October 2008

Like a Parrot in a Flaming Tree

But like a parrot in a flaming tree
I know, it's pretty hard to see
And I'm beginning to wonder if it's time for a change

- Lyric by Phil Judd, from Split Enz's Time for a Change, on their 1975 Mental Notes album

It's not just Phil Judd wondering.

Amanda Kovattana can see the parrot:

"Huge assumptions were going down here about competition being the guiding principle of societies, not cooperation. I was beginning to see the light at the end of the tunnel.



There were no real truths, here, about human nature at all, not even economic truths. These were just ideas forced upon us and here we were going along with it, giving lip service to free market rhetoric. I longed for the day that the ideology of free market capitalism would become as abhorrent as the theory of eugenics. Given the recent financial unraveling, I may not have to wait very long.

"

So can Michael Tobis:

The current financial disaster is based on people deluding themselves that they had eliminated risk, when in fact they had coupled risk. The consequence is that small failures were avoided at the expense of big failures.

The whole setup of modern human activity makes a comparable error. There is no such thing as unlimited growth. All growing systems reach limits. The most casual understanding of exponential growth (h/t HR) makes this clear.

Either fuel supply or carbon waste are likely candidates to be the limit we hit first, but there are others. It doesn't matter. The "growth forever" idea is really "growth until it stops". If we base everything we do and everything we think on an assumption of growth, we start to build things in to protect the growth.

Much of government of the past century has been about protecting the growth. Sooner or later it is doomed to fail.

Has this just happened? Has the system reached old-fashioned bubble-popping so emphatically and so hard upon its physical limits that we will be unable to right it? Maybe, but probably not.

The problem is that righting it is not what we need to do. What we need to do is relax.

What we will inevitably try to to is rebuild the tightly coupled growth-dependent system that has spectacular failures built into its whole M.O. Realistically, some of this is unavoidable at this stage, but it's an ill-timed distraction. What we ought to do, instead, is reduce growth dependency and increase redundancy and resilience.

We need to convert to a world where less wealth gets created, and less wealth gets destroyed.

This is the relaxation scenario; it is easier on everybody, but it will take some creativity. In a perceived crisis, can we find the creativity to say, "no, we don't particularly want things to get back to normal"?

Resilience, not growth, is the goal of our time. We need to build a world where time to think and time to enjoy and time to care is valued more, where time to achieve and money to spend is valued less. Say you don't want no diamond rings and I'll be satisfied. Tell me that you want the kind of things that money just can't buy.

Trying to find sustainability in conventional economics at a time of stress is a category error if ever there was one.

It turns out that many parts of neo-classical economics are just plain wrong. For instance, "Daniel Kahneman received the Nobel Prize for the work he did in collaboration with Amos Tversky [showing that systematic biases prevent humans from being truly rational] , who would have no doubt shared in the prize had he been alive" (from Wikipedia article). And while the 'law' of supply and demand, predicting price movement, appears to be a reasonable description of general effects, all other things being equal, there have proven to be far too many variables that interact with poorly rational agents to affect price. It can't explain what happens, for example, to the price of oil.

So many things in economics have turned out to be beliefs rather than real laws. Many times they have been wishful thinking rather than verified phenomena. We need to consider some of these commonly held beliefs and question their validity in an attempt to find real explanations for what is going on.

Let's start with a common belief held by economists, politicians, and the general public — most everybody — that growth is always and forever a good thing. Even Paul Krugman, the latest Nobel Memorial winner believes it. You probably do too. But let's consider the boundary conditions.

We live on a finite world. Economic growth, which is defined as a percentage increase, year over year, of Gross Domestic Product (or gross world product for the whole planet), implies that mankind's footprint on the Ecos is increasing each year. We achieve this by taking more of natural resources, converting them to human-desired capital, and belching out waste products for nature to absorb. Here is an absolute fact that should be easy for everyone to understand. You cannot grow infinitely in a finite world. It is physically impossible (not to mention the psychological stress of crowding).

