Archived Jul 20 2009
Welcome chaos, mother of ecological capitalism
The world economy has not grappled with this much uncertainty since World War II. Not even the 1973 OPEC embargo comes close. Easily accessible oil riches by the hundreds of billions of barrels were still in the Earth’s crust instead of contributing to environmental problems in major and astoundingly varied ways. The dollar’s reign as the global currency was still firm despite abandonment of its exchangeability for gold and other reserve assets after August 1971. The accumulation of unmanageable levels of dollar-denominated debts -- the inevitable concomitant of relying on a single nation’s fiat money as the main source of international liquidity -- was already born, but the little monster had not yet escaped from the nursery.
Oil and the international monetary order are the proto-variables of the chaotic transition that now besets the world. How long this marcohistoric episode will last and how it will play out is impossible to predict. Nonetheless, independent analytical examinations of the emerging conflict -- intemperate efforts to increase material welfare on a full-up planet -- are beginning to transmute the vague image of the optimal solution. The ideal outcome is a two-level economy or, in ideological terms, Ecological Capitalism.
The present turbulence may lead to a new institutional framework in which public authority becomes responsible for the development and maintenance of the economy’s predominantly renewable resource base. It would also ensure compliance with internationally-agreed-upon environmental standards and goals.
No reason for a cardiac event!
What appears upon first hearing as a menace to private property and freedom of enterprise should turn out to be the exact opposite -- enhanced security coupled with fabulous opportunities. Long-term business and government compacts in the integrated resource and environmental (“ecological”) sector would guarantee a safe future for the largest corporations. Small and medium-sized enterprises -- the beating heart of dynamic entrepreneurship -- would see the dawn of a new golden age.
Suits and dresses made by local tailors and home-cooked gourmet meals served in spic-and-span restaurants would take the place of worldwide franchise, the uncontested leader in the race to the bottom in terms of quality and ecological impact. In general, the envisaged socioeconomic conditions would raise the population’s cultural standards, improve public health, and enlarge the space for individual self-expression.
While the world is obviously several removes from that ideal shore, the one upon which it has been prospering for over half a century is slipping further away every day.
The dominant form of national-level economic organization -- the mixed economy of industrial democracies, the “North,” -- is incapable of transforming the resource base while maintaining growth, which is widely regarded as the principal means of eliminating untenable intra- and international income differences and arresting the malignant swell of global destitution.
“Peak oil” exposes systemic weaknesses.
The rise of crude prices until July 2008 did not prompt an extraordinary flow of capital into the development of nonconventional reserves (e.g., sand, shale, heavy oil, liquefied coal). As far as substitution of renewable energy for oil and other fossil sources (i.e., coal and natural gas) is concerned, the impact had been significant but only when viewed relative to a humble initial share.
Although the use of renewable sources (mainly wind and hydropower) is projected to increase considerably, their contribution will edge up only marginally until 2030, remaining in the vicinity of one-fifth of worldwide electricity output. According to the Energy Information Agency (EIA), the renewable share of global electricity generation will grow from 19 percent in 2006 to 21 percent in 2030. The rest represents mainly fossil sources and, to a much lesser extent, nuclear electricity.
The foretold expansion in overall demand for energy during the next two decades (37 percent based on EIA data) is expected to thwart the breakthrough to bone fide sustainability. Drawdown from the solar energy savings account (fossil reservoirs) is still in an accelerating mode.
The presumed incentive of high oil prices also became the main handicap in efforts to substitute away from this ubiquitous input. The investment response was apathetic.
As the cost of transportation, food, heating, and key industrial feed stocks increased with oil prices, prospects of profitability declined across the length and breadth of economic activity. Substitution for conventional oil became expensive and the flush of enthusiasm for alternative energy, encouraged by tax breaks and subsidies, made oil-related capital projects look like potential loss-makers.
Then the economy turned south, high unemployment exerting its onerous effects upon net capital formation, especially in the energy/basic resource sector and infrastructure development.
Under the principle of minimalist government intervention -- which with some national variation is central to the institutional framework, philosophy, and political culture of developed industrial democracies -- neither high nor low prices of oil prove to be conducive to laying the foundations of sustainability. The upshot of decentralized decisions is not the embrace of “increasingly competitive alternatives” during up-tick years and when aggregate demand declines during the down-tick, entrepreneurship loses will and focus.
When the going gets rough, the behavior of “too-big-to-fail” capital on the energy front is more like a dazed cow drooling in the heat than the much-touted cavalry galloping to the rescue.
