The latest round of convulsions in the world’s financial markets has caused a great deal of panic among pundits and ordinary citizens alike. I have to admit, though, that I don’t share their consternation. One benefit of living on a writer’s limited means is that I don’t have the funds to spare for investment – like most of my generation, I’ll never be able to afford the luxury of retirement; unlike most of my generation, I’m well aware of this fact – and the lack of any personal stake in the fate of Wall Street makes it possible to sit back and watch the carnage with a certain degree of detachment.
Of course it doesn’t hurt that most of the money lost in the recent troubles never existed in the first place. The wealth allegedly created by rising house prices, for example, consists of nothing more than the belief that a great many houses could be sold by their owners for more than their previous purchase price. Only a small fraction of said owners can actually sell their homes at any one time without crashing the price – this is, after all, how housing bubbles inevitably end – but while the bubble lasts, even the most theoretical increase in value is treated as cash on the barrel. The popping of the bubble, in turn, simply dispels the delusion that these evanescent gains are actually worth anything.
Still, my habit of reaching for the popcorn instead of the panic button when the stock market swoons has another source. It’s sitting on a bookshelf a few steps from the desk where I’m writing this: a much-read copy of The Great Crash 1929 by the late John Kenneth Galbraith. The Great Crash is considered the definitive history of the speculative bubble and bust that ushered in the Great Depression; it is also the funniest work of serious economic history ever written. Galbraith’s wry humor and his superb grasp of economic process make it arguably the best introduction to the way that markets run amok and bring about their own worst nightmares.
As this suggests, bubbles rise and burst with tolerable regularity. The crucial lesson of Galbraith’s book is that what’s happening now has happened before. Dozens of times in the past, people convinced themselves that the world had entered a new economic era in which getting something for nothing was the way things worked. Dozens of times in the past, markets driven by this giddy conviction soared to absurd heights, then plunged back to earth with a resounding thud. Even the rhetoric repeats itself so precisely that you can time the market by it; when leading political figures respond to a market slump, for example, by insisting that the economic fundamentals are in good shape – an utterance that has already passed the lips of several American politicians, including John McCain – it’s always time to head for the exits.
What this implies, of course, is that the end of a bubble is not the end of the world. This is not to say it will have no impact. A great many people who thought they had huge amounts of money, and who made dismally bad decisions on that basis, will have to deal with the consequences. A great many companies made the same mistakes on an even larger scale, and face bankruptcy in many cases and massive layoffs in others; the impact on employment levels, tax revenues, and many other aspects of our collective life will not be small. If the consequences are handled clumsily enough by government and the upper levels of business, the end result could be – well, since the word “depression” has been gently shepherded out of the realm of public discourse, let’s call it the Great Recession, a period of economic contraction and retrenchment that could easily run on for a decade and leave America’s economic and political life in shreds.
All this has happened before. Only the comfortable delusion of American exceptionalism – a belief that manages to ignore all of American history before 1950, and assumes that the second half of the 20th century will repeat itself in a tape loop until the end of time – makes many Americans think that it can’t happen now, or that it won’t happen again. Yet that same delusion makes it hard to remember that our society survived this same process many times before, and will doubtless survive it once again. Nations have perished for many reasons, but curiously enough, financial collapse is not one of them – a reminder, if one is needed, that money is not wealth, but simply a tool for facilitating the exchange of that real wealth that consists of goods and services provided by people for people.
Over the last two decades or so, I’ve had quite a few occasions to reflect along these lines. Beginning with 1987’s Black Friday, which ushered in the current era of financial instability, economic crashes and convulsions of one sort or another have come at fairly regular intervals, and each time Galbraith’s book has offered a useful counterpoint to the pronouncements of the moment. This time, though, has been spiced with an additional dose of irony, for a few weeks ago one of the used book stores here in Ashland provided me with a dog-eared old copy of what was once Galbraith’s most famous book, The Affluent Society.
