Harnessing Hippogriffs

One of the more interesting aspects of writing these essays is that I can never predict in advance what will get me a flurry of outraged responses each week. It’s a fair bet that something always does; the collective conversation of the modern industrial world has become so overheated in the last decade or so that it’s difficult to say much of anything without getting somebody in a swivet; still, what it is that sets off the swiveteers routinely catches me by surprise.

Last week was no exception. Of all the things in that essay that might plausibly have launched the usual cries of outrage, the one that did so was an offhand reference to the free market fundamentalists of the Austrian school, many of whom insist that the proper solution to every economic problem is to let the market have its way. As it happens, in making that comment I was thinking specifically of Michael Shedlock aka Mish, whose blog is one of the handful I read daily.

Mish is among the most thoughtful and articulate proponents of the Austrian school in today's blogosphere, and he has an excellent eye for the economic news that matters – which is by and large exactly the economic news that the rest of the media avoids covering. Very nearly the only thing on his blog that makes me roll my eyes is his repeated insistence that the market is always right and government regulation is always wrong; no matter how berserk the market gets, its vagaries are for the best, and any problems should be corrected by privatizing even more government functions. Now of course Mish is hardly an official spokesperson for the Austrian school, as if there were such a thing, but he's not exactly alone in his insistence, either.

Enough people in the peak oil scene share similar views that it's probably necessary to say something about the free market and its potential for solving or creating problems during the twilight years of industrialism ahead of us. Any such comments need to be prefaced, though, by a reminder that a spectrum consists of something other than its two endpoints. Just as a great many people on the left have picked up the dubious habit of using labels such as "fascism" for any political system to the right of Hillary Clinton, a great many people on the right seem to have convinced themselves that any form of economic regulation at all is tantamount to some sort of neo-Marxist hobgoblin – a "socialist-communist-ecologist" system, to use a phrase that actually appeared in one of the comments fielded by last week's post.

Now it bears remembering that drowning is not the only alternative to dying of dehydration; there's a middle ground that is noticeably more pleasant than either. The same principle also applies in economics. The experiment of having government own all the means of production in an industrial society, along the lines proposed by Marx, received a thorough test at the hands of the Communist bloc and failed abjectly. At the same time, the experiment of having government keep its hands off the economy altogether in an industrial society, along the lines proposed by a great many free-market proponents these days, received an equally thorough test, and failed just as dismally. The test took place a little earlier; in America, it ran from the end of the Civil War into the first decade of the twentieth century, and the result was a catastrophic sequence of booms and busts, the transfer of most of the nation's wealth to a tiny minority of wealthy people, the bitter impoverishment of nearly everyone else, and a level of social unrest that included two presidential assassinations and so many bomb attacks on the rich and their families that bomb-throwing anarchists became a regular theme of music-hall songs.

Now it's always possible for theorists to contrast a Utopian portrait of a free-market economy against the gritty and unwelcome realities of extreme socialism, just as it's possible for people on the other side of the spectrum to contrast a Utopian portrait of a socialist economy against the equally gritty and unwelcome realities of unfettered capitalism. Both make great rhetorical strategies, since the human mind is easily misled by binary logic: if A is evil, it seems wholly reasonable to claim that the opposite of A must be good. The real world does not work that way, but this is hardly the only case in which rhetoric ignores reality.

The problem with the rhetoric, however, may be stated a bit more precisely: however pleasant they look on paper, free markets do not exist. Strictly speaking, they are as mythical as hippogriffs.

It occurs to me that some of my readers may not be as familiar with hippogriffs as they ought to be. (Tut, tut – what do they teach children these days?) For those who lack so basic an element in their education, a hippogriff is the offspring of a gryphon and a mare; it has the head, body, hind legs, and tail of a horse, and the forelimbs and wings of a giant eagle. Hippogriffs are said to be the strongest and swiftest of all flying creatures, which is why Astolpho rode one to the terrestrial paradise to recover Orlando's lost wits in Orlando Furioso, and why Juss rode one to the summit of Koshtra Pivrarcha to rescue Goldry Bluszco in The Worm Ouroboros. They are splendid creatures, no question; their only disadvantage, really, is the minor point that they don't happen to exist, and drawing up plans to use them as a new, energy-efficient means of air transport in the face of peak oil, for instance, will inevitably come to grief on that annoying little detail.

Free markets are subject to essentially the same little problem. There have been many examples of market economies in history that were not controlled by governments, but there have been no examples of market economies that were not controlled, and if one were to be set up, it would remain a free market for maybe a week at most. Adam Smith explained why in memorable language in The Wealth of Nations: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices." When a market is not controlled by government edicts, religious taboos, social customs, or some other outside force, it will quickly be controlled by combinations of individuals whose wealth and strategic position in the market enable them to maximize the economic benefits accruing to them, by squeezing out rivals, manipulating prices, buying up their suppliers, bribing government officials, and the like: that is to say, behaving the way capitalists behave whenever they are left to their own devices. This is what created the profoundly dysfunctional economy of Gilded Age America, and it also played a very large role in setting up the current debacle.

There's a rich irony here, in that the market economy portrayed in textbooks – in which buyers and sellers are numerous and independent enough that free competition regulates their interactions – is exactly the sort of commons that so many free market proponents insist should be eliminated wholesale in favor of private ownership. All commons systems, as Garrett Hardin pointed out in a famous essay a while back, are hideously vulnerable to abuse unless they are managed in ways that prevent individuals from exploiting the commons for their own private benefit. This year's Nobel laureate in economics, Elinor Ostrom, won her award for demonstrating that it's entirely possible to manage a commons so that Hardin's "tragedy of the commons" does not happen, and she's quite right – there have been many examples of successfully managed commons in history. Strip away the management that keeps it from being abused, however, and the free market, like any other commons, rapidly destroys itself.

This does not mean that the best, or for that matter the only, alternative to the unchecked rule of corporate robber barons is Marxist-style state ownership of the economy; once again, dying from heatstroke is not the only alternative to dying from hypothermia. It means, rather, that something between these two extremes might be worth trying, especially if it can be shown by historical evidence to work tolerably well in practice. Of course this is what history shows; broadly speaking, economies that leave the means of production in private hands, but use appropriate regulation to harness their energies to the public good, consistently produce more prosperity for more people than either unfettered capitalism or extreme socialism.

This being said, the midpoint between these extremes may not lie where today's conventional wisdom tends to place it. Consider an example from the not too distant past: a large industrial nation with a capitalist economy, but remarkably tough regulations restricting the growth of private fortunes and the abuses to which capitalist economies are so often prone. The wealthiest people in that nation paid more than two-thirds of their annual income in tax, and monopolistic practices on the part of corporations faced harsh and frequently applied judicial penalties. The financial sector was particularly tightly leashed: interest rates on savings were fixed by the government, usury laws put very low caps on the upper end of interest rates for loans, and hard legal barriers prevented banks from expanding out of local markets or crossing the firewall between consumer banking and the riskier world of corporate investment. Consumer credit was difficult enough to get, as a result, that most people did without it most of the time, using layaway plans and Christmas Club savings programs to afford large purchases.

According to the standard rhetoric of free market proponents these days, so rigidly controlled an economy ought by definition to be hopelessly stagnant and unproductive. This shows the separation of rhetoric from reality, however, for the nation I have just described was the United States during the presidency of Dwight D. Eisenhower: that is, during one of the most sustained periods of prosperity, innovation, economic development and international influence this nation has ever seen. Now of course there were other factors behind America's 1950s success, just as there were other factors behind the decline since then; still, it's worth noting that as the economic regulations of the 1950s have been dismantled – in every case, under the pretext of boosting American prosperity – the prosperity of most Americans has gone down, not up.

It makes a good measure of how far we have come as a nation – and not in a useful direction – that the economic policies of one of the most successful 20th century Republican administrations would be rejected by most of today's Democrats as too far to the left. A case could be made, in fact, that far and away the most sensible thing the US Congress could do today, in the face of an economy that has very nearly choked to death on its own bubbles, is to reenact the economic legislation in place in the 1950s, line for line. (When you're hiking in the woods, and discover that you've taken a trail that leads someplace you don't want to go, your best bet is normally to turn around and go back to the last place where you were still going in the right direction.)

