Wednesday, July 22, 2009

The Anti-Ecology of Money

Last week’s Archdruid Report post built on one of E.F. Schumacher’s more trenchant insights to propose a controversial way of making sense of modern economics. Schumacher, in Small Is Beautiful, drew a distinction between primary goods produced by natural processes, and secondary goods produced by human labor, and pointed out that secondary goods can’t be produced at all unless you have the necessary primary goods on hand.

This is quite true, though it’s a point often missed by today’s economists. There is at least an equal difference, though, between either of these classes of goods and a third class produced neither by nature nor by labor. These are tertiary or, more descriptively, financial goods; they form the largest single class of goods in the world today, in terms of dollar value, and the markets in which they are bought and sold dominate the economies of the industrial nations. To call this unfortunate is a drastic understatement, because the biases imposed on our societies by the domination of financial goods are among the most potent forces dragging the world to ruin.

A specific example of a tertiary good may be useful here to help clarify the concept. Consider a corporate bond with a face value of $1000. This is a good in the economic sense – that is, it can be bought for money, it can be sold for money, there are people who want to buy it and people who are able to produce and sell it. Compare it to any more tangible item of value, though, and the bond is clearly a very strange sort of good. It consists of nothing more than a promise, on the part of some corporation, to pay $1000 at some future date. That promise may or may not be honored – junk bonds are bought and sold, for example, in full knowledge of the fact that the chances the issuers will pay up are not good – but even then the chance of collecting on it is treated as an object of value.

The differences between a tertiary good and a primary or secondary one reach further than this. Tangible goods produced by natural cycles or human labor are available in amounts limited by the supply. If there’s only so much water in a river, for example, that’s how much water there is; the fact that people want more, if such is the case, does not produce any more water than the hydrologic cycle is already willing to provide. Equally, if a country’s labor force, capital plant, and resource base are fully engaged in making a certain quantity of secondary goods, producing more requires a good deal more than an agreement to do so; the country must increase its labor pool, its capital plant, its access to resources, or some combination of these, in order to increase the supply of goods.

Yet tertiary goods are available in amounts limited only by the demand. How many bonds can a corporation print? For all practical purposes, as many as people are willing to buy. A good number of the colorful bankruptcies that have enlivened the business pages in recent months, for example, took out firms that mistook a temporary bubble for permanent prosperity, issued bonds far beyond their ability to pay, and crashed and burned when all that debt started to come due. On an even more gargantuan scale, the United States government is currently trying to restart its economy by spending money it doesn’t have, selling bonds to cover the difference, and amassing debt on a scale that makes the most extravagant Third World kleptocracies look like a bunch of pikers. It’s hard to imagine any way in which the results of this absurd extravagance will be anything but ugly, and yet buyers around the world are still snapping up US treasury bonds as though there’s a scintilla of hope they will see their money again.

The difference between supply-limited and demand-limited goods, as this suggests, is among other things a difference between kinds of feedback. Think about a thermostat and it’s easy to understand the principle at work. When the temperature in the house goes below a certain threshold, the heat comes on and brings the temperature back up; when the temperature goes above a higher threshold, the heat shuts off and the temperature goes back down. This is called negative feedback.

In a market economy, all secondary goods are subject to negative feedback. That’s the secret of Adam Smith’s invisible hand: since the supply of any secondary good is limited by the available natural inputs, labor pool, and capital stock, increased demand pushes up the price of the good, forcing some potential buyers out of the market, while decreased demand causes the good to become less expensive and allows more buyers back into the market. Equally, rising prices for a good encourage manufacturers to allocate more resources, labor, and capital plant to producing that good, helping to meet additional demand, while falling prices make other uses of resources, labor and capital plant more lucrative and curb supply.

Negative feedback loops of a very similar kind control the production of primary goods by the Earth’s natural systems. Every primary good from the water levels in a river and the fertility of a given patch of soil, to more specialized examples such as the pollination services provided by bees to agricultural crops, is regulated by delicately balanced processes of negative feedback working through some subset of the planetary biosphere. The parallel is close enough that ecologists have drawn on metaphors from economics to make sense of their field, and it’s quite possible that an ecological economics using natural systems as metaphors for the secondary economy could return the favor and create an economics that makes sense in the real world.

It’s when we get to the tertiary economy of financial goods that things change, because the feedback loops governing tertiary goods are not negative but positive. Imagine a thermostat designed by a sadist. In the summer, whenever the temperature goes up above a certain level, the sadothermostat makes the heat come on and the house gets even hotter; in the winter, when the temperature goes below another threshold, the temperature shuts off and the house gets so cold the pipes freeze. That’s positive feedback, and it’s the way the tertiary economy works when it’s not constrained by limits imposed by the primary or secondary economies.

The late and loudly lamented housing bubble is a case in point. It’s a remarkable case, not least because houses – which are usually part of the secondary economy, being tangible goods created by human labor – were briefly and disastrously converted into tertiary goods, whose value consisted primarily in the implied promise that they could be cashed in for more than their sales price at some future time. (As a tertiary good, their physical structure had no more to do with their value than does the paper used to print a bond.) When the price of a secondary good goes up, demand decreases, but this is not what happened in the housing bubble; instead, the demand increased, since the rising price made further appreciation appear more likely, and the mis-, mal- and nonfeasance of banks and mortgage companies willing to make six- and seven-figure loans to anyone with a pulse removed all limits from the supply.

