Tags: collapse* + economy*

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  1. There is this funny story about the “Cobra Effect” based on an anecdote from British colonial time in Delhi.

    Apparently, the officials of the British government were terrified by a large number of venomous cobra snakes in the city. To solve the problem, someone came up with a brilliant idea of an exchange offer to the people of Delhi. Money for dead cobras.

    Guess what happened next? Soon, the enterprising Delhiites were breeding cobras. When the government found out, they scrapped the bounty scheme, whereupon the cobra breeders set the snakes free. And the cobra population went up, not down.

    A similar incident occurred in Hanoi under the French colonial rule. There were too many rats, so the rulers introduced a bounty scheme for, of all things, rat tails. Pretty soon, Hanoi was full of tail-less rats running around. The bounty hunters never killed them. Instead, they just severed their tails, released them back into the sewers, so that they could continue to procreate and make more rats, which of course, increased the rat catchers’ income.

    Why did both situations backfire? Because well-intentioned people who created the bounty schemes didn’t think about second order effects. They didn’t pause, reflect and ask how people will respond to their brilliant-sounding idea.

    Thinking about first-order effects is easy. Thinking about second or higher order effects is hard.

    It’s fascinating to observe how this problem keeps on repeating over and over again. One variant is called “you get what you measure.” For instance, if hospitals are asked to publish their mortality rate, the ones with the highest mortality rates are incentivised to turn away terminally ill patients.

    If someone is paid on a cost-plus basis (e.g. for generating electricity), you can be confident that there will be plenty of gaming in the form of cost padding.
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  2. There’s a problem, however. De-growth solves the sustainability challenge by shifting the burden onto a much more challenging issue, which is to design and implement a de-growth economy. Nobody has the slightest hint as to how to render viable a world economy that would be structurally de-growing while ensuring social balance, individual and collective satisfaction, and peace between the large states. Even the slow-growing economy (at a less-than-1% growth rate) that results from my earlier demonstration remains an unsolved challenge, since we still don’t know how to ensure employment, innovation, useful investments, and even democracy at such a low pace of economic growth. Just think back to the social structures and the kinds of international relations that prevailed across the world before industrialization.
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  3. We can have it all: that is the promise of our age. We can own every gadget we are capable of imagining – and quite a few that we are not. We can live like monarchs without compromising the Earth’s capacity to sustain us. The promise that makes all this possible is that as economies develop, they become more efficient in their use of resources. In other words, they decouple.

    There are two kinds of decoupling: relative and absolute. Relative decoupling means using less stuff with every unit of economic growth; absolute decoupling means a total reduction in the use of resources, even though the economy continues to grow. Almost all economists believe that decoupling – relative or absolute – is an inexorable feature of economic growth.

    On this notion rests the concept of sustainable development. It sits at the heart of the climate talks in Paris next month and of every other summit on environmental issues. But it appears to be unfounded.

    A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. It points out that governments and economists have measured our impacts in a way that seems irrational.

    Here’s how the false accounting works. It takes the raw materials we extract in our own countries, adds them to our imports of stuff from other countries, then subtracts our exports, to end up with something called “domestic material consumption”. But by measuring only the products shifted from one nation to another, rather than the raw materials needed to create those products, it greatly underestimates the total use of resources by the rich nations.
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  4. can we transition to these renewable energy sources and continue using energy the way we do today? And can we maintain our growth-based consumer economy?
    The answer to both questions is, probably not.

    The industrial sector: Making pig iron—the main ingredient in steel—requires blast furnaces. Making cement requires 100-meter-long kilns that operate at 1500 degrees C. In principle it is possible to produce high heat for these purposes with electricity or giant solar collectors, but nobody does it that way now because it would be much more expensive than burning coal or natural gas. Crucially, current manufacturing processes for building solar panels and wind turbines also depend upon high-temperature industrial processes fueled by oil, coal, and natural gas. Again, alternative ways of producing this heat are feasible in principle—but the result would probably be significantly higher-cost solar and wind power. And there are no demonstration projects to show us just how easy or hard this would be.

    The food sector: Nitrogen fertilizer is currently produced cheaply from natural gas; it could be made using solar or wind-sourced electricity, but that would again entail higher costs. Food products—and the chemical inputs to farming—are currently transported long distances using oil, and farm machinery runs on refined petroleum. It would be possible to grow food without chemical inputs and to re-localize food systems, but this would probably require more farm labor and might result in higher-priced food. Consumers would need to eat more seasonally and reduce their consumption of exotic foods.