Yet there's an interesting point that also ought to be made about the economic regulation of the 1950s. Outside of antitrust legislation, not that much of it applied to the economy of goods and services on any level, whether that of Mom and Pop grocery stores or big industrial conglomerates. The bulk of it, and very nearly all the strictest elements of it, focused on the financial industry. More broadly speaking, instead of regulating the production and consumption of goods and services, the economic policies of the Eisenhower era focused on regulating money: on ensuring that too much of it did not end up concentrated unproductively in too few hands, and on controlling its propensity to multiply as enthusiastically as rabbits on Viagra. The relative success of these measures points toward a distinction already made in these posts, and to practical steps that will be explored in next week's post.

Why Markets Fail

It’s a safe bet that any public comment on the politics of peak oil, unless it sticks closely to one of a very few widely accepted opinions, will provide a good demonstration of the laws of thermodynamics by turning plenty of energy into waste heat. Last week’s Archdruid Report post was no exception. Between those who thought I was too hard on Cuba, those who thought I was too soft on Cuba, those who insisted America is already a fascist dictatorship, those who thought America would be better off as a fascist dictatorship, and a variety of less classifiable rants, I was well and truly denounced. My favorite for the week was a bit of online splutter that, having exhausted its author’s apparently limited vocabulary of profanity, wound up with the nastiest term he knew: “...you American!”

Those of my readers with a taste for wry humor may well have found all this as entertaining as I did. Still, this week’s essay will leave such amusements behind, and return to the theme I’ve been developing in recent posts, the reinvention of economics that will be necessary in an age of hard ecological limits and deindustrial decline. Vegetarians and animal rights activists take note: a certain number of sacred cows will have to be slaughtered and dissected in the course of that inquiry, and the process is unlikely to be either painless or clean.

Of the sanctified cattle facing a gruesome fate in the years ahead of us, perhaps the most important is that blue-ribbon heifer of modern economics, the belief in the infallibility of free markets. Back in 1776, Adam Smith’s The Wealth of Nations popularized the idea that free market exchanges offered a more efficient way of managing economic activity than custom or government regulation. The popularity of his arguments has waxed and waned over the years; it may come as no surprise that periods of general prosperity have seen the market’s alleged wisdom proclaimed to the skies, while periods of contraction have had the reverse effect.

The economic orthodoxy that has been welded in place in the western world since the 1950s, neoclassical economics, made a nuanced version of Smith’s theory central to its theories, arguing that aside from certain exceptions much discussed in the technical literature, people making rational decisions to maximize benefits to themselves will simultaneously maximize the benefits to everyone. The neoclassical synthesis has its virtues; you won’t find neoclassical economists claiming, as the free market fundamentalists of the Austrian school so often do, that the market is always right, even when its vagaries cause catastrophic human suffering. The concept of market failure is part of the neoclassical vocabulary, and some useful work has been done under the neoclassical umbrella to explain how it is that markets can fail to respond to crucial human needs, as they routinely do.

Still, the great problem with neoclassical economics is the one has already been discussed in these posts: its models have consistently failed to foresee devastating economic disasters that many people outside the economics profession could readily and accurately predict years in advance. The implosion of the world economy in 2008 is only the most recent case in point. One writer who surveyed the economics field in the aftermath of the crash noted with some asperity that fewer than two dozen economists anywhere in the world warned in advance of the gargantuan bubble of securitized debt that exploded that year.

On the contrary, economists by the score lined up during the bubble years to insist that the giddy financial innovations of the previous decade had banished risk from the market and prosperity was assured into the foreseeable future. They were of course quite wrong, and their failure to see disaster as it loomed up in front of them compares very poorly with the large number of people who used historical parallels to recognize what was happening and make uncomfortably precise forecasts of the results. (Keith Brand, who ran the lively HousingPanic blog straight through the bubble, memorably summarized those predictions: “Dear God, this is going to end so badly.”)

I have discussed in several earlier posts some of the reasons why the entire economics profession has been so prone to miss the obvious in such cases. Here, though, I want to focus on a reason for failure that’s specific to neoclassical economics. Since most of the economists who provide advice to governments come out of the neoclassical mainstream, this is hardly irrelevant to our prospects for the future, especially – as I intend to show – because the same blind spot that left so many pundits dining on a banquet of crow in recent months applies with even greater force to the crucial fact of our time, the arrival of peak oil.

The point I want to make here is a little different from the most common critique of neoclassical economics, though there is a connection. Many social critics have commented on the ease with which the neoclassical synthesis consistently ignores the interface between economic wealth and power. Even when people rationally seek to maximize benefits to themselves, after all, their options for doing so are very often tightly constrained by economic systems that have been manipulated to maximize the benefits going to someone else.

This is a pervasive problem in most human societies, and it’s worth noting that those societies that survive over the long term tend to be the ones that work out ways to keep too much wealth from piling up uselessly in the hands of those with more power than others. This is why hunter-gatherers have customary rules for sharing out the meat from a large kill, why chieftains in so many tribal societies maintain their positions of influence by lavish generosity, and why those nations that got through the last Great Depression intact did so by imposing sensible checks and balances on concentrated wealth – though most of those checks and balances in the United States were scrapped several decades ago, with utterly predictable results.

By neglecting and even arguing against these necessary redistributive processes, neoclassical economics has helped feed economic disparities, and these in turn have played a major role in driving cycles of boom and bust. It’s no accident that the most devastating speculative bubbles happen in places and times when the distribution of wealth is unusually lopsided, as it was in America, for example, in the 1920s and the period from 1990 to 2008. The connection here is simple: when wealth is widely distributed, more of it circulates in the productive economy of wages and consumer purchases; when wealth is concentrated in the hands of a few, more of it moves into the investment economy where the well-to-do keep their wealth, and a buildup of capital in the investment economy is one of the necessary preconditions for a speculative binge.

More broadly, concentrations of wealth can be cashed in for political influence, and political influence can be used to limit the economic choices available to others. Individuals can and do rationally choose to maximize the benefits available to them by exercising influence in this way, but the results can impose destructive inefficiencies on the whole economy. In effect, political manipulation of the economy by the rich for private gain does an end run around normal economic processes by way of the world of politics; what starts in the economic sphere, as a concentration of wealth, and ends there, as a distortion of the economic opportunities available to others, ducks through the political sphere in between.

A similar end run drives speculative bubbles, although here the noneconomic sphere involved is that of crowd psychology rather than politics. Very often, the choices made by participants in a bubble are not rational decisions that weigh costs against benefits; it’s not accidental that the first, and still one of the best, analyses of speculative binges and panics is titled Extraordinary Popular Delusions and the Madness of Crowds. Here again, a speculative bubble starts in the economic sphere, as a buildup of excessive wealth in the hands of investors, which drives the price of some favored class of assets out of its normal relationship with the rest of the economy, and it ends in the economic sphere, with the crater left by the assets in question as their price plunges roughly as far below the mean as it rose above it, dragging the rest of the economy with it. It’s the middle of the trajectory that passes through a particular form of crowd psychology, and since this is outside the economic sphere, neoclassical economics can’t deal with it.

This would be no problem if neoclassical economists by and large recognized these limitations. Unfortunately a great many of them do not, and the result is the classic type of myopia in which theory trumps reality. Since neoclassical theory claims that economic decisions are made by individuals acting freely and rationally to maximize the benefits accruing to them, it’s seemingly all too easy for economists to believe that any economic decision, no matter how harshly constrained by political power or wildly distorted by the delusional psychology of a bubble in full roar, must be a free and rational decision that will allow individuals to maximize their own benefits and benefit society as a whole.

Now of course, as mentioned in an earlier post, those who practice this sort of purblind thinking often find it very lucrative to do so. Economists who urged more free trade on the Third World at a time when “free trade” distorted by inequalities of power between nations was beggaring the Third World, like economists who urged people to buy houses at a time when houses were preposterously overpriced and facing an imminent price collapse, not uncommonly prospered by giving such appallingly bad advice. Still, it seems unreasonable to claim that all economists are motivated by greed, when the potent force of a fundamentally flawed economic paradigm also pushes them in the same direction.

