Thursday, June 7, 2012

Economic Growth in the 21st Century

"As the decline in production begins first in oil and then later this century in coal, the decline and collapse of modern civilization will also occur without a society already adapted to less net energy usage.  This phenomenon is known as resource depletion...  It's not just energy or erosion we're dealing with, but a crippling combination of things which will make it impossible for economic growth to continue."

The study of economics has become known as the dismal science, a phrase coined by the 19th century historian Thomas Carlyle.  Carlyle coined the phrase, most likely in response to a prediction by economist Thomas Malthus.  Malthus' Essay on the Principles of Population predicted that, "The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race."  A dismal prediction indeed, and likely one that would cause some sort of cognitive dissonance among those who fully understand just what his essay implies.  However, in the modern era of economics, any such notion of a catastrophic or dismal failure of the earth to be able to provide for the needs of man has been removed from thought and theory.  This is not true of every economist, but it is far too often true that "legitimate" economists do not believe in such nonsense.  These "legitimate" economists are often simply the result of corrupted academe so adeptly described by Charles Ferguson, both in the Academy Award winning film Inside Job, as well as this article.  It's not just the corrupt few on the side of wall street, but nearly every mainstream economist has a commonly held belief that economic growth - the increase in the capacity of an economy to produce goods and services - is the proper response to alleviating poverty.  In fact, the 21st century will not continue to see this ever expanding increase in goods and services.  Here's why...

The basic assumptions of modern economics, going back to Adam Smith's The Wealth of Nations, are flawed. They're based on a scientific paradigm that ignores ecological realities, as well as a flawed view of exactly what is responsible for this production.  John Michael Greer in The Wealth of Nature: Economics as if Survival Mattered points out this very thing.  Greer points to the beginning of The Wealth of Nations which states, "The annual labor of every nation is the fund which originally supplies it with all the necessities and conveniences of life."  Greer's response to this was that, "left unrecognized is the crucial fact that the annual labor of a nations would be utterly useless without the goods and services provided free of charge by Nature, which 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."  What Greer is referring to are the natural processes which allow us to grow food.  These would include the hydrologic cycle, pedogenisis (soil growth), and the large amount of solar energy provided by our center and steward of the solar system, the sun.  However, they also include the anaerobic decomposition of buried dead organisms which have become our fossil fuels (such as oil and coal).  This would also include ore genesis processes, which create the various mineral deposits in the crust of the earth.

The thesis of The Wealth of Nations asserted that the division of labor increases productivity - and therefore the increase in the capacity to produce goods and services - as well as asserting that a condition of opulence or great wealth would arise.  This thesis overlooks the simple fact that increased productivity doesn't necessarily mean better productivity, or a better life for everyone indefinitely, by increasing production.  Without the understanding that the economy was both dependent upon the environment that supported it, and limited by Nature, it is easy to ignore that economic production can damage the earth that supports it.  This could be seen in early agricultural economies and the great empires of ancient times.  For example, ancient Mesopotamia suffered greatly as the increased agricultural production from irrigation caused soil erosion that made farming impossible and caused collapse.  Another example would be the economy of ancient Rome which collapsed due to over expansion, which was largely due to resource shortages and environmental degradation.  By the CE the Mediterranean basin had been largely deforested, which in turn caused erosion and the need to seek timber for their growing economy elsewhere.  The erosion this caused made Rome more and more reliant on the fields of Northern Africa to feed the population of Rome.  This was also a case of military expansionism that deforested Northern Africa and turned it into "the bread basket" of Rome.  Much of the area once plowed under to raise grain for the Romans has now turned to desert.  So in past times there have been collapses due to this increasing capacity to produce goods beyond what the primary economy (the primary goods provided to us by natural processes) can provide.  For further evidence of this, or a detailed study of societal collapse for similar reasons, see Joseph Tainter's The Collapse of Complex Societies.

The main difference between the modern economy and the ancient agricultural empires, is that we have used enormous amounts of fossil fuels to power industry and production.  Coal literally sprang up as a replacement for fuel for heating homes after timber shortages made this fuel - that was once banned by Edward I (blacksmiths using coal could be hanged) - an in demand item.  However, as I've talked about in my early post on Energy and Society these fuels are not a limitless resource, but a finite source of energy that has brought about unforeseen environmental effects like climate change.  As the decline in production begins first in oil and then later this century in coal, the decline and collapse of modern civilization will also occur without a society already adapted to less net energy usage.  This phenomenon is known as resource depletion, and has played its role as previously stated in the collapse of empires.  It's not just energy or erosion we're dealing with, but a crippling combination of things which will make it impossible for economic growth to continue.  These include desertification, loss of fresh water sources from overuse and pollution, loss of biodiversity/extinction rates which signal a new era of extinction, depletion of fossil fuels, topsoil erosion, climate change, as well as the limits to a debt based monetary system (more on this later). 