    In short, there are far more challenges associated with the energy transition than opportunities. There are potential solutions to all of the problems we have identified. But most of those solutions involve higher costs or reduced system functionality. Moreover, the energy dynamics of the transition itself will pose a challenge: where will the energy come from to build all the solar panels, wind turbines, batteries, electric blast furnaces, and solar cement kilns that we’ll need? Building the fossil-fueled energy producing-and-consuming infrastructure of the modern world has been by far the greatest construction project in human history. It took over a century, and it’s still a work in progress. Now we’ll have to replace most of this vast infrastructure with something different

    the preponderance of research literature supports the conclusion that the all-renewable industrial economy of the future will be less mobile and will produce fewer and more expensive goods. The 20th century industrial world was built on fossil fuels—and in some ways it was built for fossil fuels (as anyone who spends time in American suburban communities can attest). High mobility and the capacity for ever-expanding volumes of industrial production were hallmarks of that waning era. The latter decades of the current century will be shaped by entirely different energy sources, and society will be forced to change in profound ways.

    that implies a nearly complete rethinking of the economy—both its means and its ends
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  5. The Wall Street Journal recently ran an article called, Glut of Capital and Labor Challenge Policy Makers: Global oversupply extends beyond commodities, elevating deflation risk. To me, this is a very serious issue, quite likely signaling that we are reaching what has been called Limits to Growth, a situation modeled in 1972 in a book by that name.

    What happens is that economic growth eventually runs into limits. Many people have assumed that these limits would be marked by high prices and excessive demand for goods. In my view, the issue is precisely the opposite one: Limits to growth are instead marked by low prices and inadequate demand. Common workers can no longer afford to buy the goods and services that the economy produces, because of inadequate wage growth. The price of all commodities drops, because of lower demand by workers. Furthermore, investors can no longer find investments that provide an adequate return on capital, because prices for finished goods are pulled down by the low demand of workers with inadequate wages.

    The “secret formula” humans have had for winning in our competition against other species has been the use of supplemental energy, adding to the energy we get from food. There is a physics reason why this approach works: total population by all species is limited by available energy supply. Providing our own external energy supply was (and still is) a great work-around for this limitation. Even in the days of hunter-gatherers, humans used three times as much energy as could be obtained through food alone.

    In my view, the formula that has allowed humans to keep winning the battle against other species is the following:

    Use increasing amounts of inexpensive supplemental energy to leverage human energy so that finished goods and services produced per worker rises each year.
    Pay for this system with debt, because (if supplemental energy costs are cheap enough), it is possible to repay the debt, plus the interest on the debt, with the additional goods and services made possible by the cheap additional energy.
    This system gradually becomes more complex to deal with problems that come with rising population and growing use of resources. However, if the output of goods per worker is growing rapidly enough, it should be possible to pay for the costs associated with this increased complexity, in addition to interest costs.
    The whole system “works” as long as the total quantity of finished goods and services rises rapidly enough that it can fund all of the following: (a) a rising standard of living for common workers so that they can afford increasing amounts of debt to buy more goods, (b) debt repayment, and interest on the debt of the system, and (c) and an increasing amount of “overhead” in the form of government services, medical care, educational services, and salaries of high paid officials (in business as well as government). This overhead is needed to deal with the increasing complexity that comes with growth.

    The formula for a growing economy is now failing. The rate of economic growth is falling, partly because energy supply is slowing (Figure 3), and partly because we need more and more every year to do the same things.

    One way of viewing our problem today is as a crisis of affordability. Young people cannot afford to start families or buy new homes because of a combination of the high cost of higher education (leading to debt), the high cost of fuel-efficient new cars (again leading to debt), the high cost of resale homes, and the relatively low wages paid to young workers. Even older workers often have an affordability problem. Many have found their wages stagnating or falling at the same time that the cost of healthcare, cars, electricity, and (until recently) oil rises. A recent Gallop Survey showed an increasing share of workers categorize themselves as “working class” rather than “middle class.”

    It is this affordability crisis that is bringing the system down. Without adequate wages, the amount of debt that can be added to the system lags as well. It becomes impossible to keep prices of commodities up at a high enough level to encourage production of these commodities. Return on investment tends to be low for the same reason. Most researchers have not recognized these problems, because they are narrowly focused and assume that models that worked in the past will continue to work today.
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  6. One way or another, the economy (and here we are talking mostly about the economies of industrial nations) must shrink until it subsists on what Earth can provide long-term.