That same pressure, with the same financial incentives to back it up, also drives the equally bad advice so many neoclassical economists are offering governments and businesses about the future of fossil fuels. The geological and thermodynamic limits to energy growth, like political power and the mob psychology of bubbles, lie outside the economic sphere. The interaction of economic processes with energy resources creates another end run: extraction of fossil fuels to run the world’s economies, an economic process, drives the depletion of oil and other fossil fuel reserves, a noneconomic process, and this promises to flow back into the economic sphere in the extended downward spiral of contraction and impoverishment I’ve called the Long Descent.

Here again, neoclassical economics is poorly equipped to deal with the reality of noneconomic constraints on economic processes. It thus comes as no surprise that when an economist enters the peak oil debate, it is almost always to claim that there is nothing to worry about, because the market will solve any shortfall that happens to emerge. As shortfalls emerge, expect to hear the claim – already floated by a few economists – that declining production is simply a sign that the demand for fossil fuel energy has decreased. No doubt when people are starving in the streets, we will hear claims that this is simply because the demand for food has dropped.

There are promising signs that the grip of neoclassical theory on modern economics is beginning to weaken. A recent conference on biophysical economics – a field which embraces the heretical concept that the laws of nature trump the laws of money – attracted many attendees and, in a shift of nearly seismic proportions, managed to get coverage in the New York Times. Other alternative viewpoints in economics are beginning to be heard, as they usually are in times of financial woe. Still, what’s needed now is something even more sweeping: an economics of whole systems, perhaps modeled on ecology, in which the entire world of noneconomic factors that influence economic processes is explicitly included in theories and practical analyses. Until that emerges, the advice governments and businesses receive from their paid economists may well continue to make matters worse rather than better.

Strange Bright Banners

The transformation of money from a pragmatic measure of wealth to a metastatic abstraction that threatens to devour the economy of real wealth that created it – the theme of the last three posts here – has, as my readers have been quick to point out, political implications. The conventional wisdom these days ignores those implications; the consensus among alternative thinkers, which I suppose could be called the unconventional wisdom, deals with them in a stereotyped manner. I find it increasingly hard to accept either viewpoint.

The conventional wisdom, like most great fallacies, begins with a truth and stretches it until it becomes for all practical purposes a falsehood. The truth, one of the great achievements of the last three hundred years of thought, is the recognition that human life comprises a number of separate spheres that overlap solely in the life of the individual. Most of us have learned, for example, that when a religious leader makes statements concerning matters of scientific fact, those statements deserve no more (albeit no less) respect than those of any other interested layperson, and if the religious leader claims divine sanction for his opinions, he has overstepped the proper bounds of religion. (We are still in the process of learning that the reverse is also true, and a scientist who attempts to claim the prestige of science for an attack on religion is equally out of line.) Literature and the arts define another such sphere; so does politics; so does the realm of production and exchange of wealth summed up imperfectly in the word economics.

The separation of these spheres, important as it is, can never be total, because each human being participates in all of them and must balance their claims against one another. For this reason it’s entirely appropriate, say, for religious leaders to raise questions about the moral dimensions of the economy, or for a painter such as Picasso to deliver a devastating critique of a political act with his brush, and in the process create one of the great works of his career. In the same way, the political and economic spheres interpenetrate in significant ways, not least because money (the currency of economics) and power (the currency of politics) can often be traded in for one another. Thus it’s reasonable to discuss the ways that the distribution of wealth in a society intersects with its distribution of power.

This is what the conventional wisdom refuses to do. It’s acceptable nowadays to argue about whether government ought to regulate business, and in what minor ways; it’s very occasionally acceptable to talk about the corruption of government by business, though usually only when some egregious example of this standard practice is selected for pillorying in front of the public. It’s not acceptable anywhere in the American mainstream to talk about the extent to which the entire political process from top to bottom has been skewed by economic interests to the point of absurdity. The current “health care reform” farce is a case in point; most of the plans being discussed in Congress just now deal with the fact that half the American people can’t afford health insurance by forcing them to buy it anyway under penalty of law, funnelling tens of billions of dollars out of the pockets of struggling families – in the midst of a recession, no less – into the coffers of a health insurance industry that is already one of the most overfunded and corrupt institutions in American public life. (If this seems as wrongheaded to you as it does to me, dear reader, a letter to each of your congresspersons might be in order.)

It is to the credit of what I’ve called the unconventional wisdom, the consensus viewpoint of critics of the current system, that they recognize this overlap. What makes the unconventional wisdom problematic, here as elsewhere, is that so much of it redefines such overlaps in terms so extreme that a valid insight is once again falsified. It’s unquestionably true that business interests exert undue influence on the American political system, but this does not justify the wild claims so often made about the extent, centralization, and evil intentions of those interests and their influence.

Take the insistence, so often heard from radicals of the left and right alike, that America is a fascist state. If America were a fascist state, those on both sides of the political spectrum who currently exercise their freedom of speech to call it that would long since have been dragged from their beds in the middle of the night by uniformed thugs, never to be seen again – at least until their bones are pulled from a mass grave and identified by dental records decades from now. That is how things happen in a fascist state, and for today’s smug and pampered American radicals to wrap themselves in the mantle of victims of fascism, while relying on civil rights no fascist system grants its citizens, displays a profound disrespect for those who have actually suffered under totalitarian regimes.

To some extent this habit of flinging around extreme claims is simply the normal rhetorical extravagance of those who know they will not be held accountable for their words. Still, it is far from helpful to insist that because American democracy is troubled, corrupted by economic interests, and increasingly dysfunctional, it ought to be equated with the worst examples in our culture’s political demonology. It is even less helpful when this sort of thinking leads to the assumption that anything that replaces it must be better than the system we have now. That’s a common assumption in troubled times, but it’s also one to which history delivers a devastating reproof.

Imagine along these lines, dear reader, that sometime in the next year or so you start hearing media reports about a rising new figure in American politics. He’s young and charismatic, a military veteran who won the Distinguished Service Cross for bravery under fire, and heads a vigorous new third party that looks as though it might just be able to break the stranglehold of the established parties on the political system. Some of his ideas come straight from the fringes, and he’s been reported to have said very negative things about Arabs and Islam, but he’s nearly the only person in American public life willing to talk frankly about the difficulties Americans are facing in an era of economic collapse, and his party platform embodies many of the most innovative ideas of the left and right. Like him or not, he offers the one convincing alternative to business as usual in an increasingly troubled and corrupt system.

Would you vote for him? Millions of Germans did; replace the Distinguished Service Cross with the Iron Cross and Arabs with Jews, and the parallel should be self-explanatory. That parallel is anything but unique, for that matter; swap out a few details and you have the early careers of Mussolini, Salazar, Peron, or any number of other dictators of the same era. One of the problems with the continual use of fascism as a bogeyman by political extremists is that it becomes far too easy to forget how promising fascism looked in the 1920s and 1930s to many good people disgusted with the failings of their democratic governments. It’s not the “cornpone Hitler” James Howard Kunstler has predicted that we have to fear, much less the imaginary conspiracies that occupy so much space in today’s alternative discourse, but a suave, articulate, and charismatic figure who harnesses the widespread assumption that anything must be better than what we have today, and replaces a dysfunctional democracy with an all too functional tyranny.

Such a figure, it bears remembering, could as easily emerge from the left as from the right. One popular DVD that circulated widely in the peak oil scene a few years back was called The Power of Community, a documentary about how Cuba survived its own equivalent of peak oil when Soviet fuel subsidies stopped at the end of the Cold War. It’s a worthwhile case study of how a society can weather an extreme energy shortage, but it finessed one of the key points that enabled the Cuban response, namely, that Cuba is a dictatorship. To impose the draconian restrictions on energy use that got his country through its “Special Period,” Castro did not have to mobilize public opinion, placate powerful special interests, and shepherd legislation through a fractious Congress riven by ideological splits and determined to defend its prerogatives; he simply had to impose them, and those who disagreed were welcome to spend the next few years discussing the matter at length behind bars with their fellow political prisoners.

