates of the free market have spent years arguing that commons should be eliminated wholesale in favor of private ownership. All commons systems, as Garrett Hardin pointed out in a famous essay,11 have to be managed in ways that prevent individuals from exploiting the commons for their own private benefit; otherwise they fail. The 2009 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,12 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 market, like any other commons, destroys itself.
The Market as Commons
Heretical as this concept may be in term of contemporary economics, it can be demonstrated easily enough by a piece of economic history within the experience of many of my readers. Consider an old-fashioned shoe store of the sort most American towns of any size had 50 years ago. Most of the profit that paid the store’s bills and kept its proprietor fed and housed came from shoes of a relatively modest number of standard types and common sizes, but the store also carried types and sizes that were of special interest to local customers, including some quite unusual ones — for example, orthopedic shoes for a regular customer with foot deformities — and also provided shoe repair and alterations and a range of shoe-related products tailored specifically for the needs of the local market.
Such businesses could be quite successful, but the fact that most of their profit came from a fraction of their total line of goods and services made them vulnerable to competition from businesses that offered only those profitable lines. This was the opening that department stores exploited in the postwar years. As they expanded out of the large cities, they provided shoes in the more popular styles and sizes, without the other goods and services the local shoe stores provided. Since the department stores did not have the costs associated with these other goods and services, and could draw on economies of scale out of reach of local shoe stores, they could sell their products more cheaply than the local shoe stores.
As a result, customers went to the department stores rather than the local shoe stores and many of the latter were forced out of business. This meant that many of the specialized goods and services that had once been available in towns across America — in this example, shoe repair — stopped being available, except to those willing to travel to a city large enough for a shoe repair store to remain viable on its own, without the income stream the old stores had received from the sale of common varieties of shoes.
Nor does the process stop there, for the department stores turned out to be equally vulnerable to discount shoe stores, which provided even fewer services and an even more restricted range of styles and sizes, and thus either outcompeted the department store shoe departments or forced them to follow the discount store model. The result, in most North American towns and a surprisingly large number of cities, is that the only shoes available to consumers at all are cheaply made, poorly fitting mass-produced shoes in a small range of styles and sizes, sold in discount shops by clerks who wouldn’t know how to help a customer find a shoe that fits even if that were part of their job description.
This logic is by no means limited to shoes. The same race to the bottom in which quality goods and services become unavailable and local communities suffer has taken place in nearly the same way in nearly every industry in the industrial world. A torrent of cheap shoddy goods funneled through Wal-Mart and its ilk 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 people. 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.
In the real world, in other words, a laissez-faire market doesn’t always produce improved access to better and cheaper goods and services, as Smith argued it would;13 instead, it can put desirable products out of reach of consumers who would be happy to pay for them, but are not numerous enough to generate enough business to keep a shop from shutting its doors. It can also have disastrous impacts on such non-economic goods as healthy communities. The shift from an economy of local firms, which spent most of their income locally, to an economy of multinational firms that effectively pump money out of most of the world’s communities to concentrate it in a handful of important cities, has played a massive role in the economic debacle that has overwhelmed so many towns and rural regions in the industrial world.
These effects can be understood by recognizing that a market is a commons, along the lines sketched out by the Garrett –Hardin essay mentioned above. Like any other commons, it can break down when it is not managed in ways that keep the common interest of all participants from being harmed by the actions of individuals. This does not mean that markets ought to be abolished, any more than Hardin’s arguments show that commons ought to be abolished; the idea that markets ought to be replaced by government bureaucracies was tested thoroughly in the Marxist states of the twentieth century and turned out to be a comprehensive flop. What it means, as I propose to show later on in this book, is that the same logic of checks and balances that has proven to work tolerably well in the political sphere needs to be applied to the economic sphere, particularly to those dimensions of economics that overlap with non-economic realities.
Energy’s Rules
Despite the problems just outlined, the faith in free markets governed by supply and demand remains central not only to contemporary economics but to much of the modern world’s collective conversation about the future. It’s very 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 into 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 logic owes much of its influence to the fact that in many cases, markets do behave this way. Like any description of a complex system, though, the use of the invisible hand as an explanatory tool needs to be balanced by an awareness of the situations in which it fails to work. The economics of energy defines one of these situations. Energy, as E. F. Schumacher pointed out,14 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 — 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.15
For a useful example, consider an agrarian civilization that runs on sunlight, as every human society did until the rise of industrialism three centuries ago. In energetic terms, part of the annual influx of solar energy is collected via agriculture, stored as 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.
