Policy makers trapped in unresolvable dilemmas
Corporate vampires growing on debt
In this article I connect the fall in the growth rate, with its roots in the rising costs of energy extraction and generation, to declining resilience in the economic system. These are in turn related to a more conflict ridden geo-politics. There is an increased vulnerability to shocks which will be catastrophic unless and until there is a new conventional wisdom in society about what is wrong and what has to be done about it. Things would still be hard if we had a better understanding of what is wrong but society would be in a better position to do something about the predicaments that face us all. Unfortunately those with a vested interest in current arrangements are not likely to change their world view any time soon. With their control over an extraordinarily servile mass media there is a grave obstacle to society understanding its predicament and responding appropriately. The global system is entering an extremely dangerous phase for life on the planet.
Growth and stability go together – like balance and momentum on a bike
Let me start by using the metaphor of riding a bicycle. With forward momentum it is possible to balance on a bicycle – as soon as the bike and passenger stops it becomes almost impossible. There is an analogy here for the capitalist economy. If it is growing a capitalist economy will stay economically stable. If it is not growing then, after a time, it automatically becomes unstable. Account books can be balanced, bills paid and debts serviced when individuals, households, companies and government are in surplus because incomes are rising. However a surplus requires growth. In general terms in a contracting system the incomes are more likely to be inadequate to cover outgoings. Some of the costs cannot be paid when revenues do not cover those costs. When an economic system is no longer growing conflicts arise as to who is going to take the losses. This turns out to be the most vulnerable people and those with least power, those on the periphery of society. Ethical standards and care are eroded. Callousness and dishonest practice become normal. These two erode stability because the ability to trust disintegrates.
Sectors producing “bads” – a growing vested interest in instability and conflict
The knock on consequences are frightening. In a society in which conflicts are on the rise the groups and institutions who deal with conflict gain more power. Indeed they have a vested interest in yet more conflict: this includes the armed forces and the arms industry, security companies, police and prisons, dodgy intelligence agencies and spin doctors. People who would otherwise be seen as sociopaths and thugs prosper. They profile themselves as heros. Millions who are bewildered by the disintegration are drawn to the simple messages blaming scapegoats for the chaos – usually people who cannot fight back. The disintegration of social norms becomes cumulative. Instead of producing “goods” the economy produces “bads”. We can see this particularly in the US economy but also in the UK. As societies are pulled apart in conflict people are forced to flee and then join the groups who are scapegoated.
The growing conflict has an international dimension too – countries manoeuvre and develop long term strategies to try to maintain access to dwindling energy and other resources possessed under the ground elsewhere in the world. They spill blood based on lies. They scheme and make accusations that the politicians of other countries are doing what they have done many times before. Compare and contrast these two covers of the US magazine Time:
Debt can stabilise expansion but destabilises during contraction
These are the social and political processes that are connected parts of the big picture. Meanwhile people have to survive economically which they do by running down their savings and by borrowing more. During expansion short term borrowing will stabilise a system in its fluctuations and imbalances. If incomes are rising the future will provide the wherewithal to rebuild savings and/or to service and repay what was lost in temporary dips. But being able to see the difference between a “temporary dip” during a growth trend and a dip ocurring because permanent contraction is about to become a new norm is something else. My argument here is that we are seeing the end of growth as predicted in the 1970s because we have reached limits in the ecological system and of cheaply accessible resource availability.
The belief that growth will resume eventually is a “faith”
For the system to be stable the key decision makers have to continue in the conviction that growth will resume eventually, come what may. Thus the idea that growth is the natural order of things in capitalism, is more fundamental that any old belief. It is a core faith. It has something about it that the elite and their hangers on are extremely reluctant to re-examine. Too much is at stake.
When a system is accumulating debts faster than incomes are growing it ought to be seen as a sign of increased instability but that is not going to happen if it is assumed by most people to be temporary. If they think that growth will eventually get going again, then the system will be stabilised for as long as the faith prevails. For as long as the faith prevails so too does the conviction that they stand a good chance of getting their money back….eventually.
There are those critics of the current economic system who have argue that financial markets can move very quickly as the collective psychology of the market shifts. This is only partly true because change in the underlying faith that growth will eventually resume and that current difficulties are only temporary has not happened and will not happen. On this faith depends the whole claim to legitimacy of the elite – and their assurance that they will get their money back.