    Saying “one way or another” implies that this process can occur either advertently or inadvertently: that is, if we do not shrink the economy deliberately, it will contract of its own accord after reaching non-negotiable limits. As I explained in my book The End of Growth, there are reasons to think that such limits are already starting to bite. Indeed, most industrial economies are either slowing or finding it difficult to grow at rates customary during the second half of the last century. Modern economies have been constructed to require growth, so that shrinkage causes defaults and layoffs; mere lack of growth is perceived as a serious problem requiring immediate application of economic stimulus. If nothing is done deliberately to reverse growth or pre-adapt to inevitable economic stagnation and contraction, the likely result will be an episodic, protracted, and chaotic process of collapse continuing for many decades or perhaps centuries, with innumerable human and non-human casualties. This may in fact be the most likely path forward.

    Is it possible, at least in principle, to manage the process of economic contraction so as to avert chaotic collapse? Such a course of action would face daunting obstacles. Business, labor, and government all want more growth in order to expand tax revenues, create more jobs, and provide returns on investments. There is no significant constituency within society advocating a deliberate, policy-led process of degrowth, while there are powerful interests seeking to maintain growth and to deny evidence that expansion is no longer feasible.

    Nevertheless, managed contraction would almost certainly yield better outcomes than chaotic collapse—for everyone, elites included. If there is a theoretical pathway to a significantly smaller economy that does not pass through the harrowing wasteland of conflict, decay, and dissolution, we should try to identify it. The following modest ten-point plan is an attempt to do so.
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  7. The problem is that Italy has an appallingly low trend GDP growth rate – possibly negative at this point – and nothing which has happened since the financial crisis ended suggests it is going to to improve radically anytime soon, in fact there are good reasons to think that growth could even deteriorate further.

    In the first place Italy’s working age population is now falling, and many young educated Italians are leaving to work elsewhere.
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  8. In Denial: Self-Deception, False Beliefs, and the Origins of the Human Mind, Varki and Brower take it one step further. They argue that while our intelligence and use of tools set human beings apart from the rest of the animal kingdom, our capacity for denial may be the greatest differentiating factor. The late Danny Brower asked Varki, a biologist, why other smart, self-aware animals such as elephants, apes, dolphins, whales, or magpies, had not achieved levels of intelligence seen in human beings. Many of these animals can recognize themselves, communicate with one another, and mourn relatives or companions. They have all had more time on Earth to evolve.

    The theoretical, though as yet unverifiable, answer put forward by Varki and Brower revolves around two things: (1) that human beings are aware of the thoughts of others, and (2) that they have ability to deny reality. According to them, denial is the essence of what it means to be human! They argue that as human beings became aware of their mortality, some fell into depression while others were able to carry on without becoming crippled by this realization. Mind-over-reality became our defining characteristic, enabling us to maintain sanity in the face of danger. Those who suffer from depression are often more aware of reality, they note, which in turn can cause crippling anxieties. On a society-wide basis, such anxiety can cause an avoidance of procreation, which would be an evolutionary dead-end.

    But in the Anthropocene, have the tables turned? Now, reality-accepting behaviour may be an evolutionary boon. Rather than leading to a dead-end, accepting the reality of overconsumption and overpopulation may result in actions that increase the likelihood of human survival. Could it be that those who accept reality have suddenly become cultural (r)evolutionaries better adapted for long-term human survival? Can the shift happen quickly enough to improve our survival prospects?
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  9. An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment.

    If Keynes were alive today, he might be warning of a repeat of 1937, when policy mistakes turned a promising recovery into history’s worst double dip. This time, Europe is the danger zone; then it was the U.S. What’s called the Great Depression was really two steep downturns in the U.S. The first ended in 1933. It was followed by four years of output growth averaging more than 9 percent a year, one of the strongest recoveries ever. What aborted the comeback is still debated. Some economists blame President Franklin Roosevelt for signing tax hikes and cuts in New Deal jobs programs. Others blame the Federal Reserve. Dartmouth College economist Douglas Irwin argues that the Roosevelt administration triggered the relapse by buying up gold, removing it from the U.S. monetary base. The move to prevent inflation succeeded all too well, causing deflation. Whatever the cause, Britain and other trading partners were dragged down, and U.S. output plunged and didn’t fully recover until America’s entry into World War II. “We are really at a kind of 1937 moment now,” says MIT’s Temin. “It’s a cautionary history for us.”
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  10. we are trying to solve 21st -century problems with 19th- and 20th- century economic thought
    Tags: , , by M. Fioretti (2014-10-20)
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