Agrarian civilizations of this kind very often develop thriving market economies in which goods and services are exchanged between individuals. They also develop intricate systems of social abstractions that manage the distribution of these goods and services 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 annual grain 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’re the pharaoh of Egypt and you sell gold to buy marble for your latest pyramid, and then change your mind, 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 soon 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 our inputs include vast quantities of prehistoric sunlight, in the form of fossil fuels, as well as current solar energy in various forms. Atop that foundation, we have built our own kind of markets to exchange goods and services, and an abstract system for managing the distribution of goods and services — money — that is as heavily wrapped in mythology as anything created by the archaic agrarian 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 conquest of neighboring territory 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 (that is, the cost of using money) and can cause economic contraction. This was a serious and recurring problem across the industrial world in the nineteenth century, and led reformers in 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 an expanding money supply eventually gave rise to a system that built a constantly expanding money supply into the foundations of its economy.
That system, taken very nearly to its furthest possible extreme, is the economy that exists today in most nations of the industrial world. Created in response to an age of unparalleled growth, it assumes that perpetual growth on the same scale is an inevitable fact of economic life. The notion that growth might turn out to be a temporary, if protracted, phenomenon of the recent past, and will not continue into the future, will be found nowhere in contemporary mainstream economics or politics. It’s true, of course, that three centuries of statistics support the idea of perpetual growth; it’s not often remembered that those three centuries represent a tiny and very unusual fraction of humanity’s trajectory on this planet, but there is another problem with those numbers. These days, a very large proportion of the numbers are faked.
Lies and Statistics
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, varies a good deal, because 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. The science of economics, however, is mostly about numbers that measure, in abstract terms, the exchange of potatoes and haircuts (and, of course, everything else).
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 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 is exactly what has happened to economic statistics.
For decades now, to begin with, the US government, like that of most other nations, has 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 congress people 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 Bertram Gross predicted back in the 1970s,16 economic indicators have been turned into “economic vindicators” that subordinate information to public relations, and the massaging of economic figures Gross foresaw has turned into cosmetic surgery on a scale that would have made the late Michael Jackson gulp in disbelief.17
When choices are guided by numbers, and the numbers are all going the right way, it takes a degree of insight unusual in contemporary life to remember that the numbers may not reflect what is actually going on in the real world. You might think that this wouldn’t be the case if the people making the decisions know that the numbers are being fiddled with to make them more politically palatable, as economic statistics in the United States and elsewhere generally are.
It’s important, therefore, to remember that we’ve gone a long way past the simplistic tampering with data practiced in, say, the Lyndon Johnson administration. With characteristic Texan straightforwardness, Johnson didn’t leave statistics to chance; he was well known in Washington politics for sending any unwelcome number back to the bureau that produced it, as many times as necessary, until he got a figure he liked.
Nowadays nothing so crude is involved. The president — any president, of any party, or for that matter of any nation — simply expresses a hope that next quarter’s numbers will improve; the head of the bureau in question takes that instruction back to the office; it goes down the bureaucratic food chain, and some anonymous staffer figures out a plausible reason why the way of calculating the numbers should be changed; the new formula is approved by the bureau’s tame academics, rubberstamped by the appropriate officials, and goes into effect in time to boost the next quarter’s numbers. It’s all very professional and aboveboard, and the only sign that anything untoward is involved is that for the last 30 years, every new formulation of official economic statistics has made the numbers look rosier than the one it replaced.
It’s entirely possible, for that matter, that a good many of those changes took place without any overt pressure from the top at all. Hagbard’s Law is a massive factor in modern societies. Coined by Robert Shea and Robert Anton Wilson in their tremendous satire Illuminatus!, Hagbard’s Law states that communication is only possible between equals. In a hierarchy, those in inferior positions face very strong incentives to tell their superiors what the superiors want to hear rather than ‘fessing up to the truth. The more levels of hierarchy between those who gather information and those who make decisions, the more communication tends to be blocked by Hagbard’s Law. In today’s governments and corporations, the disconnect between the reality visible on the ground and the numbers viewed from the corner offices is as often as not total.