Most ordinary people will lose faith in the system long before the elite does
Yes, participants in financial markets may lose confidence en masse in a way that has catastrophic effects for millions of people if credit and payment systems freeze up. But will the participants in financial markets lose their faith that their system will eventually resume its growth path? Will they lose their faith enough to become permaculturists and gardeners? That kind of “change in psychology” is very different and there is little hope of that happening. Although millions of people will have to improvise ways of surviving the coming catastrophes it is unlikely that the elite will change its way of thinking fundamentally. Instead it will likely use its access to the state to plunder the populace on a narrative of “returning to normality” at home while desperately trying to access resources abroad through participation in highly risky military adventures that could escalate into catastrophic global conflict.
‘Clearing out the dead wood’ will not be enough to reboot the system – there will be no resumption of growth after a collapse
As I observe events I come across analysts of a libertarian persuasion who are quite lucid and clear about how insanely far away from “economic fundamentals” the financial markets and the economy are. They are clear headed observers of what is called the “everything bubble”. They are aware that the unintended consequences of central banks withdrawing support from the financial markets will be very very painful because what has been jacked up so high has a long way to fall.
However I do not believe that letting the a lot of companies collapse “to clear out the dead wood” will be a painful healing process that will reboot capitalism. I do not believe that this would eventually mean a return to a healthy growth path. This is the end of the growth path – and it will therefore be the end of the financial system in its current form. Many libertarians are aware they crisis is deep but because of not being aware of resource constraints and ecological constraints they are not aware of quite how deep it is.
The only thing that will save humanity is a recognition that we must all live with a radical reduction of resource and energy use and that we must do that by establishing radical institutions for sharing – sharing domestic resources, sharing heat, sharing with libraries of things and resource centres, sharing information systems, sharing with public transport systems, sharing with community supported agricultural that uses ecological design. Capitalism as growing market system is kaputt. We are watching it die. We need something to replace it and that something is a revival of the commons – sharing natural resources and taking joint responsibility to conserve and protect them too.
Why is future contraction inevitable?
I will come back to this later – but for now let me address the issue of why growth is falling. Growth can occur very short term when the productive capacity of an economy – its people and machines – are better used. This is short term growth as a change in the level of capacity utilisation – but this is different from the growth (or otherwise) of the capacity itself.
Long run growth entails increasing the capacity to produce. Most economists think of this in terms of the amount of available labour, its level of skill as well as the equipment and infrastructure, or capital stock, that that labour can work with. Long run growth is when the labour and/or the capital stock it can work with are, ideally, both increasing.
So what has actually been happening? If growth is for real each person employed should be producing more and more over time –there should be increasing labour productivity because they are better equipped. In reality however the trend in labour productivity looks like this:
This has led some economists to say we have entered a period of “secular stagnation” . Although the economists of the 1970s proclaimed the limits to growth disproven, it looks like growth is indeed petering out. But why?
As it turns out there are other ways of understanding growth than the capital and labour models that are described above – and they provide a much better fit for statistical data. To properly understand growth it helps to recognise that economic activity is embodied and embedded in the physical world. It has a physical dimension and can be understood and measured using concepts from physics. Almost all the production processes and services of a modern economy take place using powered machined, powered equipment and powered infrastructures – switched on and off, steered and guided by human actors. The power involves the conversion of coal, oil and gas – as well as electricity which is generated by the conversion of coal, oil and gas – and uranium and moving water, wind and solar. Creating the machinery and equipment also involves a conversion of materials using powered machinery. Thus increased production can be accounted for by using more power ( leaving the machinery switched on for longer )– as well as by increasing the efficiency with which energy is converted through machines to do useful work.
Research by Robert Ayres and Benjamin Warr has shown that best fit to explain growth was growth of energy multiplied by efficiency with which that energy (exergy) is converted into physical work. After 1975 only 12% of recent growth not accounted for in this way in the USA. This may be the digital revolution – the application of energy through machines to the processing of information flows.
Here’s a diagram from Gail Tvberg applying a similar logic to growth in the global economy. It will be noticed that in her diagram too growth has fallen since the mid 1960s. (Note it is a bigger group of countries than the first diagram.)
So what determines the amount of energy delivered to the economy? The important point to grasp is not the absolute amount of energy produced but the net energy. The energy sector itself is a user of energy in its exploration, extraction, refining, conversion, transport and distribution processes. This energy used to get energy and to process it before delivery has to be taken out before you have a figure for what is delivered to the rest of the economy – to consumers, other companies and government. It is important because over time the amount of energy needed to find new reserves, to extract them, to process them and deliver them increases over time. Depletion means harder to find, more expensive to extract because of more complicated and engineering intensive processes, needing more processing and refining because not the ideal kind of resource, further away from the market and more expensive to deliver.