Those who believe that the current goldilocks loitering of oil prices between the “not too high” and the “not too low” will somehow stimulate reserve development and investment in refinery capacity forget about the larger context: The recession continues to dissuade private-profit-motivated capital formation.
“Peak oil” as an economic phenomenon
Geologists still argue, and will do so for some time, about whether the world has already maxed out its annual rate of oil extraction; or whether it is close to that acme, or indeed, very far from it. This last opinion comes from an outlier group of independent scientists and other sources strongly suspected that, one way or another, business interests color their assessments.
Economic analysis is tilting the debate in favor of accepting “peak oil” as an undeniable component of reality. Its assumption helps more than any other theory or hypothesis to explain recent and current developments, including malfunctions in the mixed economy.
Developed and experimented out during the American New Deal, the mixed economy spread around the world in the postwar era and became the legal-ideological foundation of the current global order. The system received many shocks and endured much stretching and the folding over the decades but it always rebounded. Its ability to satisfy material needs and wants remained intact. Until now, that is, when for the first time in modernity, physical obstacles have emerged to block exponential economic growth.
Worldwide oil consumption in the vicinity of 85 million barrels per day may be such an obstacle. Trying to go above it via mobilizing nonconventional reserves or around it by developing alternative sources of energy appears to be sufficient to throw national economies into disarray.
The input demand for getting over or around the oil barrier may well be large enough to require that a slack in the global economy’s aggregate resource demand be channeled toward the energy sector. But when growth slows or stops, the main stimulus -- the price of the barrel rolling higher -- vanishes.
It is highly doubtful that a spontaneous, growth-preserving gradual transformation to renewable energy sources is achievable under the prevailing economic organization’s decentralized and easily distractible incentive system.
Curse for an economist: “May you be a forecaster in interesting times.”
Forecasting consists largely of holding a mirror up to the past, combining the picture with the intended effects of policy measures and calling it “the future.” This cannot possibly work when bizarre goings-on force policies to cross never-before imagined thresholds.
According to all official and most private sources, once the global economy leaves its current rough spot behind, it will grow between 3.0 and 4.0 percent per annum (PPP-weighted average) until 2030, approximating the past quarter century’s performance.
To make good on this prognosis, crude oil output must increase. IEA estimates that worldwide oil demand will be around 106 million barrels per day by 2030. If we accept the central economic thesis of “peak oil” -- i.e., that the price of the barrel must trend up when global resources are at their approximate full employment level -- then something must give. Either the past quarter centuries’ growth experience will not be repeated or new sources of cheap alternative energy will put the squeeze on oil dependence to an extent not foreseen -- a bold spell of hopefulness, not unlike expecting financial salvation from the roulette wheel.
It is much more likely that the world economy will walk aimlessly in circles for many years, led by the long rhythm of oil price fluctuations.
When the price of oil falls in the wake of a recessionary downturn, the system’s natural reflex is not to build the infrastructure to produce alternatives to conventional oil. When the economy recovers, resources stream toward current production, driving up oil prices again and reconstituting the basis for a new recession.
As demonstrated by last year’s U.S. Presidential election, public opinion is pushing the state to assume a greater role in economic management and this threatens to alter the private-public hybrid of the mixed economy. A point may be reached beyond which the system could no longer be called “mixed economy;” that is, free market capitalism in which the national government’s responsibility is restricted to keeping the economy on an even keel through fiscal and monetary measures. Trade and industrial policies, even in their actually practiced, indirect and limited forms, are frowned upon and may be legally challenged by partner countries through the World Trade Organization.
Financial crisis obscures the fact that the world economy has encountered material limits.
The bubble-burst-triggered financial mess and sky-rocketing oil prices have been cited as likely causes for the current recession, the first being generally favored over the second. The dualism is false and the emphasis is misplaced.
Restless feedback loops unite the two seemingly incommensurable aspects, and developments in production and consumption take precedence over mega-transactions that light up pixels ‘round-the clock on a billion computer monitors facing each other while being subtly tuned to an unperceived, virtual global center.
Monetary conditions, including polices, may hasten or retard the rupture of speculative bubbles, but the root cause of the bust is always some misalignment between the herd’s escalating expectations and underlying physical reality. So it has been, starting from Dutch tulips and the exploits of John Law through the stock market craze of the roaring twenties, the big puff of Nipponese assets at the end of the 80s, and the last gasp of “dot come,” ten years later. And so it is, of course, with the subprime washout in which the world still flounders.