Whether deliberate or generated by Hagbard’s Law, the manipulation of economic data by the government has been duly pilloried in the blogosphere, as well as the handful of print media willing to tread on such unpopular ground. Still, I’m not at all sure these deliberate falsifications are as misleading as another set of distortions. 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 should, 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.
By productivity, economists mean labor productivity — that is, how much value is created per unit of labor. Thus anything that cuts the number of employee hours needed to produce a given quantity of goods and services counts as an increase in productivity, whether or not it is efficient or productive in any other sense. Here’s what A Concise Guide to Macroeconomics by Harvard Business School professor David A. Moss, as mainstream a book on economics as you’ll find anywhere, has to say about it: “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).”18
Output, here as always, is measured in money — usually, though not always, corrected for inflation — so what “productivity” means in practice is income per worker hour. Are there ways for a business to cut down on the employee hours per unit of income without actually becoming more productive in any 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.
Driving the fixation on labor productivity is the simple fact that in the industrial world, for the last century or so, labor costs have been the single largest expense for most business enterprises, in large part because of the upward pressure on living standards caused by the impact of cheap abundant energy on the economy. The result is a close parallel to Liebig’s law of the minimum, one of the core principles of ecology. Liebig’s law holds that the nutrient in shortest supply puts a ceiling on the growth of living things, irrespective of the availability of anything more abundant. In the same way, our economic thinking has evolved to treat the costliest resource to hand, human labor, as the main limitation to economic growth, and to treat anything that decreases the amount of labor as an economic gain.
Yet if productivity is treated purely as a matter of income per worker hour, the simplest way to increase productivity 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 face 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 counts as an increase in productivity. If you have been wondering why so many corporations with no obvious connection to the world of finance, such as auto manufacturers, launched large financial branches in recent decades, this is part of the reason why: the higher income per worker hour from manufacturing financial paper enables the firm to claim increases in productivity.
As important as the misinformation produced by these inappropriate statistical measurements, however, is the void that results because 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 an economy better suited to a future of energy constraints, and the relative position of different nations, to say nothing of the trend line of their energy productivity over time, would provide useful information to governments, investors and the general public alike.
Even when energy was still cheap and abundant, the fixation on labor productivity was awash with mordant irony, because only in times of relatively robust economic growth did workers who were rendered surplus by such “productivity gains” readily find jobs elsewhere. At least as often, they added to the rolls of the unemployed, or pushed others onto those rolls, fueling the growth of an impoverished underclass. With the end of the age of cheap energy, though, the fixation on labor efficiency promises to become a millstone around the neck of the world’s industrial economies.
Economic Superstitions
After all, a world that has nearly seven billion people on it and a dwindling supply of fossil fuels can do without the assumption that putting people out of work and replacing them with machines powered by fossil fuels is the way to prosperity. This is one of the unlearned lessons of the global economy that is now coming to an end around us. While it was billed by friends and foes alike as the triumph of corporate capitalism, globalization can more usefully be understood as an attempt to prop up the illusion of economic growth by transferring the production of goods and services to economies that are, by the standards just mentioned, less efficient than those of the industrial world. Outside the industrial nations, labor proved to be enough cheaper than energy that the result was profitable, and allowed industrial nations to maintain their inflated standards of living for a few more years.
At the same time, the brief heyday of the global economy was only made possible by a glut of petroleum that made transportation costs negligible. That glut is ending as world oil production begins to decline, while the Third World nations that profited most by globalization cash in their newfound wealth for a larger share of the world’s energy resources, putting further pressure on a balance of power that is already tipping against the United States and its allies. The implications for the lifestyles of most Americans will not be welcome.
To extract ourselves from the corner into which we have backed ourselves, however, requires coming to terms with the fact that a very large number of the previous choices all of us have made were founded on folly. If we lived in a world in which people always made rational decisions to maximize benefits to themselves, recognizing our past folly would be simply another rational decision, but in the real world things are not quite so simple. To understand why, it’s necessary to talk a little about the role of superstition in human affairs.