All of which costs the energy industry more over time. But the energy industry cannot charge just whatever it likes to recoup its costs. The energy industry are by and large price-takers not price makers. When the price of oil went up to $140 a barrel in 2008 the economy collapsed and prices went right down. Many people could not service their debts AND their pay their fuel bills. Although oil prices came down they drifted up again until they collapsed again during 2014.
However you approach it since energy underpins all economic activity it follows that the price of energy is a big deal for the non energy sector of the economy – when the price of energy is low it is a boost rather like the boost of low interest rates. However a boost from low energy prices may take time to have an effect. If people and companies are heavily in debt they may first take the windfall of low energy prices and use it to pay down debts rather than spending extra in a way that will boost economic activity.
Quantitative easing and quantitative tightening
To summarise the point here – ultimately the growth rate is falling because the energy system is in crisis. It is costing more to extract energy. Debt only works for a time and with declining effectiveness to fix this. Borrowing can stabilise fluctuations in an economy on a growth path but it is something else when debt is used to stabilise a decelerating growth trend until the point that there is no growth at all. In this latter point the debt system itself gets into difficulties and the management technique has been quantitative easing. There has been a rise is asset prices because central banks are buying up debt instruments like bonds to drive down interest rates.
When interest rates are near or at zero, or even below it, what can happen is that the cheaply borrowed money is not invested in real investment in production capacity. As production opportunities stagnate that is too risky. Instead money is borrowed and used by companies to buy back their own shares. When share buy backs occur profit earnings are spread over a smaller amount of share capital. Remaining shareholders earn more per share – however real production investment stagnates and companies are loaded with a higher amount of debt. If interest rates rise the heavily indebted companies will be in deep trouble. It reinforces the pressure on central banks keep interest rates low. Now however, by convincing themselves that economies are “recovering”, central bank economists are taking the fatal step of raising interest rates by selling debt at a time when the US state is going to be borrowing hand over fist to spend on armaments in particular.
Instability is also a function of the degree of connectedness – but this is leading to “contagion vulnerabilities” and “complexity overwhelm”
Although I have so far concentrated on the fall off in growth as a reason for instability there are other reasons why the system becomes vulnerable to collapse – these other reasons are to be found in the increasing interconnectedness and thus the danger of collapses of a domino chain variety – as well as problems of “complexity overwhelm” for decision makers.
Globalisation and the hyper division of labour is still promoted by economists on the alleged benefits of international specialisation using simple models used for comparative advantage used by David Ricardo 2 centuries ago. But the era of global trade and digital computer telecommunications is hyper connected and thus hyper complex. The dangerous consequences of that hyper connection and complexity are insufficiently acknowledged.
The idea which the diagram tries to express is that ecological or economic systems evolve over time in three dimensions – capacity, connectedness and resilience. This way of understanding has been taken from a group of academics who are interested in the resilience of systems. They have evolved a way of thinking about resilience called “panarchy” . Their name for their model, “panarchy” is derived from “pan” as in panorama, the wide viewpoint AND as in “Pan” the god of nature. The “archy” is rather like archy in “hierarchy” or “anarchy”.
Panarchical evolution tends to go round in cycles. After a collapse in which “capacity” has been reduced pioneers and new developments are released. At first they are very loosely or not at all connected together but they are the “first shoots” of new systems using the resources released during the collapse. For example there might be a die off in a densely forested eco-system so that some plants that were previously smothered by a dense forest are able to flourish as “pioneering species” in the space left behind. After the catastrophe of the Black Death it was difficult to maintain the manorial system and feudalism – those ordinary people who survived had more freedom from the warlord aristocracy and land was released for new uses. Many monks who had been the learned classes died – and new universities with new ideas were set up to replace them.
Eventually whatever new systems emerge from the new developments and the pioneers of a new order develop capacity, strength and specialist institutions. Their connectedness and dense patterns of interdependency emerge – eg in economic history we have seen how, after the European middle ages, transport and communication systems; energy networks like power grids; banking, finance and transactions systems all emerged and meshed together over centuries into a global economy…However failure in the hub interdependencies like finance and banking would spell disaster. The system has become vulnerable to new forms of collapse.
Joseph Tainter’s argument, in this book “Collapse of Complex Societies” is that societies become more complex over time and that complexity eventually gets so great that in a crisis it is impossible to do anything effective. Tainter’s view has some similarities to the ideas of the Panarchy theorists – particularly their description of how mature, highly interconnected systems, become less resilient. There is paralysis because there are too many dilemmas and conundrums for which there are no pain free solutions. Brexit is a wonderful example and has given rise to a “Tainter” moment for the British government – the complexity of Brexit has overwhelmed the government and they probably sense they are losing control.
