For the critical significance of the oil predicament and other looming resource shortages to penetrate social consciousness and become common cause, the world needs more than factual analysis. Economists and the public at large will have to be disabused of a wide spectrum of deep-dyed convictions and beliefs about the relationship between economic activities and the planet’s physical limitations. We may begin this process, which is likely to be long and painful, by identifying the defects in the way the big canvas is presently viewed. In particular, three closely related errors clamor for immediate exposure.
Error No. 1: Most economists do not recognize the importance of being ecologically earnest.
Neoclassical economics, largely identified as mainstream or traditional thought or economic orthodoxy, clings to the notion that the economy incorporates nature rather than being subject to it. It does not explicitly acknowledge long-term material-energy constraints, and its “natural resource and environmental economics” offshoot supports the prevalent ideology that maximizing private profits is the best way to satisfy eternally growing individual and social wants.
Since the expansion of resources lags behind the rank growth of wants both quantitatively and qualitatively (i.e., their composition is not optimal compared to momentary demand), mainstream economics is preoccupied with the efficient allocation of resources and disregards or minimizes the issue of scale. The burning question of where to stop the reckless squandering of irreplaceable natural resources and to avoid the fatal overload of environmental sinks is kicked under the rug.
The “scale issue” did not exist in mid-eighteenth century pre-industrial Britain when Adam Smith, the founding figure of laissez faire capitalism, scripted the doctrine that still defines the central logic of economic orthodoxy. The “scale issue” could be — and probably had to be – neglected even roughly two hundred years later when the push for economic development came to shove in the post-World War II era. The Earth’s population was still a sparse 2.5 billion.
But now, when the human biomass is moving toward the seven billion mark and is projected to swell to nine billion in three decades; when science has so convincingly demonstrated that global society’s material ambitions are eating into homo sapiens’ ecological niche, side-stepping the “scale issue” is tantamount to turning the reason of another age into an obstacle to creative thinking in the current one.
Unfortunately, four-fifths of the planet’s population (the “South”) is poor compared to the one-fifth in the “North” — the industrialized countries. This condition alone guarantees that growth-advocating and growth-worshipping economics is not about to be placed on the profession’s “negative watch list.”
Nonetheless, one should be aware that the “queen of social sciences,” responsible for maintaining the economy’s operation manual and shaping public opinion on vital issues, has not only misplaced correctness (an old charge) but it may also have completely lost it; and, as surely as perpetual motion machines are uninventible, she will lose her crown and scepter.
Instead of owning up to the fact that the world accelerates the depletion of nonrenewable resources just when it should begin to decelerate in order to forefend tragic collisions with nature’s unbending ring fence, conventional economic philosophy just keeps spinning its wheels with undiminished frenzy in its own shallow, fossilized conceptual world.
While commentary on current events sticks to the proto-textbook (authored shortly after World War II), probing the foundations of economic behavior and institutions doesn’t harvest more than dead weeds – hypertrophied mental constructs devoid of real life significance and benign lumps of innocuous trivia, born “in vitro” from an immoderate atomization of subjects.
Neoclassical orthodoxy, firmly entrenched behind the moated walls of academic institutions and in perfect control of the “discourse” through language and discipline, has become intellectually unappealing. Outspoken students at major universities in Britain and France, fed up with reified, dried formalisms, disheartened by the prospect of becoming political economic zombies that swagger around with an inflated rational pose, have labeled contemporary mainstream economics “autistic.”
Error No. 1 disallows the uniting of seemingly disparate processes into a comprehensive, “Gestalt” perspective.
Error No. 2: Not seeing our civilization’s first run-in with natural constraints and the financial crisis as meaningfully coincidental
For the first time in history, the expansion of material welfare has come face-to-face with a hard barrier. At present levels of technology, and with the way production is organized and consumption is oriented, the world can neither live without oil nor can it find a way to substitute for it in a fashion that would preserve economic growth. Juggling taxes and subsidies — the two main instruments in the mixed economy’s meager policy tool box — does not do the job, and private profit-based incentives have no significant truck with it.