In the saying “it is easier said than done,” the first verb symbolizes commitments and promises on paper and the second one, the real economy.
A good case can be made that rising gasoline prices, increasing the cost of commutes from ever more distant suburbs, began to break the back of American real estate asset inflation in 2007. The material economy reasserted its supremacy over financial huckstering which, on its own, never knows when or how to stop selling painted skies to patsies and dreamers.
No one should be fooled by the prevailing low in oil prices.
Demand for the economy’s plasma is growing in absolute terms just as the time of low-cost oil is winding down. The Institute for Transport Studies at the University of Leeds forecasts two billion vehicles worldwide by 2030. This is more than double their current number. Thirst for automobile ownership in Asia alone could drive oil prices back to mid-2008 levels or higher in a few years.
Events would become considerably more transparent if it were admitted that the price of energy (relative to other commodities) must rise statistically because increasing amounts of energy will be required to harness additional units of energy.
“Peak oil,” trough economics, and the footprints of chaos
Substitution for conventional oil is an arduous challenge because the economy’s most critical single input is a significant complement to each substitute. Mummified, paleo-market doctrinarism prevents economists from looking harder at this empirical fact.
Neoclassical convictions and expectations have been erected on the bedrock of simple geometric shapes; downward sloping demand and upward sloping supply curves. The underlying assumptions seem faultlessly logical. Of course, it is not the first time that superficial appearance allied with immediate intuition became the scientific measure of reality. If the Earth really moves, as some heretics claimed in the 17th century, wouldn’t the wind constantly tousle our hair? If objects fall to the ground it is because they are naturally attracted to the center of the universe. Sure.
Supply and demand curves, which, like the shoulders of Atlas, are being asked to support a whole universe of economic thought, are not fully two-dimensional (or n-dimensional in standard, multivariate calculus-based microeconomics, where “n” is a natural number). They are fractals. Their dimension is somewhere between one and two. An actual demand curve may look like California’s coast going from Cape Mendocino to San Diego; and a supply curve may resemble China’s northeastern coast, from Kuang-Chou (Canton) in the direction of Shanghai. The southern portion of the Indian subcontinent provides a compact geographic image. Tellingly, the two biased random paths (west as demand and east as supply) “intersect” in the Indian Ocean, rather than at an equilibrium point.
Convoluted, irregular fractal dimensions are the spatial manifestations of erratic temporal processes. While it is generally true that more is produced and less is purchased at higher prices, this is not the full story. If it were, global markets and international trade would indeed have a tendency toward dynamic self-correction under the aegis of ratiocination.
A broader perspective suggests that irreversible and cumulative nonlinear evolutions accompany developments in the world economy because its accretion is a dissipative, hence unidirectional, thermodynamic unfolding. Noncyclical processes shadow the growth of material output, which must, per the laws of physics, result in occasional “symmetry-breaking” -- that is, developments that are impossible to predict from past experience and data.
An undetected nonlinear evolution in the background, manifest through the oil problem, may have already driven the world economy and its organizational framework into chaos. “High oil price/economic setback, followed by signs of recovery/higher oil price” might be a periodic, repetitive subprocess. Identifying such deterministic side-progressions plays a critical role in diagnosing chaos. Their presence implies that some of the parameters of the underlying system (i.e., quantifiable characteristics of the mixed economy at the national, and those of multilateral institutions at the global level) have left their range.
“China Syndrome,” starring top policymakers
The sight of one outsized attempt after another to sanitize the banking system and restart the economy offers a compelling parallel with the 1979 movie, “China Syndrome.” Shift supervisor and staff sweat in the nuclear reactor’s control room, trying to arrest the rise of water levels to a point where damage to the core would cause a lethal release of radioactivity into the environment. They open relief valves, pull levers, turn switches and knobs, tap on glass covers. As tremors, strange vibrations of gauge needles, and unusual instrument readouts fail to subside, they begin to understand that the system has a mind of its own.
Control has slipped away from the controllers.
To each other they say: “Just keep smiling, for heavens sake, act confident!” To the public: “Of course we know exactly what we are doing. No, no, no, there is no danger of meltdown -- whatsoever. We will continue to monitor the situation.”