In the area where I live, the Appalachian mountains of eastern North America, superstition is very much a living phenomenon. Many local gardeners, for example, choose times to plant seeds according to the signs and phases of the moon. This habit may reasonably be considered a superstition, but that word has a subtler meaning than most people remember these days. A superstition is literally something “standing over” (in Latin, super stitio) from a previous age; more precisely, it’s an observance that has become detached from its meaning over time. A great many of today’s superstitions thus descend from the religious observances of archaic faiths. When my wife’s Welsh great-grandmother set a dish of milk outside the back door for luck, for example, she likely had no idea that her pagan ancestors did the same thing as an offering to the local tutelary spirits.
Yet there’s often a remarkable substrate of ecological common sense interwoven with such rites. If your livelihood depends on the fields around your hut, for example, and rodents are among the major threats you face, a ritual that will attract cats and other small predators to the vicinity of your back door night after night is not exactly foolish. The Japanese country folk who consider foxes the messengers of Inari the rice god, and put out offerings of fried tofu to attract them, are mixing agricultural ecology with folk religion in exactly the same way; in Japan, foxes are one of the main predators that control the population of agricultural pests. The logic behind planting by the signs is a bit more complex, but it may not be irrelevant that the sequence of signs include all the tasks needed to keep a garden or a farm thriving, more or less equally spaced around the lunar month, and a gardener who works by the signs can count on getting the whole sequence of gardening chores done in an order and a timing that consistently works well.
There’s a lot of this sort of thing in the world of superstition. Nearly all cultures that get any significant amount of their food from hunting, for example, use divination to decide where to hunt on any given day. According to game theory, the best strategy in any competition has to include a random element in order to keep the other side guessing. Most prey animals are quite clever enough to figure out a nonrandom pattern of hunting — there’s a reason why deer across America head into suburbs and towns, where hunting isn’t allowed, as soon as hunting season opens each year — so inserting a random factor into hunting strategy pays off in increased kills over time. As far as we know, humans are the only animals that make decisions with the aid of horoscopes, tarot cards, yarrow stalks and the like, and it’s intriguing to think that this habit may have had a significant role in our evolutionary success.
Is this all there is to the practice of superstition? It’s a good question, but one that’s effectively impossible to answer. For all I know, the ancient civilizations that built vast piles of stone to the honor of their gods may have been entirely right to say that Marduk, Osiris, Kukulcan et al. were well pleased by having big temples erected in their honor, and reciprocated by granting peace and prosperity to their worshippers. It may just be a coincidence that directing the boisterous energy of young men into some channel more constructive than street gangs or civil war is a significant social problem in most civilizations, and giving teams of young men huge blocks of stone to haul around, in hot competition with other teams, consistently seems to do the trick. It may also be a coincidence that convincing the very rich to redistribute their wealth by employing huge numbers of laborers on vanity buildings provides a steady boost to even the simplest urban economy. Maybe this is how Kukulcan shows that he’s well pleased.
Still, there’s a wild card in the deck, because it’s possible for even the most useful superstition to become a major source of problems when conditions change. When the classic lowland Mayan civilization overshot the carrying capacity of its fragile environment, for example, the Mayan elite responded to the rising spiral of crisis by building more and bigger temples. That had worked in the past, but it failed to work this time, because the situation was different; the problem had stopped being one of managing social stresses within Mayan society, and turned into one of managing the collapsing relationship between Mayan society and the natural systems that supported it. This turned what had been an adaptive strategy into a disastrously maladaptive one, as resources and labor that might have been put to use in the struggle to maintain a failing agricultural system went instead to a final spasm of massive construction projects. This time, Kukulcan was not pleased, and lowland Mayan civilization came apart in a rolling collapse that turned a proud civilization into crumbling ruins.
Rationalists might suggest that this is what happens to a civilization that tries to manage its economic affairs by means of superstition. That may be so, but the habit in question didn’t die out with the ancient lowland Mayans; it’s alive and well today, with a slight difference. The Mayans built huge pyramids of stone; we build even vaster pyramids of money.
It’s all too accurate these days to describe contemporary economics as a superstition in the strict sense of the word. The patterns of dysfunction summarized in this chapter — the factors inherent to the profession of economics that make for bad decisions; the blindness to the impact of non-economic factors on economic processes; the belief in the infallibility of free markets in the face of contrary evidence; the reliance on “cooked” and irrelevant statistics — are all part of a way of thinking about economic life that worked tolerably well, from certain perspectives, during the age of economic expansion that was kick-started by the Industrial Revolution and reached its peak in the late twentieth century. Like the Mayan habit of building pyramids, though, the reasons why it worked were not the reasons its votaries thought it worked, and underlying changes in the energy basis of the world’s industrial economies have made today’s economic superstitions a severe liability in the future bearing down on us.