Growth includes growth of profit, growth of sales, growth of markets, and, to make the latter possible, growth of the population. Growth creates more jobs so that the growing population has something productive to do and an income so as to buy the growing number of goodies and fa(s)t foods. What's not to like about growth? As long as we are growing at a 'reasonable' rate all is right with the world. Right?

So much for rational agent theory. No one in their right mind can believe that growth, even at a 3 - 5% rate per year could go on forever. At a five percent growth rate, whatever is growing doubles every 14.21 years! Given a finite volume in which to grow, how long will it take to fill the volume completely? It is patently absurd for anyone to believe that growth in and of itself is a goal of economic activity.

And Robert Nadeau:

• The market system is a closed circular flow between production and consumption, with no inlets or outlets.
• Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
• The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
• The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
• There are no biophysical limits to the growth of market systems.

If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale. Because neoclassical economics does not even acknowledge the costs of environmental problems and the limits to economic growth, it constitutes one of the greatest barriers to combating climate change and other threats to the planet. It is imperative that economists devise new theories that will take all the realities of our global system into account.

And Ilargi sees it with outstanding clarity:

There is a completely unfounded and utterly irrational picture of the world being touted that claims all will be fine, and soon too. When the economy rebounds, in that familiar imaginary place that’s just around the corner beyond the horizon, the wonderful certainty of unbounded growth will dissolve all debt and make us richer than we've ever been before. All of us.

It would not be correct to call this a fantasy. It is much more. It’s religion. It’s chasing the golden calf. And it does not condone critical views and questions. Growth is such a powerful deity that taking on additional, even unlimited, debt, in order to get to the promised land tolerates no scrutiny, a principle not unlike the mind-frame of your everyday suicide-bomber.

Growth, in the eyes of its believers, knows no more limits than do the powers of any of the all-seeing ever-present gods found in the monotheistic religions, Judaism, Islam and Christianity. The faithful growth flock, after having grown from A into A+, accumulating already seemingly infinite earthly possessions, blindly follows their shiny calf along its unidirectional and one-dimensional path to more of the same. The Lord of More. And as long as no questions are ever asked, the only limits will be those imposed by another deity, Gaia.

I have a question. I would like to know why no-one ever asks what exactly is is that they wish to grow into. Where it is they want to go. We have all seen the surveys that show, without missing a beat, that the happiest people on the planet do not live in the richest communities, but in the closest knit ones. Happiness is not two and a half people in a 10000 square foot mansion with wall-size TV’s and a garage filled with vehicles modeled after rhinoceroses.

So why the heck doesn't George Bush, Gordon Brown, the members of that strange pseudo-scientific cult of "economics", and everybody else get it?

The problem is in the fundamentals, not in the detail.

We can't see the flaming parrot for the tree.

Footnote:

Radio New Zealand has produced an excellent documentary series, EnzOlogy, about Split Enz. A live performance of Time for a Change appears at the end of part 10. (Warning, 98MB download.) Wonderful. The original album version is featured in part 2.

Don't Surrender Our Rights in the Name of Anti-terrorism

There's a nice bit of balance in the Director of Public Prosecution's lecture Coming out of the Shadows:

"... we have been absolutely right to resist, whenever they have been suggested, special courts, vetted judges and all the other paraphernalia of paranoia. Of course, you can have the Guantanamo model. You can have the model which says that we cannot afford to give people their rights, that rights are too expensive because of the nature of the threats we are facing. Or you can say, as I prefer to, that our rights are priceless. That the best way to face down those threats is to strengthen our institutions rather than to degrade them. It is difficult to see who will maintain a cool head if governments do not. Or who will protect our Constitution if governments unwittingly disarm it. The response to terror is, of course, multi-layered. It has to be that way. In some contexts it is dealt with geopolitically, by engaging relations between sovereign states. In others it is disrupted by intelligence and by other interventions. In still others the response must plainly be military. But on the streets of our country, violent law breaking is dealt with as crime. It is taken through the courts as crime. It is confronted with in accordance with our Constitution. In all the debates that have raged back and forth, Britain has been absolutely right to hold fast to this course. We would do well not to insult ourselves and all of our institutions and our processes of law in the face of these medieval delusions. As I say, the response to terror is multi-layered. But it should not include surrender."