A great deal of the American left seems to have seen nothing wrong in this curious definition of “community.” This in itself is troubling, as is the enthusiastic reception of David Korten’s The Great Turning, among the most antidemocratic books of recent years, by the same circles. Korten argues that certain people – essentially, those who share his background and values – are at a superior “developmental stage” to others and are therefore better suited to rule, and the only way to survive the spiralling crises of the present and near future is to take power away from the “developmentally inferior” people who now hold it and give it to the gifted few. The idea that these few might need to be subject to checks and balances to keep them from abusing their power, it hardly need be said, finds no place in Korten’s book – a point that has done uncomfortably little to decrease its popularity.

It’s from sources like these that a neofascism of the left could quite readily emerge on American soil. Of course a neofascism of the right is equally possible, and the most dangerous possibility of all – because the most likely to slip past social critics unnoticed – might well be a movement that places itself in the abandoned middle ground of American politics. There is a great deal of empty space where common sense and compromise once bridged the gap between the major parties, and those parties themselves have become increasingly detached from the values and needs of the people they claim to represent. That space could offer an unparalleled opportunity to an astute and ambitious demagogue. It’s not exactly comforting that Nick Griffin, the head of Britain’s neofascist British Nationalist Party, is now using images of Churchill and the Battle of Britain in place of the Nazi regalia his followers once sported; Griffin is no fool, and where he goes, others will likely follow.

The crucial point that has to be recognized, and is too little recognized just now, is that it’s quite possible to replace a bad system with one that is much, much worse. Historians generally agree that the Weimar Republic was a failure, but I know of none who would suggest that the regime that followed it was an improvement. In the same way, those philosophes who criticized the Ancien Regime in its last years were quite correct to point out that the French monarchy and government were dysfunctional, corrupt, and wildly inefficient. Still, their guiding assumption – that what replaced it could only be better – was brutally betrayed by the Terror, the imperial tyranny of Napoleon, and a quarter century of bloody warfare, leading to no better end than the devastation of France and the restoration of an even more feckless monarch than the one they hoped to see overthrown.

The collapse of American democracy, or what is left of it, into one or another form of autocracy may be a foregone conclusion at this point. Certainly Oswald Spengler, whose ideas continue to land solid hits on a future his critics just as consistently miss, considered it that. He argued that the great struggle of the century or two ahead of his time would pit failing democracies corrupted by wealth in a long but ultimately losing struggle against the rising force of what he called Caesarism – the rise of charismatic leaders who would finish destroying crumbling democratic institutions and rule by a combination of force of personality and raw physical violence. The first round in that struggle began during Spengler’s own lifetime, though he did not live to see the first generation of Caesars fall; it seems unwise to dismiss the possibility of an imminent second round out of hand.

Still, the last word in all this probably belongs to an unlikely but eloquent spokesman, whose name I do not know. He was an elderly man, a Navy veteran with grandchildren, waiting for his laundry to finish at a laundromat here in Cumberland when I arrived there this morning on the same errand. Passing the time as the dryers tumbled, we talked about the weather and the misbehavior of politicians downriver in Washington DC. Then he shook his head and said, “I feel sorry for my grandkids. Me, I’ve had a good life, and my sons all did pretty well, but my grandkids and other people’s kids, they’ll never have what we had.”

For more than two centuries, the glue that has held American society together has been the hope – often falsified, but more often fulfilled – that each generation, no matter how difficult its own life might be, could hope for better things for its children. That faith is breaking apart where it has not already shattered. In its wake, strange bright banners are all too likely to be unfurled, and I suspect that a great many people who imagine themselves immune from the temptation of simple answers will end up marching beneath those banners toward some terrible destiny.

The Twilight of Money

I’ve commented before in these essays that one of the least constructive habits of contemporary thought is its insistence on the uniqueness of the modern experience. It’s true, of course, that fossil fuels have allowed the world’s industrial societies to pursue their follies on a more grandiose scale than any past empire has managed, but the follies themselves closely parallel those of previous societies, and tracking the trajectories of these past examples is one of our few useful sources of guidance if we want to know where the current versions are headed.

The metastasis of money through every aspect of life in the modern industrial world is a good example. While no past society, as far as we know, took this process as far as we have, the replacement of wealth with its own abstract representations is no new thing. As Giambattista Vico pointed out back in the 18th century, complex societies move from the concrete to the abstract over their life cycles, and this influences economic life as much as anything else. Just as political power begins with raw violence and evolves toward progressively more subtle means of suasion, economic activity begins with the direct exchange of real wealth and evolves through a similar process of abstraction: first, one prized commodity becomes the standard measure for all other kinds of wealth; then, receipts that can be exchanged for some fixed sum of that commodity become a unit of exchange; finally, promises to pay some amount of these receipts on demand, or at a fixed point in the future, enter into circulation, and these may end up largely replacing the receipts themselves.

This movement toward abstraction has important advantages for complex societies, because abstractions can be deployed with a much smaller investment of resources than it takes to mobilize the concrete realities that back them up. We could have resolved last year’s debate about who should rule the United States the old-fashioned way, by having McCain and Obama call their supporters to arms, march to war, and settle the matter in battle amid a hail of bullets and cannon shot on a fine September day on some Iowa prairie. Still, the cost in lives, money, and collateral damage would have been far in excess of those involved in an election. In much the same way, the complexities involved in paying office workers in kind, or even in cash, make an economy of abstractions much less cumbersome for all concerned.

At the same time, there’s a trap hidden in the convenience of abstractions: the further you get from the concrete realities, the larger the chance becomes that the concrete realities may not actually be there when needed. History is littered with the corpses of regimes that let their power become so abstract that they could no longer counter a challenge on the fundamental level of raw violence; it’s been said of Chinese history, and could be said of any other civilization, that its basic rhythm is the tramp of hobnailed boots going up stairs, followed by the whisper of silk slippers going back down. In the same way, economic abstractions keep functioning only so long as actual goods and services exist to be bought and sold, and it’s only in the pipe dreams of economists that the abstractions guarantee the presence of the goods and services. Vico argued that this trap is a central driving force behind the decline and fall of civilizations; the movement toward abstraction goes so far that the concrete realities are neglected. In the end the realities trickle away unnoticed, until a shock of some kind strikes the tower of abstractions built atop the void the realities once filled, and the whole structure tumbles to the ground.

We are uncomfortably close to such a possibility just now, especially in our economic affairs. Over the last century, with the assistance of the economic hypercomplexity made possible by fossil fuels, the world’s industrial nations have taken the process of economic abstraction further than any previous civilization. On top of the usual levels of abstraction – a commodity used to measure value (gold), receipts that could be exchanged for that commodity (paper money), and promises to pay the receipts (checks and other financial paper) – contemporary societies have built an extraordinary pyramid of additional abstractions. Unlike the pyramids of Egypt, furthermore, this one has its narrow end on the ground, in the realm of actual goods and services, and widens as it goes up.

The consequence of all this pyramid building is that there are not enough goods and services on Earth to equal, at current prices, more than a small percentage of the face value of stocks, bonds, derivatives, and other fiscal exotica now in circulation. The vast majority of economic activity in today’s world consists purely of exchanges among these representations of representations of representations of wealth. This is why the real economy of goods and services can go into a freefall like the one now under way, without having more than a modest impact so far on an increasingly hallucinatory economy of fiscal abstractions.

Yet an impact it will have, if the freefall proceeds far enough. This is Vico’s point, and it’s a possibility that has been taken far too lightly both by the political classes of today’s industrial societies and by their critics on either end of the political spectrum. An economy of hallucinated wealth depends utterly on the willingness of all participants to pretend that the hallucinations have real value. When that willingness slackens, the pretense can evaporate in record time. This is how financial bubbles turn into financial panics: the collective fantasy of value that surrounds tulip bulbs, or stocks, or suburban tract housing, or any other speculative vehicle, dissolves into a mad rush for the exits. That rush has been peaceful to date; but it need not always be.