Undead Money
Like most complex intellectual superstitions — consider astrology in the Middle Ages and Renaissance — economics has a particularly strong following among the political classes. Like every other superstition, in turn, it has a solid core of pragmatic wisdom to it, but that core has been overlaid with a great deal of somewhat questionable logic which does not necessarily relate to the real cause and effect relationships that link the superstition to its benefits. My wife’s Welsh ancestors believed that the bowl of milk on the back stoop pleased the fairies and that’s why the rats stayed away from the kitchen garden; the economists of the twentieth century, along much the same lines, believed that expanding the money supply pleased — well, the prosperity fairies, or something not too dissimilar — and that’s why depressions stayed away from the United States.
In both cases it’s arguable that something very different was going on. The gargantuan economic boom that made America the world’s largest economy had plenty of causes. The strong regulations imposed on the financial industry in the wake of the Great Depression made a significant contribution (a point that will be explored in more detail later on in this book); the accident of political geography that kept America’s industrial hinterlands from becoming war zones, while most other industrial nations got the stuffing pounded out of them, also had more than a little to do with the matter; but another crucial point, one too often neglected in studies of twentieth-century history, was the simple fact that the United States at mid-century produced more petroleum than all the other countries on Earth put together. The oceans of black gold on which the US floated to victory in two world wars defined the economic reality of an epoch. As a result, most of what passed for economic policy in the last 60 years or so amounted to attempts to figure out how to make use of unparalleled abundance.
That’s still what today’s economists are trying to do, using the same superstitious habits they adopted during the zenith of the age of oil. The problem is that this is no longer what economists need to be doing. With the coming of peak oil — the peak of worldwide oil production and the beginning of its decline — the challenge facing today’s industrial societies is not managing abundance, but managing the end of abundance. The age of cheap energy now ending was a dramatic anomaly in historical terms, though not quite unprecedented; every so often, but rarely, it happens that a human society finds itself free from natural limits to prosperity and expansion — for a time. That time always ends, and the society has to relearn the lessons of more normal and less genial times. This is what we need to do now.
This is exactly what today’s economics is unprepared to do, however. Like the lowland Mayan elite at the beginning of their downfall, our political classes are trying to meet unfamiliar problems with overfamiliar solutions, and the results have not been good. Repeated attempts to overcome economic stagnation by expanding access to credit have driven a series of destructive bubbles and busts, and efforts to maintain an inflated standard of living in the face of a slowly contracting real economy have heaped up gargantuan debts. Nor have these measures produced the return to prosperity they were expected to yield, and at this point finger-pointing and frantic pedaling in place seem to have replaced any more constructive response to a situation that is becoming more dangerous by the day.
The sheer scale of the debt load on the world’s economies is an important part of the problem. Right now, the current theoretical value of all the paper wealth in the world — counting everything from dollar bills in wallets to derivatives of derivatives of derivatives of fraudulent mortgage loans in bank vaults — is several orders of magnitude greater than the current value of all the actual goods and services in the world. Almost all of that paper wealth consists of debt in one form or another, and the mismatch between the scale of the debt and the much smaller scale of the global economy’s assets means exactly the same thing that the same mismatch would mean to a household: imminent bankruptcy. That can take place in either of two ways — most of the debt will lose all its value by way of default, or all of the debt will lose most of its value by way of hyperinflation — or, more likely, by a ragged combination of the two, affecting different regions and economic sectors at different times.
What that implies for the not-too-distant future is that any economic activity that depends on money will face drastic uncertainties, instabilities and risks. People use money because it gives them a way to exchange their labor for goods and services, and because it allows them to store value in a relatively stable and secure form. Both these, in turn, depend on the assumption that a dollar has the same value as any other dollar, and will have roughly the same value tomorrow that it does today.
The mismatch between money and the rest of economic life throws all these assumptions into question. Right now there are a great many dollars in the global economy that are no longer worth the same as any other dollar. Consider the trillions of dollars’ worth of essentially worthless real estate loans on the balance sheets of banks around the world. Governments allow banks to treat these as assets, but unless governments agree to take them, they can’t be exchanged for anything else, because nobody in his right mind would buy them for more than a tiny fraction of their theoretical value. Those dollars have the same sort of weird half-existence that horror fiction assigns to zombies and vampires: they’re undead money, lurking in the shadowy crypts of the world’s large banks like so many brides of Dracula, because the broad daylight of the market would kill them at once.