Like the power station, the mixed economy has parameters that must remain within their ranges in order for the system to work as designed. Once these ranges are violated, bifurcation -- a sort of chaotic cascading -- threatens to disrupt business as usual. When that occurs, system failure becomes obvious and no PR campaign can spin it out of sight.
As nations wrestle in vain with the complex problem of stimulating GDP growth while boosting reliance on renewable energy, the surmise is bound to awaken that the mixed economy model must give way to new principles of economic self-organization at both national and global levels.
Creating unheard-of fiscal deficits and shooting the monetary base toward the sky in a near vertical trajectory will not help rekindle private business and, at the same time, move economies toward resource and environmental sustainability. Apparently, when macroeconomic dose-response mechanisms no longer function as expected, theoretical self-assurance and favorable past experience push policymakers toward increasing the dose.
Consequently, the public is feeding the goose that lays the rotten egg.
The great metamorphosis has already begun.
If one defines neoliberalism as the intention to increase the weight of private capital in the mix of the mixed economy, we may say that it is fading like an ancient god. Since its defeat is not the result of choreographed opposition, no new ideology has taken its place. Labeling U.S. ownership of GM and a number of financial/banking outfits as the triumph of some lingering socialist phantom is erroneous despite what hardened wiseacres of the declining paradigm claim between shrieks of “Treason!”
The U.S. government did not seek to own car companies and banks. Ownership fell into Uncle Sam’s lap in the wake of combined and closely related unfavorable developments in the real economy, in the financial world, and as a result of newly-discovered institutional shortcomings. There is nothing but nationalization between throwing money into black holes -- accelerated fiscal ruin -- and risking that the “too-big-to fail” threat proves to be real.
The difficult, adaptive transformation leading to Ecological Capitalism is now underway. It would be shorter and less troublesome if the following two principles gained broad acceptance:
First, new policies and institutions that are not known from history must develop through independent, ideologically unconstrained thinking. Second, economic growth has costs. These must be netted out from its benefits in order to understand how far and in what ways it can be reasonably pursued and when it should be banned.
Recognizing the economic consequences of “peak oil“ would foster acceptance on both accounts.
Ecological Capitalism would be “Capitalism 3.0.”
Capitalism 1.0 was the laissez faire/metal money era -- or Classical Capitalism -- which ended with the outbreak of World War I. Capitalism 2.0 is (has been?) the mixed economy, or Modern Capitalism, the most successful and increasingly adopted model since the end of World War II.
Capitalism 1.0 had to go because limited and incalculably changing gold supplies imposed unmanageable restrictions on national economic policies and international trade. There was no institutional and legal framework for global cooperation, yet the world had an increasing need for it. Social and economic obstacles to growth killed the cat.
Capitalism 2.0’s quest for eternal life is also destined to be unsuccessful because nature is refuting its mainstay -- unbounded growth. Extant institutions appear unable to protect 6.8 billion people (9 billion by mid-century) from crippling rates of exhaustible resource extractions and lethal environmental degradation.
In the end, the “greed and bubble” fractional reserve banking and a multilateral system so weak that any country able to field three well-spoken men in suits and ties can play it like a twenty-dollar toy Casio will also have to go.
Capitalism 3.0 will need a monetary and financial order that combines the advantages and gets rid of the disadvantages of both metal and fiat moneys. Strong multilateralism, founded on democratic principles and ethical percepts deeper than thinly disguised me-me-me nationalistic self-idolatry ought to become the international basis of Ecological Capitalism.
Whether our generation likes or not, in the long run there is only one economy -- the global one. Sooner or later, the world will have to get its act together.
Going back to Mount Washington Hotel in Breton Woods for a G-265 summit might be a good start. Reconsidering what Keynes had to say there in 1944 about a supra-sovereign reserve currency and equilibrium-seeking trade arrangements could be a prerequisite for participation.
Unfortunately, as history has shown, such a meeting, conceived and conducted in the spirit of calm acquiescence, is possible only at the end of the chaotic transition, not at its beginning.
The question “If it took ‘1914-1945’ to go from Capitalism 1.0 to 2.0, what will it take for global self-organization to settle into 3.0?” is, of course, infinitely unsettling. Yet not even under the most optimistic assumptions, which take into consideration the differences between now and 1914, can one think of any realistic alternative to a multiplicity of interests, designs, and wills straining and clashing in search for new unifying principles and organizational parameters.
From ancient Hindu wisdom and the profound insights of Taoism to modern day chaos theory transpires the wearisome truth: History’s creative force emerges from a jumbled flux of dark waters.