Sir Ken Macdonald, QC, Director of Public Prosecutions

Democracy is Coming to the USA

So sang Leonard Cohen in his 1992 album The Future. But it's taking its time. In an article in Rolling Stone magazine, Greg Palast and Robert F. Kennedy Jr. tell the story of how the GOP is subverting democracy.

Banksters' Bonuses

The Banksters (thanks to Radio Ecoshock's Alex Smith for the term) took home £16 billion in bonuses in the year to April, official figures reveal.

"City bankers have not lost a penny of their multimillion-pound bonus packages so far, despite the credit crunch which has caused the worst financial crisis in 80 years, new figures show. Official statistics reveal that, in the financial year to April, City workers took home £16bn, almost exactly the same as in 2007. The period covers the Northern Rock nationalisation and the UK employees hit by the Bear Stearns implosion. During the period, banks across the world were forced to make huge writedowns on investments linked to US subprime mortgages. Bonus payments in the UK financial sector have more than trebled in just over five years, from £5bn in 2003, according to the Office for National Statistics (ONS). This is shared among just over one million employees in the sector, but that is heavily skewed towards the high-powered executives, who are routinely handed seven-figure packages."

The Independent

Don't say we weren't warned

    "Where finance is concerned, the basic implication of peak oil is pretty stark: an end to industrial expansion (i.e. "growth"). All the alternatives to oil will not keep the industrial economies expanding -- they can only slow down a contraction, and only marginally so. The trouble with this picture is that finance is a system that uses paper markers to represent the hope and expectation for the expansion of wealth. These markers are currencies, stocks, bonds, option contracts, derivatives plays, and other certificates that are traded in open markets. If there is no longer any hope of increased wealth in the world, then all those tradable paper markers become losers. Their value unwinds and imagined piles of wealth evaporate into thin air.

     The unwinding process depends on the psychology of the people who own these certificates. If they do not understand the global oil situation and its implications, then they will continue to hope for and expect expanded wealth, and thus continue to regard their paper certificates as credible markers of value. And that is largely the case at the moment, since most of the playas in the financial markets are not paying attention to the peak oil story, or don't believe it is for real.

     Two special and transient circumstances are now propping up the financial markets. One is that for practical purposes the world is virtually at peak, meaning this is an extra-special time of strange behavior (like the point in the apogee of a steep sub orbital flight in which passengers become momentarily weightless). Supply and demand for oil are only beginning to go out of whack (that is, demand just barely exceeding supply). Even at this early stage, the oil markets themselves are showing stress, as hoarding behavior sets in and induces wider swings of price volatility. But these swings in oil prices -- such as the one we're in right now, where prices have crashed 20 percent since the panic buying (hoarding) of June and July -- send false signals to the financial playas. The main false signal is that all is well on the global oil scene...there's no real supply problem...and hence no threat to the continuing expansion of industrial production and its associated wealth-generating activities. This signal just tells the playas to buy more paper markers. Thus, the stock market goes up.

     The second special and transient circumstance is that so much wealth has already accumulated along the way to peak, that financial markets take on a life of their own -- as existing wealth "invests" itself in more paper markers hoping and expecting to "grow" into even more wealth. The problem here is that existing wealth is actually being squandered, since the paper markers will only lose value as the hopes and expectations vested in them dissolve in disappointment. But we haven't quite reached that point yet.