Oil — the leading indicator of resource constraints to come
The price of this wondrous low entropy manna reaches a certain level (as occurred last year when the barrel levitated toward the $150 altitude) and a chain reaction of contagious production cutbacks ensues; then the price falls. Like a burly bouncer, high exchange value pushes back the drunken sailor of economic growth. Low exchange value defuses enthusiasm for substitution and conservation; the mobilization of additional reserves slows. The enthusiastic battle cry “Drill, drill, drill!” becomes a yawning “Drill? Maybe. We’ll see.”
When the world economy regains color and moves toward some practical measure of full employment, the price of oil will go up again, aborting recovery or causing another downturn. This relatively short “peak and pine” cyclicality of lurching forward and being thrown back is the most direct, palpable consequence of living in the epoch of “peak oil” writ large.
Believing that private business can extricate itself from this dead end is crass delusion. It has been designed by historical development to satisfy immediate human needs both in terms of providing the goods of civilization and the income-generating employment that makes their acquisition possible. What it can do for consumer goods and resources of lesser moment, it cannot do for oil. Substitution away from this omnipresent input is squarely outside the wide repertoire of the famed virtuoso performer known as the “Invisible Hand.”
The resource transfer involved in restructuring the world economy, so that it would rely predominantly on nonexhaustible energy and material resources instead of oil (and its twin hydrocarbon, natural gas) would lethally damage material welfare based on the organizing principle of “private gains above all” and institutions built around and for it.
And “peak oil” is only the first manifestation of an insidiously well-cloaked, multifaceted aggregate constraint made up of diverse, staggered resource-determined curbstones and insufficiently understood and less than adequately appreciated environmental sinks. In a few decades, economic growth, as currently comprehended and pursued, will run out of steam.
What does this gradual cutting of ecological realities into our flesh have to do with the death rattle of monetary arrangements and financial institutions heard around the clock? A great deal. This second dimension of the nebulous malaise that has descended on the world is closely tied to the first.
The international financial and monetary order is at once growth-dependent and growth-constraining.
Despite requiring constant minor and on occasion major adaptations, the kludge we dignify by calling it an “order” has been able to promote and accommodate economic expansion for over half a century. But it has two built-in snags, both of which have recently hit global society in the face: poorly controlled money creation by the banking/financial sector through the fractional reserve system and the international community’s excessive dependence on a single national currency, i.e., the U.S. dollar. Whereas the fractional reserve system pushes the real economy to grow and punishes it when it cannot, the unipolar monetary regime restrains growth in its own right.
Fractional reserve banking — the libertarian mother of unlimited expectations
This system, which allows banks to keep in their vaults only a small ratio of outstanding liabilities in the form of cash and other highly liquid assets, facilitates lending — the increase of payment obligations and, through their circulation in the banking system, the creation of money — far in excess of material production’s capacity to expand.
Like an insanely hungry beast, financial capital pulls productive capital forward, eventually causing it to stumble. At that point, the central bank, the Federal Reserve System in the U.S., should tighten the monetary leash and cool the over-excited, “irrationally exuberant” animal spirits.
Fractional reserve banking generates credit cycles. Its perennially gappy regs are a hotbed of unethical huckstering and machinations; it is prone to transforming failures of oversight into serious setbacks for the real economy. All this may be regarded as the “price of progress” — difficulties that come with the territory, the way business life is organized. And as historical experience, notably the spectacular failure of real socialism has proved, there is nothing better out there when it comes to maximizing long-term economic development.
“Ay, there’s the rub.” The systemic glitch of obligations pulling far ahead of the ability to honor them assumes a wholly different intensity and scope when long-lasting scarcity of an indispensable resource (considered axiomatically nonexistent by neoclassical economics) appears on the road. The invisible foot of ecological reality slams the brakes on general economic advancement and the travelers in this dream car fly around like mannequins in a highway safety crash test.