At the end of a period of expansion the vulnerabilities pile up. One of those consequences is what I would call “complexity overwhelm” in which decision makers get gridlocked and paralysed by all sorts of unintended consequences to their policy initiatives. What typically characterises situations of “complexity overwhelm” is that groups or individuals find themselves either paralysed and hold back from acting when they cannot resolve impossible dilemmas or they plough ahead and do take action but in so doing find themselves mired in negative consequences.
Complexity gridlock – the metaphor of “being stuck in a swamp”
This is sometimes described with the metaphor of being caught in a swamp. “Swamps” are a gridlock of vested interests trying to achieve contradictory agendas. Radical politicians like to rant at “the swamp” because it stops the implementation of their panaceas. Unfortunately “swamps” are an inevitable feature of complex systems. In a very complex system there are no simple solutions and it is hubristic to believe that there are.
Let me spell this out at more length with another example – fracking. In any complex situation, when you take one action it will have more than one consequence. If you believe you have an energy security problem and decide to frack the country for shale oil and gas you don’t just get oil or gas – you get communities who read about the oil and gas industry and become concerned about the consequences for their health and wellbeing, about water, atmospheric, and soil contamination, about quiet country roads and villages being invaded by heavy traffic. This becomes evident when the people who will be negatively affected start campaigning and what seemed like a straightforward policy becomes stuck in protests, legal challenges, and enormous expenses for policing. A swamp is what you get in a complex society when you believe in simple solutions, in panaceas, and other people confront you with a wider reality that you would like to ignore but they do not let you. In the process you ought to ask, though few pig headed politicians do, if your opponents are so powerful because you have ignored the fact that the costs and harms of your intended action exceed the benefits.
This is what the words “limits to economic growth” actually mean. Further growth, further development, is more damaging that leaving things as they are and instead of trying to expand it is better to find equitable ways to contract.
At the limits to economic growth difficult situations start to appear not as problems, which have solutions to be resolved by further development and growth, but as predicaments, which don’t. Situations appear as dilemmas – choices between equally unpalatable options when doing nothing also seems to be inconceivable.
Paradoxically this is a situation tailor made for leadership by supremely self confident leaders who in real life are incompetent buffoons – Donald Trump, Boris Johnson. They are not bright enough to see what damage they are doing as they blunder around.
In the first case paralysis arises because there is a recognition by the decision makers that they are not facing one or more problems so much as dilemmas. When you are “on the horns of a dilemma” the solution of one side creates a problem on the other, and vice versa. Thus, for example, the Northern Ireland border issue associated with Brexit is not a simple problem. It is a dilemma. If Britain remains in the customs union and common market there is no need for a border. If it leaves there is no avoiding having a border.
The British government claims that there are technological and bureaucratic solutions to this dilemma – as we will see this is entirely what one would expect them to say. The default faith of our era is that there is a technological solution for everything as long as it is incentivised by the right price. Tim Watkins lampooned this attitude that there is always a solution.
Connectedness, “contagion” and “too big to fail”
In addition to “complexity overwhelm” hyper interconnected societies suffer from “contagion risks” of all sorts. Hyper interconnectedness means problems are transmitted in cascades or domino chains of failure as when one ill person infects others or when one insolvent company or bank brings down others. Another phrase for essentially the same thing is “systemic risk”. A problem in a small part of the system threatens the functioning of the whole through all the interdependent institutions directly and indirectly connected to it. “Stability” is another word – as in Financial Stability policies and committees of central bankers.
“Too big to fail” is another phrase that highlights the same issue. Once an institution is highly connected with many others its failure would have far reaching consequences and governments and “authorities” fear losing control of the chain of consequences. The failure of Lehman Brothers bank in 2008 meant that hundreds of thousands of creditor and debtor claims involving billions of pounds required unravelling – representing work for many years. If a number of other banks had gone down too the consequences would not have been possible to administer and cope with.
It came close and it will again. Yet if too big to fail institutions are always rescued a new set of dilemmas and crises are created. In a few years new nightmare scenarios have emerged.
Policy makers trapped in unresolvable dilemmas
The reluctance to let such systems fail has had far reaching consequences. A policy environment takes root that allows banks and other companies to continue that are not making a profit and have no long run prospect of doing so. This completely contradicts the ideology of capitalism. Even worse the companies that are allowed to survive are only able to so as a result of a decision in one part of the elite to look after another part of the elite. In the meantime other companies are allowed to go to the wall. Everyone can see that if you are very rich and well connected you get bailed out. If you are one of the “little people” – then you might end up living in your car or sleeping on the street.