With all this in mind and the mountains of evidence that humans are doing seemingly irreversible harm to our ecosystems, why is it that economists continue to propose more growth as the means to help our society?  Usually clear headed economists, like Paul Krugman, still throw their weight behind policies to continue or try to continue growth even after writing in a NY Times article: "What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story."  It's truly a case of the old saying that when the only tool you have is a hammer then everything you see starts to look like a nail.  Rather than refocusing our energy towards real solutions to material problems, economists keep positing that more growth can and should be achieved even by the taking on of more and more debt privately and publicly because, well, it will keep the economy growing and unemployment will lessen.  Why doesn't he mention that there is simply a class of dependent laborers without access to resources or the freedom to live life without the managers of capital (which direct economic activity in the modern world)?  Instead he suggests more economic growth will help alleviate the poverty caused by this second "great depression."  Perhaps he is failing to ask whether or not growth in the modern era has begun failing to make us richer (as is it did when the world was not yet entirely conquered by European empires and industrial society), and if it now makes everyone poorer, as we deplete what is left of our resource base. 

Of course I'm not alone in saying that the previous trends of growth are not going to continue indefinitely.  In fact a recent study at MIT, which set out to re-examine the famous 1972 book The Limits to Growth, has stated that the world could suffer from a "global economic collapse" which could cause "precipitous population decline" if resource consumption was left unchecked.  Richard Heinberg has also warned in 9 of his award winning books, about the perils of energy depletion.  In his latest book The End of Growth, he explains with detail how policies that once led to prosperity are now leading us to disaster.   He also argues that growth in consumption should be dropped for a new goal of improving the quality of life.  The problem with this is that the obvious answers to improvement in the quality of life involve sharing, which has become labeled as class warfare.  Self interest can only take a society towards the interests of those that come to dominate society and communities when it is not checked by some sort of ethical or cultural standard of caring for the community around you (including not just humans, but rivers, streams, fish, wildlife and Nature as a whole).  Without delving too deeply into the subject, it's easy to summarize that there are alternative economic theories and ideologies that involve cooperation, and more local and communal living that probably provide our best chance to stabilize our society.

If resource depletion wasn't bad enough, there is also a very big problem with monetary systems and especially debt.  The amount of debt in the world has been growing steadily, especially debt held by sovereign nations.  The world debt held just by these nations alone is more than $45 trillion dollars.  At the same time, especially within the US and some European countries, the percentage of domestic corporate profits in the financial sector boomed.  As Simon Johnson cites "From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007."  What this information is telling us, is there has been a serious amount of financialization within the world.  Even though resources necessary to the continuation of our industrialized society are beginning to go into decline, the financial sector is claiming greater and greater wealth. 

In order to understand this process it's useful to be able to classify the economy into its smaller parts.  E.F. Shumacher has classified the difference between the goods and services provided by human labor, and the goods and services provided by nature.  He labeled the former secondary goods while the latter he called primary goods.  Primary goods in fact, make it possible for the secondary goods to even exist.  The world's primary goods like oil or mineral deposits are being depleted.  However, there should be a third tier added to the economy above the primary and secondary goods.  This is a class of goods that are neither produced by nature or labor, but they are produced by the financial sector.  This comes right to the heart of modern monetary policy as it involves all bonds in creation.  A bond is simply nothing more than a promise to pay an amount in the future.  This is viewed as an economic good as there are those who produce them and those who want to sell them.  This good can be passed along from seller to buyer any amount of times and even if it's highly unlikely for this promise to be honored, the chance of collecting is seen as an object of value.  As the primary economy begins to shrink in the amount of goods provided, the tertiary or financial economy continues to claim more and more wealth from promises to pay, by selling these debts not just to private citizens, but national governments.  Since the world has increasingly come under a debt based monetary system it has become possible and very profitable to exchange money for money.  The entirety of the financial sector uses this concept to make its money, and it has created a sort of economic monoculture wherein all economic exchanges are valued by their exchange value for money. 

The end result from this is that a collapse in the primary economy (one that many ecologists are warning is coming) would certainly cause a collapse of the secondary economy of goods and services provided by human labor, as the materials to labor on and with become scarce.  Such a scenario would surely collapse the bloated financial economy with it's continual growing debts and it's metamorphosis into treating money as a good to be produced and sold.  The limit to debt is the ability the debtor has to pay back that debt.  Therefore, the economy is going to need to produce a serious amount of goods to pay back the debts already on the books at a time when the amount of goods and services available is on the brink of a serious decline.  Our financial sector has been issuing debts that the earth simply cannot pay, especially when these debts are necessary for financial growth on a continual basis.  With these simple and logical conclusions about our new economic reality, how can we continue this radical view that limitless growth is not only possible, but desirable and the only way to fix poverty?  Any economist that still holds the ability to value human and all life beyond merely its monetary exchange value would tell you that while growth does provide more goods and services in the world, it does not cure poverty because the same economic conditions that produce growth also produce poverty by the distribution of goods and services.  It's like building a wall with one hand while the other knocks it down. 

The most important thing to take away from this is not some depressing doomsday scenario (although it is important to acknowledge the disaster just around the corner), but to realize that other, better options exist to meet our economic needs than endless growth.  Without adoption of the environmental sciences and some simple logic into economics, we are doomed to fail.  If we instead adopt more ecological understanding into our economic system, we are destined to change the nature of economic exchange to a nature based system, erase the class of money rentiers which monopolize current economic exchanges, and possibly design a society with the stability needed for a healthy ecosystem with a more healthy and just human society.  It's simply a matter of re-framing our view that more is better into one in which we seek improvements in the quality of life.  This could also mean reestablishing our connection to the community of people, as well as nature that surround us.  None of this will be accomplished though without the diffusion of economic and environmental knowledge to the increasingly radical majority that believe growth can and will continue infinitely.