Through chaotically intricate cross-catalytic feedback loops between the financial and the real sectors, defaults and rumors of defaults spread across national borders and lines of commerce, throwing the entire corporate meshwork of a repercussion-prone global economy out of kilter. That’s where we are today.
Limits to growth built into excessive dollar dependence
It’s simple geography. The part is always smaller than the whole. The U.S. economy, which plays the pivotal role in assuring international liquidity, is smaller than the world economy. This distortion has gradually made the sinews linking the pivot to the rest of the world taut and now they threaten to pop.
While the dollar cannot remain forever the “lingua franca” of global monetary and financial relations, no other national currency can possibly replace it.
The greenback’s role in the context of monetary and financial deregulations over the past decades enticed and forced the United States to incur chronic trade deficits and subject its national economy to a structural transformation that favored (mostly nontradable) services over (mostly tradable) industry, consumption over production, and borrowing over saving.
To facilitate the increase of international trade and capital flows — essential for worldwide prosperity — American households and businesses, as well as the country’s government, had to sink deep into debt. As an inextricable epiphenomenon, growing dollar balances at foreign disposal have been seeking growing volumes of dollar-denominated, interest-earning financial assets, including U.S. government securities. The small cottage industry of transforming debt obligations into marketable financial assets, a mere side-show until the 1970s, has undergone an exponential transformation into a multi-trillion-dollar, unregulated monster conglomerate.
The congenital asymmetry between the part and the whole is now coming home to roost. The mass production of marketable dollar-denominated commercial assets is dispelling the magic suspension of disbelief about their solvency, “in toto.” The likelihood that long-term foreign lending to accommodate U.S. debt service needs may stall is on the rise. The recession-triggered contraction in the current account deficit is reducing the growth of foreign dollar holdings just when borrowing must drastically increase as a result of quantum leaps in the nation’s fiscal imbalance.
Parallel with this development, the American public is becoming increasingly irritated by the endless spread of foreign real asset ownership. Buying buildings and factories is an alternative to acquiring commercial papers or government securities in using accumulated off-shore dollar balances.
Conventional economics regards this reaction as uninformed and parochial since it does not take into account the widespread presence of U.S. capital abroad. But if one considers the monetary system-dictated divergence of interests between the United States and the rest of the world, this seemingly not much more than populist/protectionist sentiment reveals an intrinsically reasonable core.
The asymmetry between the pivot and the rest of the world implies that outgoing U.S. capital is relatively limited. And while the potential for foreign control of U.S. real assets increases with every recorded current account deficit, market forces prevent the elimination of this gap. Should a strong trend be created toward closing it (e.g., through the increase of U.S. exports and reduction of U.S. imports), the rest of the world would experience a shortage of the “global currency” and the dollar would appreciate, reversing the trend of reduction in the trade deficit — the main component of the current account.
The national sovereignty of the United States is jeopardized when nondemocratic countries become ensconced in the commanding heights of its economy. The world as a whole also tends to lose when oppressive governments gain clout in the largest democracy. Thankfully, many economists have come to realize this.
One may conjecture that as the level of debt the U.S. can contract and the public’s tolerance of foreign direct investment max out, global economic growth slows. International trade and capital movements cannot flourish without an abundantly available reference and invoice currency that can be spent freely in the issuing country.
True, the euro became a formidable competitor for the dollar as a reserve urrency, but it cannot become the universal medium of multilateral trade and financial relations. For this to happen, “euroland” would have to accept the kind of secular deterioration in its external balance (assuming flexible exchange rates and largely unrestricted capital flows) that the United States has experienced during the past half century. Massive amounts of euro would need to accumulate outside the EU’s domestic economic playground and immediate vicinity for this evolutionary newcomer on the monetary scene to take the relay baton of pivot currency. It is hard to conceive of circumstances under which Brussels would choose or could be forced to follow such a path.