     In simply bidding the markets up, the system has spun off even more gobs of presumed wealth. Some of this "liquidity" -- say, in the checking accounts of people who work for Goldman Sachs -- has found its way into Manhattan condominiums, or Aspen McMansions, and filtered through the system to everyone from the lawyers who write up the pre-nuptial agreements to the guys who sell the furniture to the people who drive the delivery trucks that bring it to the door, to the men laying tiles in the new bathrooms.

     The basic insanity of a system that presumes vastly increased wealth where none will occur, has led to further distortions in finance. The most obvious one is the so-called housing bubble. The misplaced extreme expectation in the ever-increasing value of paper wealth, led to the hijacking of mortgages by financial playas who bundled them into odd lots of tradable debt (promises to pay) and used them to leverage abstruse bets (hedges) on the behavior of other kinds of paper markers (currencies, interest rate differentials, commodity prices) -- very profitably as long as all playas believed that industrial societies that run all oil would continue to grow, to produce more wealth. The level of abstraction in these rackets -- their distance from the reality of productive activity --is self-evident.

      But they were so successful that the profligate creation of ever more mortgages became an increasingly reckless and irresponsible enterprise. Contracts were made with house-buyers who had no record of credit worthiness and often no real proof of income. Contracts were made on terms (interest payments) that were deceptive, even ruinously false, for the house-buyers. The reckless reassignment of lending risk into ever more abstract layers of deferred obligation, and the ease of credit that ensued, allowed millions of ordinary people to acquire real property on unrealistic terms, which had the affect of bidding up the price of houses that these owners will eventually have to surrender for nonpayment.

      That process is now underway. The reckless creation of mortgages had the further effect of stealing demand for house-building from the future. So many new houses were built and then sold to people who will probably have to surrender them, and then so many more beyond that were built in the expectation and hope that reckless mortgage creation would continue forever, that there is now a massive over-supply of total existing houses while the pool of suckers for new ruinous mortgages has shrunk to zero.

      Similar excesses in all the other lending and debt sectors, including "non-performing" credit card obligations and government deficits, will also unwind and thunder through the system.

      Meanwhile, the false signal from the oil markets that has been broadcasting for eight weeks will come offline and a new signal will come on as prices go back up. The pause in bidding for future oil induced by the panic over-buying of the summer will end. The heating season is here. It's 40 degrees out in upstate New York this morning and the furnace is cranking. The Chinese and the Indians and even the people in France have not stopped using oil, even if Americans have put their Winnebagos up on blocks for the season.

     As the price of oil goes back up, the financial markets will get a new signal that running industrial societies has just gotten more expensive again. That will dampen hopes and expectations for increased wealth from these societies. Meanwhile, the air will be coming out of millions of mortgages, and the loss of value will spread among playas holding these bundles of mortgage debt (i.e. promises that money spent on houses is being paid back, which it won't be). At the same time the houses themselves will lose value as the pool of potential buyers shrinks to nothing. That is, the inflated value (high price) of these assets will deflate.

     As this occurs, there will be far fewer wage-earners putting up additional houses, fewer furniture sales, fewer trips by delivery truck drivers and fewer tile-jobs in the McBathrooms.

     This is why I view the fall melt-up of the stock markets as a swan dive. We're at the apogee now, just as the world is at the apogee of its oil production. I confess, I thought the reality of our economic predicament would be recognized by the playas and their markets sooner than it has. It turns out the the chief luxury of the final cheap oil blowout has been the artificial support of unrealistic hopes and expectations."

James Howard Kunstler, "Swan Dive", (scroll down to October 9, 2006 post)

Hats off to Alex Smith on the Radio Ecoshock podcast for the link.

Limits

Historian Simon Schama, talking on this morning's Start the Week on Radio 4:

"this time it's about America, that was founded on the premise of unlimited plenty, which could be released only if you apply hard work and the kind of Benjamin Franklin resourcefulness. Realise that you can still be America, but you must acknowledge realistically [that] you're living in an age of limits. If you want your children and your grandchildren to have a chance on a dying planet they must observe a different philosophy about what we do with the limits."