It’s been popular for some years, since the sheer amount of undead money stalking the midnight streets of the world’s financial centers became impossible to ignore, to suggest that the entire system will come to a messy end soon in some fiscal equivalent of a zombie apocalypse movie. Still, the world’s governments are doing everything in their not inconsiderable power to keep that from happening. Letting banks meet capital requirements with technically worthless securities is only one of the maneuvers that government regulators around the world allow without blinking. Driving this spectacular lapse of fiscal probity, of course, is the awkward fact that governments — to say nothing of large majorities of the voters who elect them — have been propping up budgets for years with their own zombie hordes of undead money.
The only response to the current economic crisis most governments can imagine involves churning out yet more undead money, in the form of an almost unimaginable torrent of debt; the only response most voters can imagine, in turn, involves finding yet more ways to spend more money than they happen to earn. So we’re all in this together, guiding our actions by superstitions that no longer have any relation to the world in which we live. Everybody insists that the walking corpses in the basement are fine upstanding citizens, and we all pretend not to notice that more and more people are having their necks bitten or their brains devoured.
As long as most people continue to play along, it’s entirely possible that things could stumble along this way for quite a while, with stock market crashes, sovereign debt crises and corporate bankruptcies quickly covered up by further outpourings of unpayable debt. The problem for individuals and families, though, is that all this makes money increasingly difficult to use as a medium of exchange or a store of wealth. If hyperinflation turns out to be the mode of fiscal implosion du jour, it becomes annoying to have to sprint to the grocery store with your paycheck before the price of milk rises above one million dollars a gallon; if we get deflationary contraction instead, business failures and plummeting wages make getting any paycheck at all increasingly challenging. In either case pensions, savings and insurance policies are as good as lost.
The act of faith that leads policy makers today to think that policies that failed last year will succeed next year is only part of the problem. The superstitions that lead so many intelligent people to think that our problems can be solved by pursuing new and expensive technological projects are another part. There are technologies that can help us right now, as I hope to show later on in this book, but they fall on the other end of the spectrum from the fusion reactors, solar satellites and plans to turn all of Nevada into one big algae farm that get so much attention today. Local, resilient, sustainable and cheap: these need to be our keywords for technological innovation just now. There are plenty of technological solutions that answer to that description, but again, our superstitions stand in the way.
In an age after abundance, the most deeply rooted of our superstitions — the belief that Nature can be ignored with impunity — is also the most dangerous. It’s only fair to point out that for most people in the industrial world, for most of a century now, it has been possible to get away with this kind of thinking more often than not; the same exuberant abundance that produced ski slopes in Dubai and fresh strawberries in British supermarkets in January made it reasonable, for a while, to act as though whatever Nature tossed our way could be brushed aside. In an age after abundance, though, this may be the most dangerous superstition of all. The tide of cheap abundant energy that has defined our attitudes as much as our technologies is ebbing now, and we are rapidly losing the margin of error that made our former arrogance possible.
As that change unfolds, it might be worth suggesting that it’s time to discard our current superstitions concerning economics, energy and Nature, and replace them with a more functional approach to these things. A superstition, once again, is an observance that has become detached from its meaning, and one of the more drastic ways this detachment can take place is through a change in the circumstances that make that meaning relevant. This has arguably happened to our economic convictions, and to a great many more of the commonplaces of modern thought; it’s simply our bad luck, so to speak, that the consequences of pursuing those superstitions in the emerging world of scarcity and contraction are likely to be considerably more destructive than those of planting by the signs or leaving a dish of milk on the back step.
The remaining chapters of this book will attempt to sketch out some of the ways our current economic superstitions might best be replaced with more productive ways of understanding the production and exchange of goods and services among human beings. To make any progress toward that goal, however, it’s necessary to realize that the production and exchange of goods and services among human beings is a subset, and a fairly small one, of a much larger economy that embraces the entire natural world. To grasp that, it’s necessary to take the challenge to conventional economic thought a good deal deeper than we have taken it so far.