Both shortcomings of the international monetary/financial system (the poorly restrained use of fiat money and mistaking bucks for global chips) and oil-dependency tend to frustrate private-profit-motored economic growth. Although the two cannot be linked convincingly through rational synthesis (e.g., econometric analysis), their joint appearance on the center stage of current events can hardly be overlooked.
To create a framework of understanding that is broader than the one provided by routine economic modeling, it may be helpful to invoke the idea of synchronicity, or meaningful coincidence, developed by the great psychological philosopher Carl Gustav Jung.
Just as simultaneous occurrences in mental life can arise from interactions that are too complex and entangled to allow pinpointing direct causality, so it may be with the relationship between the breakdown of banking and financial practices and the consequences of the world finding itself in the temporal region of “peak oil.” Mapping out the logic of interdependence may have to wait for the development of a historical perspective, but the synchronicity of the two processes is highly suggestive of a comprehensive pattern. Paroxysms of shortsightedness embedded in over-confident individual behavior, material ambitions, and corresponding institutions seem to have been ordered together to step into Mother Nature’s office.
Error Number 3 follows directly from errors Number 1 and 2.
Error No. 3: Using history to prove that there is nothing new under the sun.
A frequently applied device aimed at discrediting the notion of “peak oil” is to cite failed predictions made earlier, some of them more than a century old. Being right up to this point leaves the door wide open to be wrong from now on. Not only has the technology of finding oil reserves improved over time, so also has the knowledge deployed in estimating how much is left.
Words about oil being finite both physically and economically (i.e., some reserves are prohibitively costly to access) are like hinges worn thin from overuse. But this does not mean that they are not true. Nonrenewable resource depletion is a one-way street and when an input happens to reign supreme as oil does, lessons drawn from history rapidly lose their value.
When the U.S. housing market began to come apart in 2007, dragging with it businesses and governments worldwide, eminent economists, senior government officials, and investment gurus kept insisting that the situation was a repetition of the “savings and loan” fiasco of the 1980s and 90s. While some suggested that it was more similar to what happened after the “dot com” bubble burst in 2000, others maintained that the U.S. was faced with the same difficulties as Japan during the 1990s. If the kinds of mistakes made by the Japanese policymakers could be avoided, U.S. real estate and banking would be back on track and the global economy would be ready to resume full speed ahead.
As economic conditions and growth prospects begin to resemble a crisis rather than just another recession, the boom and collapse of the 1920s is becoming the touchstone of historical relevance in advice and commentary (although claims that all we see is a simple redux of the afflicted 1890s or the panic of 1907 have not completely vanished).
It is, of course, important to glean guidance from the past. Criticism is aimed here only at exaggerating the significance of history to the point of marginalizing, suppressing or altogether denying its genuine novelty-generating capacity.
To put it bluntly, confidence that the present economic/financial dislocation can be righted by the successful application of lessons learned during the Great Depression is utterly unfounded.
More than seven decades ago the globe was empty; now it is full and getting fuller every minute. There were no multilateral organizations before the end of World War II and economic interdependence (both sectoral and national) was incomparably less than it is at present. There was no instant communication through the internet, and — to emphasize the coercive forces that emerge along the unidirectional path of the world’s socioeconomic evolution — there were roughly one trillion more barrels of oil underground than are available today.
The problem of the 1930s was how to restore growth. The problem now is how to restructure national economies and multilateral ties so as to deal with energy, material, and environmental limitations to growth while also taking into account the difference between the South and the North regarding needs for increased material output.
In these days, more than any time in living memory, extrapolations based on intra-historic perspectives promise to be completely off the mark.
The Pandora’s Box of global self-organization is wide open. One may wish that Keynes were alive today to help see our generation through this stressful, traumatic period by formulating a new general theory that would set aright once again the economist’s “pre-analytic vision,” an inner sense of what is at once savvy and ethical.