Some economists spend their lives writing in obscurity, and some become famous without seeing their ideas put into practice. Galbraith was not so lucky. Published in 1958, The Affluent Society argued that the United States had achieved a self-sustaining level of opulence to which the old laws of economic scarcity no longer applied, and that this abundance could support sweeping public programs to eliminate poverty and provide amenities for all. These claims became holy writ in mid-20th-century liberal circles, and drove most of a generation of American public investment, from Johnson’s Great Society on down. In the process, it committed America to unsustainable public expenditures that set the stage for the economic troubles of the Seventies, and helped drive the backlash of the Eighties that replaced tax-and-spend Democrats with borrow-and-spend Republicans. By the time Galbraith died in 2006, he was treated by most economists with that dismissive fondness reserved for proponents of failed ideologies.
The Affluent Society has been much critiqued by those economic thinkers whose faith in the omniscience of the free market rivals a medieval peasant’s trust in the miracle-working powers of the bones of the local saint, but it seems to me that the book’s major flaw has been missed by these writers. Ironically, Galbraith in The Affluent Society fell into the same trap he critiqued in The Great Crash: the belief that economic reality had changed and the old rules no longer applied. He was quite correct to note that America in the 1950s had become stunningly wealthy, but he was quite wrong to think that this wealth was more than a temporary phenomenon.
Two factors gave postwar America the longest period of sustained economic expansion in its history. First, the accident of geography that put nearly all the battles and air raids of the Second World War on other nations’ territory left the United States in a unique position at the war’s end. Every other industrial power on the planet had had its factories and cities pulverized by enemy action; America, and only America, was left with its industrial plant intact. For more than a decade after 1945, as a result, America dominated the world’s markets for most industrial goods, and profited mightily as a result. By the time The Affluent Society saw print, though, this dominance was already fading, and within another decade it would be a thing of the past.
Just as important as America’s industrial predominance was its role as the world’s largest producer of crude oil. In 1950, for example, the United States produced as much petroleum as the rest of the world put together. Its huge market share allowed it to prosper in the same way that oil sheikdoms are prospering today. By the end of the 1950s, however, the vast American thirst for cheap energy had turned the United States into a net importer of oil; by 1970, US petroleum production peaked and began its irreversible decline as America’s oil reserves began skidding down the far side of Hubbert’s peak. All this made the opulence of the Fifties a passing phase, and turned Galbraith’s prescription for a better society into an expensive flop.
Behind both these failures, it seems to me, is the besetting sin of modern economics, the failure to ground economic factors in their historical and ecological contexts. The index of The Affluent Society contains no entries for “energy,” “coal,” or “petroleum;” while Galbraith briefly raises the issue of resource depletion at the end of his book, he presents it purely as a challenge that could be solved with an adequate supply of scientific talent. The role of contingent historical events in launching American society on its trajectory through affluence and out the other side gets equally short shrift in Galbraith’s book. Neither of these faults is unique to Galbraith; they pervade the entire discipline of economics, which has consistently tried to impose timeless laws on the grubby historical realities of economic life, and has just as consistently ignored the role of natural systems as a primary source of economic value.
It’s for these reasons, I’ve come to think, that a society guided by economic ideas treats pollution as an amenity problem, rather than a factor that can reduce the Earth’s ability to support human societies, and treats resource scarcity as something that can be solved by investing more money, rather than a hard limit to growth. On a larger scale, it’s for these reasons that the three-hundred-year boomtime of industrialism looks normal to so many people today. Looked at with an eye tempered by the cycles of history and the principles of ecology, it takes on a very different shape; its similarity to a speculative bubble is hard to miss; its dependence on reckless, unsustainable exploitation of half a billion years of stored photosynthetic energy, in the form of the Earth’s fossil fuel reserves, becomes just as visible as the dependence of the late housing bubble on wild overestimates of how much future buyers would pay for homes.
Thus the last three centuries of industrialism have given us, not an affluent society, but an effluent one: effluent in the literal sense – one that pours out its waste on the living Earth that supports it – and also in the deeper sense of its Latin roots, ex-fluere, to flow out or away. By ignoring its own dependence on functioning natural systems and the nonrenewability of the resource base that allows it to function, it is causing the historic and ecological conditions that allowed it to emerge and flourish to trickle away out of reach. The history of industrial humanity may therefore turn out to be a repetition, on a much larger scale, of the same sequence of bubble and bust that is heading to its normal conclusion in the world’s financial markets right now; it’s pleasant to think that a future equivalent of John Kenneth Galbraith might someday write the history of that larger boom and bust for the edification of our descendants.