An increasing number of companies do not quite die and sort of survive as “zombies” – companies that struggle to service their debts on the boundaries of insolvency. The word Zombie conveys the idea of moribund companies kept alive by policy but there are also companies and even whole economic sectors that have emerged that appear to be positively flourishing even though they are losing money year after year. These black holes for capital and resources including companies like Amazon and the Elon Musk companies Tesla and Solar City. The shale oil and gas industry is another example. Because they are doing a lot of damage perhaps we need another name for them – I suggest “vampires”.
Corporate Vampires Growing on Debt
Take Amazon for example. Its growth has been a serious challenge to many retail businesses already suffering from recessionary conditions as indebted consumers struggle to make ends meet. But Amazon has an added advantage that it has been able to borrow to expand without actually making a profit. David Stockman has traced its rise and rise to the bubble finance characterising the US financial markets:
“When you set aside AWS’ sales and operating income during 2017, Amazon’s e-Commerce business generated $160 billion of sales, but posted operating income of negative $200 million.
That’s right. The monster of the retail midway posted no profit whatsoever last year!
And it’s getting worse. During 2016 the e-Commerce business posted $1.1 billion of operating income on $124 billion of sales; and the year before that (2015) operating income was $2.6 billion on e-Commerce sales of $99 billion….AMZN was valued at a frisky 35X free cash flow in early 2016 and a completely insane 121X a few weeks ago.”
The Saga of Elon Musk and his companies, Tesla, SolarCity and SpaceX is in a league of its own. In what is called “The heroes journey” an amazing character invites people to join an adoring fan club, or better still, invest their money in it. The journey of Elon Musk is one of technological innovation of the type that made America great. The technologies are those of space travel and those that will rescue the world from environmental and energy crisis. Although it encapsulates the delusions that are driving us into a catastrophe naive investors love it. It is delusionary because the costs and future problems of transforming the energy system, inclusive of electric cars and solar energy are being massively underestimated. Many solar providers have already gone bust.
If that were not bad enough Tesla’s capacity to produce its EVs for the super rich has gone badly wrong because of poor engineering and a haphazard manufacturing process. Literally the wheels are coming off Tesla EVs yet this has not yet dented TESLA capitalisation and the finance and grants continue to come in.
A third example of an industry that is not required to make a profit is shale oil and gas. It
creates havoc with local environments and public health in areas unlucky enough to be in its way. It created plenty of methane, ethane and propane for the chemical industry so that it can fill the world’s oceans with plastic to kill all marine life. It created an illusion that all is well because oil production is booming…and it makes a massive financial loss and accumulates debt – organised by unscrupulous finance market institutions who earn fees organising loans to companies with very doubtful prospects, companies that savvy investors should not touch with a barge pole.
What we are talking about here is about propping up an increasingly unstable economy, one that has stopped growing in its fundamentals, with bubbles blown up by central banks. Why are they doing this? The answer is that, with their out of date economic model, with their inability to acknowledge that we have reached the limits to economic growth, the economic policy makers don’t know any different.
In conclusion – geo-politics and the planet in danger
If it were just stupid investors who were going to lose their money one could enjoy the schadenfreude – but it is much more serious. The crisis is global and it is undermining the geo-political dominance of the USA. For elite actors in different countries the underlying trends appear above all as an erosion of US political and military power to intervene in the world and to mould it to their wishes. In an article by Nafeez Ahmed we learn about a US army document which concedes the real interests driving US military strategy toward Russia are “dominating oil pipeline routes, accessing the vast natural resources of Central Asia, and enforcing the expansion of American capitalism worldwide.”
There are multiple political flash points – particularly in the middle east and with Russia and China. At the time of writing a very dangerous situation has evolved in Syria with the danger of military clashes between Russia and the USA allied with NATO and Israel. I am not going to analyse these in depth, merely to say that in just a few years Russia, China and all middle eastern countries, whether allies or enemies of the US and NATO, will get dragged down by energy depletion and climate change too. Everyone has an interest in discussing how we are going to get through that – but at the time of writing this does not seem likely because elites the world over prefer to believe that they can win in geo-political conflicts which are more likely to lead to a nuclear war in which almost all of us die.
9th April 2018
Brian Davey graduated from the Nottingham University Department of Economics and, aside from a brief spell working in eastern Germany showing how to do community development work, has spent most of his life working in the community and voluntary sector in Nottingham particularly in health promotion, mental health and environmental fields. He helped form Ecoworks, a community garden and environmental project for people with mental health problems. He is a member of Feasta Climate Working Group and former co-ordinator of the Cap and Share Campaign. He is editor of the Feasta book Sharing for Survival: Restoring the Climate, the Commons and Society, and the author of Credo: Economic Beliefs in a World in Crisis.