I’ve argued in previous posts here that the industrial age is in some sense the ultimate speculative bubble, a three-century-long binge driven by the fantasy of infinite economic growth on a finite planet with even more finite supplies of cheap abundant energy. Still, I am coming to think that this megabubble has spawned a second bubble on nearly the same scale. The vehicle for this secondary megabubble is money – meaning here the entire contents of what I’ve called the tertiary economy, the profusion of abstract representations of wealth that dominate our economic life and have all but smothered the real economy of goods and services, to say nothing of the primary economy of natural systems that keeps all of us alive.

Speculative bubbles are defined in various ways, but classic examples – the 1929 stock binge, say, or the late housing bubble – have certain standard features in common. First, the value of whatever item is at the center of the bubble shows a sustained rise in price not justified by changes in the wider economy, or in any concrete value the item might have. A speculative bubble in money functions a bit differently than other bubbles, because the speculative vehicle is also the measure of value; instead of one dollar increasing in value until it’s worth two, one dollar becomes two. Where stocks or tract houses go zooming up in price when a bubble focuses on them, then, what climbs in a money bubble is the total amount of paper wealth in circulation. That’s certainly happened in recent decades.

A second standard feature of speculative bubbles is that they absorb most of the fictive value they create, rather than spilling it back into the rest of the economy. In a stock bubble, for example, a majority of the money that comes from stock sales goes right back into the market; without this feedback loop, a bubble can’t sustain itself for long. In a money bubble, this same rule holds good; most of the paper earnings generated by the bubble end up being reinvested in some other form of paper wealth. Here again, this has certainly happened; the only reason we haven’t see thousand-percent inflation as a result of the vast manufacture of paper wealth in recent decades is that most of it has been used solely to buy even more newly manufactured paper wealth.

A third standard feature of speculative bubbles is that the number of people involved in them climbs steadily as the bubble proceeds. In 1929, the stock market was deluged by amateur investors who had never before bought a share of anything; in 2006, hundreds of thousands, perhaps millions, of people who previously thought of houses only as something to live in came to think of them as a ticket to overnight wealth, and sank their net worth in real estate as a result. The metastasis of the money economy discussed in previous posts here is another example of the same process at work.

Finally, of course, bubbles always pop. When that happens, the speculative vehicle du jour comes crashing back to earth, losing the great majority of its assumed value, and the mass of amateur investors, having lost anything they made and usually a great deal more, trickle away from the market. This has not yet happened to the current money bubble. It might be a good idea to start thinking about what might happen if it does so.

The effects of a money panic would be focused uncomfortably close to home, I suspect, because the bulk of the hyperexpansion of money in recent decades has focused on a single currency, the US dollar. That bomb might have been defused if last year’s collapse of the housing bubble had been allowed to run its course, because this would have eliminated no small amount of the dollar-denominated abstractions generated by the excesses of recent years. Unfortunately the US government chose instead to try to reinflate the bubble economy by spending money it doesn’t have through an orgy of borrowing and some very dubious fiscal gimmickry. A great many foreign governments are accordingly becoming reluctant to lend the US more money, and at least one rising power – China – has been quietly cashing in its dollar reserves for commodities and other forms of far less abstract wealth.

Up until now, it has been in the best interests of other industrial nations to prop up the United States with a steady stream of credit, so that it can bankrupt itself filling its self-imposed role as global policeman. It’s been a very comfortable arrangement, since other nations haven’t had to shoulder more than a tiny fraction of the costs of dealing with rogue states, keeping the Middle East divided against itself, or maintaining economic hegemony over an increasingly restive Third World, while receiving the benefits of all these policies. The end of the age of cheap fossil fuel, however, has thrown a wild card into the game. As world petroleum production falters, it must have occurred to the leaders of other nations that if the United States no longer consumed roughly a quarter of the world’s fossil fuel supply, there would be a great deal more for everyone else to share out. The possibility that other nations might decide that this potential gain outweighs the advantages of keeping the United States solvent may make the next decade or so interesting, in the sense of the famous Chinese curse.

Over the longer term, on the other hand, it’s safe to assume that the vast majority of paper assets now in circulation, whatever the currency in which they’re denominated, will lose essentially all their value. This might happen quickly, or it might unfold over decades, but the world’s supply of abstract representations of wealth is so much vaster than its supply of concrete wealth that something has to give sooner or later. Future economic growth won’t make up the difference; the end of the age of cheap fossil fuel makes growth in the real economy of goods and services a thing of the past, outside of rare and self-limiting situations. As the limits to growth tighten, and become first barriers to growth and then drivers of contraction, shrinkage in the real economy will become the rule, heightening the mismatch between money and wealth and increasing the pressure toward depreciation of the real value of paper assets.

Once again, though, all this has happened before. Just as increasing economic abstraction is a common feature of the history of complex societies, the unraveling of that abstraction is a common feature of their decline and fall. The desperate expedients now being pursued to expand the American money supply in a rapidly contracting economy have exact equivalents in, say, the equally desperate measures taken by the Roman Empire in its last years to expand its own money supply by debasing its coinage. The Roman economy achieved very high levels of complexity and an international reach; its moneylenders – we would call them financiers today – were a major economic force, and credit played a sizeable role in everyday economic life. In the decline and fall of the empire, all this went away. The farmers who pastured their sheep in the ruins of Rome’s forum during the Dark Ages lived in an economy of barter and feudal custom, in which coins were rare items more often used as jewelry than as a medium of exchange.

A similar trajectory almost certainly waits in the future of our own economic system, though what use the shepherds who pasture their flocks on the Mall in the ruins of a future Washington DC will find for vast stacks of Treasury bills is not exactly clear. How the trajectory will unfold is anyone’s guess, but the possibility that we may soon see sharp declines in the value of the dollar, and of dollar-denominated paper assets, probably should not be ignored, and cashing in abstract representations of wealth for things of more enduring value might well belong high on the list of sensible preparations for the future.

The Metastasis of Money

The confusion between money and wealth, the theme of last week’s Archdruid Report post, has become almost impossible to avoid these days. Perhaps the most important reason is the extent to which money has metastasized so deeply into our economic life that it’s nearly impossible to do much of anything without it.

The economic textbooks you did your best not to read in school justify that ubiquity by a neat rhetorical trick. If you remember anything at all about the economics textbook you did your level best not to read back in your school days, it’s probably that bit of rhetoric; it can be found in the canned explanation for why we use money, somewhere around page 6. It runs something like this: there’s a plumber and a pig farmer who want to do business with one another, see, but the plumber’s Jewish and the pig farmer has nothing to trade but pork. Add money, and voila! The farmer sells his pork to other people and uses the proceeds to pay the plumber, who uses it to buy gefilte fish and matzoh meal. Everyone’s happy except, presumably, the pigs.

It all seems very logical until you think about it for ten seconds. Notice, to start with, how the explanation assumes that the plumber, the pig farmer, the purchasers of pork, the kosher deli, and everyone else are restricted to the specific kind of economic relationships that exist in, and only in, a money economy. The plumber doesn’t, as most people did as little as a hundred and fifty years ago, benefit from a household economy that provides a great deal of his food, including small livestock in the back garden. The pig farmer doesn’t, as most people did until as little as fifty years ago, do essentially all of his household repairs himself. Both of them are defined by a single function: the pig farmer can only produce pork, the plumber only plumbing.

Nor do the farmer, the plumber, or anyone else have access to any of the immense variety of nonmonetary systems of exchange human beings have used throughout history. !Kung hunter-gatherers sharing out a wildebeest among band members according to traditional rules, Haida chiefs distributing blankets and salmon to all comers at a potlatch, and medieval peasants working a baron’s demesne lands for a set number of days each year to maintain their feudal right to their own cottages and fields, all participated in flexible and effective systems of exchange that had nothing to do with money. Urban societies as complex as ancient Egypt got by entirely without money, and still managed to keep plumbers, pig farmers, and a great many other occupational specialties gainfully employed for millennia.

All that the textbook explanation proves, in other words, is that if you have a money economy, it does probably need some kind of money to make it work. This is not the conclusion the textbooks draw from the plumber and the pig farmer, of course; with very few exceptions, they leap from their canned example to the claim that money must be essential to any economy worth the name, and the rest of the textbook proceeds to focus on theories about the behavior of money under the false impression that those theories deal with the behavior of wealth.

The mistaken metaphysics discussed in last week’s post plays a large role in fostering this misunderstanding, but the sheer pervasiveness of money in today’s industrial economy has an even larger role. For most people in the modern industrial world, the only way to get access to any kind of wealth – that is, any good or service – is to get access to money first, and exchange the money for the wealth. This makes it all too easy to confuse money with wealth, and it also fosters the habit of thought that treats money as the driving force in economic life, and thinks of wealth as a product of money, rather than seeing money as an arbitrary measure of wealth.

The thought experiment of placing a hundred economists on a desert island with $1 million each but no food or water is a good corrective to this delusion. Unfortunately this same experiment is being tried on a much vaster scale by the world’s industrial economies right now. We have seven billion people on a planet with a finite and dwindling supply of the concentrated energy resources that are keeping most of them alive, and governments and businesses alike are acting as though the only possible difficulty in this situation is coming up with enough money to pay for investments in the energy industry.

It should be obvious that no amount of money can overcome the thermodynamic and statistical laws that have placed hard limits on the amount of highly concentrated energy resources that happen to exist on our planet. This is not obvious to most people nowadays, however, because the metastasis of money throughout the economy has trained nearly all of us to think that if you have enough money you can get whatever you want. The fact that the richest people in the world can put their entire fortunes into health care and still get old and die is one of the few persistent reminders that money cannot overcome the laws of nature, or provide access to goods and services that don’t exist.

So how did money get transformed from a convenient yardstick for real wealth to the be-all and end-all of contemporary economic life? At least three factors were involved, two of them common to complex urban societies throughout history, one unique to ours.

First, despite the drastic oversimplifications of the textbook example cited earlier, it reflects a reality: a complex society can gain significant advantages from a medium of exchange that can be traded for any form of wealth. Even in societies where most goods and services are distributed by way of social networks, a social consensus tends to establish certain trade goods – wampum shell strings among the First Nations of eastern North America, for instance – as a common measure for those goods and services that are exchanged in other ways. As a society becomes more complex and the division of labor among different crafts expands, some standard measure of wealth becomes more useful. While money itself was invented around 700 BCE by the ancient Greeks, other ways of measuring wealth for the sake of easy exchange had been in use in Old World urban societies for millennia before then, and it’s not inaccurate to include money or some equivalent system as part of the basic toolkit that makes complex urban societies possible.

Second, whenever common measures of wealth are controlled by institutions, those who manage those institutions become powerful, and can be counted on to maintain and expand their power whenever possible. In ancient Egypt, for example, grain in temple warehouses provided the basic measure of wealth; as a result the priests who controlled the stockpiled grain became a potent political force. In medieval Europe, when land was the basic measure of wealth – there’s a reason we still call it “real estate,” as though all other wealth is unreal – the power of the feudal nobility derived directly from their control of land. Today the governments that claim exclusive power to print and regulate money, and the banks and financial corporations that manage most of society’s money, derive much of their effective power from their control over the medium of economic exchange, and can be counted on to encourage the rest of society to rely ever more completely on the thing that gives them power.

These two factors can be traced in the history of most of the complex urban societies of the past. What makes our civilization something of an extreme case is a third factor – the extreme complexity of an economic system that has temporarily replaced the limited energy resources of other human societies with a torrent of cheap and abundant energy from fossil fuels.

Ilya Prigogine, one of the most innovative physicists of recent years, showed via a series of dizzyingly complex equations that the flow of energy through a system increases the complexity of the system. If there was ever any doubt of the accuracy of his claim, it was settled by the economic history of the western world from 1700 to the present. The societies over which the tsunami of the Industrial Revolution broke in the early 18th century were not unusually complex by the standards of past civilizations; their own contemporaries in the Chinese and Ottoman Empires considered western Europeans, and not without reason, to be grunting, smelly barbarians with few of the arts and graces of civilization.

Fossil fuels may not have done anything about the gracelessness and the smell, but it certainly made up for any shortage in complexity. Until the dawn of the industrial age, as a general rule of thumb, some 90% of the inhabitants of any complex society worked in agriculture, providing the food and raw materials that supported themselves as well as the 10% who could be spared for all other economic roles. By 1900, at the zenith of the age of coal, many nations in the industrial world had dropped the percentage of their work force in agriculture below 50%, and shifted the workers thus freed up into a broad assortment of new economic roles. By 2000, buoyed by the much higher concentration and efficiency of petroleum, many industrial nations had dropped the percentage of their work force in agriculture below 5%, with the other 95% filling newly invented roles in the most complex economies in the history of the planet.

One consequence of this swift and unprecedented surge in complexity was the triumph of money over all other systems of exchange. When the vast majority of workers at every income level labored at tasks so specialized that their efforts only produced value when combined with those of hundreds or thousands of other workers, money provided the only way they could receive a return on their labor. When most of the customers for any given product had money and nothing else to exchange for it, buying products for money became standard. Social networks of exchange – household economies, customary local exchanges, church and fraternal networks– shattered under the strain, and were replaced by purely economic relationships – wage labor, shopping, public assistance – that could be denominated entirely in cash. The last three centuries of social and economic history are largely a chronicle of the results.

If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.

In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.

Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.

This is another context in which a wider view of history than economists usually allow themselves to take could offer a useful warning. The dominance of money in complex societies has a distinctive trajectory over time, and next week’s post will discuss some of the ways in which that trajectory might unfold in the decades immediately before us.

The Metaphysics of Money

To mention money and metaphysics in the same sentence, as I did at the close of last week’s post, is to invite any number of misunderstandings. The hoary habit of thinking that walls off philosophical questions in a ghetto of abstractions apart from the world of ordinary life gets in the way of clarity here as so often, but there’s an even more basic problem: most people these days have no clear notion of what the word “metaphysics” means in the first place.

The tangled history of the word probably makes that inevitable. A nameless librarian in ancient Alexandria first coined it out of sheer desperation while cataloging the works of Aristotle; most of the treatises got names based on their subject matter – Physics, Meteorology, Poetics, and so on – but one difficult treatise was labeled simply meta phusikoi, “the stuff that comes after the Physics.” Then, as the fourth-grade history paper put it, some other stuff happened – the library of Alexandria burned, Rome fell, what was left of the classical world got tipped into history’s dumpster by a band of helpful Visigoths, and so on. When the dust finally cleared, Aristotle was very nearly the only systematic ancient thinker whose works were still around, and so he became, in Dante’s words, “the master of those who know.”

That meant, among other things, that the labels assigned to his treatises by that anonymous Alexandrian savant became the basic categories of scholarship in the Middle Ages. (Most of them remain basic categories today, which is why your local university has departments of physics, meteorology, and so on.) Metaphysics was no exception, and the philosophical issues Aristotle tackled in that treatise have carried that label ever since.

Those issues are what Aristotle himself called “first philosophy:” an analysis of the basic terms that have to be sorted out before any kind of philosophy can be sure of its foundations. The medieval scholars who blew the dust off Aristotle’s treatise, however, interpreted his work in their own way, which meant that the basic issues of philosophy were redefined in terms of Christian, Muslim, or Jewish theology. By the time the 18th century rolled around, metaphysics as a discipline was almost entirely identified with the theological basis given it by the scholars of the Middle Ages, and so it got dropped like a hot potato as secularism swept the academic world.

By the end of the 19th century even theologians had stopped doing metaphysics in the old style, and most of the people practicing what used to be called metaphysics weren’t using the word. At that point, in a fine display of history’s twisted sense of humor, the word got picked up by the American folk religious movement ancestral to today’s New Age scene, and turned into a label for their own beliefs. The town in southern Oregon where I used to live has a Metaphysical Library, which even had a few books on metaphysics in the philosophical sense of the world, though how they got there I have no idea. The vast majority of the books were on past lives, channeled entities, flying saucers, evil conspiracies, and the rest of the mental furniture of contemporary alternative culture.

Thus it’s probably necessary to point out that when I mention the metaphysics of money, I ‘m not referring to claims that money was invented by a conspiracy of evil space lizards, or that you can get as much money as you want by convincing yourself that money really, really wants to bed down in your wallet. You can find books making both these claims at the library just mentioned, as it happens, but both beliefs – and a good many statements less obviously absurd – are in large part produced by a failure to engage in the other kind of metaphysics, the thoughtful consideration of the basic categories of thought itself.

That sort of analysis seems very abstruse and impractical, until you notice the consequences of ignoring it. Sweeping claims are being made these days about whether certain things exist or do not exist, for example, by people who never seem to have examined their own presuppositions about what it means to exist and how a thing can be known to exist. That’s the problem with the ghettoizing of philosophy mentioned earlier; the philosophical issues you ignore can still sneak up on you while you’re not looking, and turn your best attempts at thinking into gibberish.

This, finally, is where metaphysics and money come together. Last week’s post discussed some of the reasons why you can get better economic advice from a randomly chosen fortune cookie at your local Asian buffet than from the most prestigious contemporary economists. Part of it, as I pointed out, was the way that the boom-bust cycle makes giving bad advice the most lucrative career strategy for economists; another part is due to the attempts of economists to make their field a theoretical science without going to the trouble of grounding their theories in an adequate foundation of historical fact.

Still, there’s a third factor at work, and it’s even more pervasive than the two just named. It’s far from unique to economics – in one way or another, it underlies a great many of the mistakes that are tipping our own civilization into the same dumpster that received the ruins of Rome – but it stands out in the field of economics with particular clarity. Its roots are in a metaphysical error which might as well be called, after one of its most influential practitioners, Descartes’ fallacy.

Rene Descartes is famous nowadays for saying “I think, therefore I am.” Few people these days take the time to find out what he meant by that statement, and fewer still catch onto the radical project that underlay it. Without too much inaccuracy, Descartes can be called the first modern thinker. Certainly he was the first to embrace what has become an automatic presupposition of modern thought, the notion of the individual self as an isolated, independent witness whose thoughts and experiences are entirely its own. What existed, to Descartes, was limited to what he could know, and know precisely, with the same exactness as a geometrical proof.

Descartes was arguing, in effect, that “to be” means the same thing as “to be known,” and “to be known” in turn equals “to be precisely defined.” It’s clear that he recognized, and intended, the sweeping implications of this metaphysical stance. It’s equally clear that a great many of the people who unknowingly follow his lead nowadays either accept those implications uncritically or have never noticed their existence. In the hands of much of modern science, in particular, Descartes’ equation has been blended with a passion for quantitative measurement to produce an even more extreme form of the same logic. To a great many scientists today, what exists is limited to what can be known; what can be known is limited to what can be measured; and what can be measured is treated as though it was identical to its measurements.

You can get away with this in physics, and still do excellent science. The objects studied by physics follow patterns that can be modeled effectively by mathematics, and most of them are so remote from ordinary human experience that anything about them that doesn’t measure easily can be ignored without too much trouble. Try doing this in sciences closer to the realm of everyday human life, on the other hand, and you can count on running into trouble, because in that realm Descartes’ approach is usually a bad idea, and the modern scientific expansion of it an even worse one. What can be measured is only a subset of what can be known, and what can be known, at least in any given situation, is only a subset of what exists; nor does the fact that some properties of a thing can be measured according to some numerical scale prevent it from having other properties at least as important that are not subject to that kind of measurement.

The sort of bad logic that treats quantitative measurements as the only things that really exist is pervasive in the sciences, but its grip is even tighter on those fields of study that want to claim the prestige of science but can’t quite pass muster. Economics could be the poster child for this noxious effect. Down through the generations, against the sound advice of its best practitioners, economists have consistently treated the one thing in their field that can easily and consistently be measured with numbers – money – as though it was the one thing that matters. It’s easy to see how seductive this habit can be, since it seems to allow everything to be measured on a common scale; the problem, of course, is that everything that can’t be flattened out into that common scale gets mislaid, and as often as not these mislaid factors prove to be decisive.

In The Wealth of Nations, Adam Smith criticizes the notion – as common in his time as in ours – that money is the same thing as wealth. The wealth of a country, he points out, consists of the product of its natural resources and collective labor: in modern terms, it’s the sum total of the goods and services produced by a nation’s ecosystems and economy. In another place, though, he defines wealth as anything that can be valued in money. These definitions do not conflict with one another; rather, they make the crucial point that money is not wealth but the yardstick by which modern cultures measure wealth. This ought to be the first thing we teach children about money, though of course it isn’t.

It probably ought to be the first thing we teach economists about money, too, but the power of Descartes’ fallacy stands in the way. Money is a unit of measurement, so it’s inherently easy to define, understand, and quantify. Wealth is much less easy to force into the Procrustean bed of numbers; that’s why we use money as a rough and ready way of sorting out the relative value of different kinds of wealth so they can be exchanged without too much trouble. Money is so convenient as a way of measuring wealth that very often it ends up eclipsing wealth, and this is why most economists nowadays, even when they think they’re talking about wealth, are actually talking about money. This becomes especially problematic when, as so often happens, they start attributing to wealth characteristics that are only true of money.

This habit of thought pervades contemporary economics. For a relevant example, watch the way most economists these days brush aside the immense challenges of peak oil with the assurance that if oil ever does get scarce, the market will come up with alternatives. Implicit in this claim is the assumption that any energy source is as good as any other, and that the total amount in the system is effectively unlimited. This is true of money – one dollar bill is worth exactly the same amount as any other, and the total number of dollars in circulation is as close to limitless, these days, as the printing presses of the US Treasury can make it – but it is emphatically not true of energy resources, or of any other form of wealth.

Compare any two energy resources in practical terms and it’s clear that in most cases they’re not even apples and oranges; they’re apples and orangutans. Take petroleum and solar energy as good examples. A highly concentrated form of chemical energy and a rather diffuse form of electromagnetic energy have very little in common, and even when they can do the same things – you can heat a house with passive solar design, for example, or you can heat it with an oil-fired burner – the technologies are totally different. Easy talk about swapping one for the other thus evades the immense challenge and nearly unimaginable cost of scrapping multiple continent-wide infrastructures geared to oil and building new ones suited to solar energy. (There are plenty of other questions that it ducks, too, but this one will do for starters.)

Presumably an economist would notice something odd if he sat down at a lunch counter, ordered the daily special, and was handed instead a box of socket wrenches, even if the price of the wrenches was exactly the same as the daily special. If the economist was starving on a desert island and a crate that washed ashore proved to contain socket wrenches rather than food, the difference would be a matter of life or death. This latter is uncomfortably close to our position just now, as the world’s energy companies race each other and the clock to extract fossil fuels in nearly unimaginable volumes from the Earth’s dwindling supplies. If we allow ourselves to wait until those supplies start to run short, it will be much too late to start retooling our civilization for some other energy resource, even if one happens to turn up.

Because a subculture of erudite scholars in the economics departments of universities have made a metaphysical error, in other words, our civilization may have missed its chance to dodge disaster. It’s hard to think of a better argument for the importance of metaphysics than that. Still, the problem sketched in this post extends much further than I’ve had space to outline here, and the way in which money has metastatized in our society to become the measure of all things has become a massive though unrecognized barrier in the way of any attempt to improve a rapidly worsening situation. We’ll explore that in next week’s post.

Why Economists Fail

The last two posts here on The Archdruid Report, while they dealt with issues that are becoming increasingly hard to avoid as industrial society begins its long slide down the slopes of Hubbert’s peak, were something of a distraction from the theme I’ve been trying to pursue for the last few months, the theme of deindustrial economics. I want to return to that theme here, and continue exploring the possibilities and risks of economic life in an age of decline.

Mind you, it may have occurred to many of my readers – and it has certainly occurred to me – that there’s something distinctly odd about an archdruid setting aside his white robe and oaken staff for the chalk and blackboard of the economics classroom. I am not an economist; I don’t even play one on television, and my background in economics consists mostly of extensive reading and study in what nowadays would be considered the fringes of the subject – most notably the writings of the late E.F. Schumacher, which set this sequence of posts in motion.

Yet there’s a case to be made for discussing economics from a standpoint distinct from that of today’s economists – in fact, from nearly any imaginable standpoint other than that of today’s economists. That case could draw its initial arguments from many points, but the most obvious one just now has to be the near-total failure of contemporary economic thought to provide meaningful guidance to the macroeconomic challenges of our time.

This may seem like an extreme statement, but the facts back it up. Consider the way that economists responded – or, rather, failed to respond – to the late housing boom. This was as close to a perfect textbook example of a speculative bubble as you’ll find in recent history. The very extensive literature on speculative bubbles, going back all the way to Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, made recognizing another example of the species easy enough. All the signs were there: the dizzying price increases, the huge influx of amateur investors, the giddy rhetoric insisting that prices could and would keep on rising forever, the soaring rate of speculation using borrowed money, and the rest of it.

By 2005, accordingly, a good many people outside the economics profession were commenting on parallels between the housing bubble and other speculative binges; by 2006 the blogosphere was abuzz with accurate predictions of the approaching crash; by 2007 the final plunge into mass insolvency and depression was treated in many circles as a foregone conclusion – as indeed it was by then. Yet it’s a matter of public record that among those who issued these warnings, economists – who should have caught onto the bubble faster than anyone – could very nearly be counted on the fingers of one foot. On the contrary, the vast majority of the economists who expressed a public opinion on the subject insisted that the delirious rise in real estate prices was justified and that the exotic financial innovations that drove the bubble would keep banks and mortgage companies safe from harm.

These comforting announcements were wrong. Those who made them had every reason to know at the time that they were wrong. No less an economic luminary than John Kenneth Galbraith pointed out decades ago that in the financial world, the term “innovation” usually refers to the rediscovery of the same limited set of bad ideas that always, without exception, lead to economic disaster. Galbraith’s books The Great Crash 1929 and A Short History of Financial Panics, which chronicle the carnage caused by the same gimmicks in the past, can be found on the library shelves in every school of economics in North America, and anyone who reads either one can find every rhetorical excess and fiscal idiocy of the housing bubble faithfully duplicated in the great speculative binges of the past.

If this were an isolated instance of failure, it might be pardonable, but the same pattern repeats itself as regularly as speculative bubbles themselves. Identical assurances were offered – in some cases, by the identical economists – during the last great speculative binge in American economic life, the tech-stock bubble of 1996-2000. They have been offered by professional economists during every other speculative binge since the profession of economics came into being. Take a wider view, and you’ll find that whenever a professional economist assures the public that some apparently risky course of action is perfectly safe, he is usually wrong.

A colorful recent example was the self-destruction of Long Term Capital Management (LTCM) in the early 1990s. One of the two Nobel laureates in economics on LTCM’s staff announced publicly that the computer models the company used for its hugely leveraged trades were so good that they could not lose money in the lifetime of the universe. Have you ever noticed that villains in bad movies very often get blown to smithereens a few seconds after saying “I am invincible”? Apparently the same principle applies to economists, though the time lag is longer; it was, as I recall, some five years after this announcement that LTCM got blindsided by a Russian foreign-loan default that many other people saw coming, and failed catastrophically. The US government had to arrange a hurried rescue package to keep the implosion from causing a general financial panic.

Economists are not, by and large, stupid people. Those who work in some of the less glamorous subsets of the field have worked out a great many useful tools for businesses and individuals, and the level of mathematical skill to be found among today’s “quants” rivals that of many university physics departments. Yet the profession seems to have become incapable of learning from its most glaring and highly publicized mistakes. This is all the more troubling in that you’ll find many economists among the pundits who insist that industrial economies need not trouble themselves about the impact of limitless economic growth on the biosphere that supports all our lives. If they’re as wrong about that as so many other economists were about the housing bubble, they’ve made a fateful leap from risking billions of dollars to risking billions of lives.

What lies behind this startling blindness to the evidence of history and the reality of the downside? Plenty of factors doubtless play a part, but three seem most important to me.

First of all, for professional economists, being wrong is much more lucrative than being right. During the runup to a speculative binge, and even more so during the binge itself, a great many people are willing to pay handsomely to be told that throwing their money into the speculation du jour is the right thing to do. Very few people are willing to pay to be told that they might as well flush it down the toilet, even – indeed, especially – when this is the case. During and after the crash, by contrast, most people have enough calls on their remaining money that paying economists to say anything at all is low on the priority list.

The same rule applies to professorships at universities, positions at brokerages, and many of the other sources of income open to economists. When markets are rising, those who encourage people to indulge their fantasies of overnight wealth will be far more popular, and thus more employable, than those who warn them of the inevitable outcome of pursuing such fantasies; when markets are plunging, and the reverse might be true, nobody’s hiring. Apply the same logic to the fate of industrial society and the results are much the same; those who promote policies that allow people to get rich and live extravagantly today can count on an enthusiastic response, even if those same policies condemn industrial society to a death spiral in the decades ahead. Posterity, it’s worth remembering, pays nobody’s salaries today.

Second, like many contemporary fields of study, economics suffers from a bad case of premature scientification. The dazzling achievements of science have encouraged scholars in a great many fields to ape science’s methods in the hope of duplicating its successes, or at least cashing in on its prestige. Before Isaac Newton could make sense of the planets in their courses, though, thousands of observational astronomers had to amass the raw data with which he worked. The same thing is true of any successful science: what used to be called “natural history,” the systematic recording of what nature actually does, builds the foundation on which science erects structures of hypothesis and experiment.

A great many fields of study have attempted to skip the preliminaries and fling themselves straight into scientific research. The results are not good, because there’s a boobytrap hidden inside the scientific method. The fact that you can get some fraction of nature to behave in a certain way under arbitrary conditions in the artificial setting of a laboratory does not mean that nature behaves that way left to herself. If all you want to know is what you can force a given fraction of nature to do, this is well and good, but if you want to understand how the world works, the fact that you can often force nature to conform to your theory is not exactly helpful.

Economics is particularly vulnerable to this sort of malign feedback because its raw material – human beings making economic decisions – is so complex that the only way to control all the variables is to impose conditions so arbitrary and rigid that the results have only the most distant relation to the real world. The logical way out of this trap is to concentrate on the equivalent of natural history, which is economic history: the record of what has actually happened in human communities under different economic conditions. This is exactly what those who predicted the housing crash did: they noted that a set of conditions in the past (a bubble) consistently led to a common result (a crash) and used that knowledge to make accurate predictions about the future.

Yet this is not, on the whole, what successful economists do nowadays. Instead, a great many of them spend their careers generating elaborate theories and quantitative models that are rarely tested against the evidence of economic history. The result is that when those theories are tested against the evidence of today’s economic realities, they often fail.

The Nobel laureates whose computer models brought LTCM crashing down in flames, for example, created what amounted to extremely complex hypotheses about economic behavior, and put those hypotheses to a very expensive test, which they failed. If they had taken the time to study economic history first, they might well have noticed that politically unstable countries tolerably often default on their debts, that moneymaking schemes involving huge amounts of other people’s money usually end up imploding messily, and that every previous attempt to profit by modeling the market’s vagaries had come to grief when confronted by the sheer cussedness of human beings making decisions about their money. They did not notice these things, and so they and their investors ended up losing astronomical amounts of money.

The third factor driving the economic profession’s blindness to its own mistakes is more complex, and will demand a post of its own. Few things seem less related than the abstractions of metaphysics and the gritty realities of money, but there’s a crucial connection. Underlying today’s economic thought is a specific set of metaphysical assumptions, and those assumptions form the foundation of sand underneath the proud and unsteady towers of today’s economic theories. In next week’s post I plan on taking a hard look at the metaphysics of money, in the hope of finding a less problematic basis for economic life in the approaching deindustrial age.