The limits, rather, were on the demand side, where they always are in a speculative bubble: eventually the supply of buyers runs out because everyone who is willing to plunge into the bubble has already done so. Once this happened, prices began to sink, and once again positive feedback came into play. Since the sole value of these homes to most purchasers consisted, again, of the implied promise that they could be cashed in someday for more than their sales price, each decline in price convinced more people that this would not happen, and drove waves of selling that forced the price down further. This process typically bottoms out around the time that prices are as far below the median as they were above it at the peak, and for a similar reason: as a demand-limited process, a speculative bubble peaks when everyone willing to buy has bought, and bottoms when everyone capable of selling has sold.

It’s important to note that in this case, as in many others, the positive feedback in the tertiary economy disrupted the workings of the secondary economy. Long before the housing boom came to its messy and inevitable end, there was a massive oversupply of housing in many markets – there are, for example, well over 50,000 empty houses in Phoenix, Arizona right now. Absent a speculative bubble, the mismatch between supply and demand would have brought the production of new houses to a gentle halt. Instead, due to the positive feedback of the tertiary economy, supply massively overshot demand, leading to a drastic misallocation of resources in the secondary economy, and thus to an equally massive recession.

It’s long been popular to compare the tertiary economy to gambling, but the role of positive feedback in the tertiary economy introduces an instructive difference. When four poker players sit down at a table and the cards come out, their game has negative feedback. The limiting factor is the ability of the players to make good on their bets; the amount of wealth in play at the start of the game is exactly equal to the amount at the end, though it’s likely to go through quite a bit of redistribution. For every winner, in other words, there is an equal and opposite loser.

The tertiary economy does not work this way. When a market is going up, everyone invested in it gains; when it goes down, everyone invested in it loses. Paper wealth appears out of thin air on the way up, and vanishes into thin air on the way down. The difference between this and the supply-limited negative feedback cycles of the environment could not be more marked. In this sense it’s not unreasonable to call the tertiary economy a kind of anti-ecology, a system in which all the laws that govern ecology are stood on their heads – until, that is, the delusional patterns of behavior generated by the tertiary economy collide with the hard limits of ecological reality.

It’s not all that controversial to describe financial bubbles in this way, though you can safely bet that during any given bubble, a bumper crop of economists and pundits will spring up to insist that the bubble isn’t a bubble and that rising prices for whatever the speculation du jour happens to be are perfectly justified by future prospects. On the other hand, it’s very controversial just now to suggest that the entire tertiary economy is driven by positive feedback. Still, I suggest that this is a fair assessment of the financial economy of the industrial world, and the only reason that it’s controversial is simply that we, our great-grandparents’ great-grandparents, and all the generations in between have lived during the upward arc of the mother of all speculative bubbles.

The vehicle for that bubble has not been stocks, bonds, real estate, derivatives, or what have you, but industrialism itself: the entire project of increasing the production of goods and services to historically unprecedented levels by amplifying human labor with energy drawn from the natural world, first from wind and water, and then from fossil fuels in ever-increasing amounts. Like the real estate at the core of the recent boom and bust, this project had its roots in the secondary economy, but quickly got transformed into a vehicle for the tertiary economy: people invested their money in in industrial projects because of the promise of more money later on.

Like every other speculative bubble, the megabubble of industrialism paid off spectacularly along its upward arc. It’s inaccurate to claim, as some of its cheerleaders have, that everybody benefited from it; one important consequence of the industrial system was a massive distortion of patterns of exchange in favor of the major industrial nations, to the massive detriment of the rest of the planet. (It’s rarely understood just how much of today’s Third World poverty is a modern phenomenon, the mirror image and necessary product of the soaring prosperity of the industrial nations.) Still, for some three hundred years, standards of living across the industrial world soared so high that people of relatively modest means in America or western Europe had access to goods and services not even emperors could command a few centuries before.

In the absence of ecological limits, it’s conceivable that such a process could have continued until demand was exhausted, and then unraveled in the usual way. The joker in the deck, though, was the dependence of the industrial project on the extraction of fossil fuels at an ever-increasing pace. Beneath the giddy surface of industrialism’s bubble, in other words, lay the hard reality of the tertiary economy’s dependence on resources from the primary economy. The positive feedback loop driving the industrial bubble can’t make resources out of thin air – only money can be invented so casually – but it has proven quite successful at preventing industrial economies from responding to the depletion of their fossil fuel supplies fast enough to stave off what promises to be the great-grandmother of all speculative busts.

The results of this failure are beginning to come home to roost in our own time. To understand the economics of the resulting collision, though, it’s necessary to note the relationship between economics and the least popular law of physics – a subject central to next week’s post.

46 comments:

Jan Suzukawa said...

Your reference to industrialism itself as being a bubble (megabubble, in fact) really startled me. Assuming this is true, it makes me wonder then whether it was ever even possible for industrialism to have worked on a global scale - to have worked out so that all of humankind could have benefited from it at least somewhat equally. Or would it always have turned out to bring enormous blessings to only a few - while actually harming the many? As usual, your post inspires further thinking.

Jacques de Beaufort said...

Agree with everything said here...

Your recent posts have been very dense, and sometimes so complex that I find it difficult to imagine their implications in the real and mundane visible(non-theoretical) world-or maybe that's the problem with "reality", that it merely masks more complex dynamics which only become visible through the perturbation of their exchange medium.

All this to say that I'm amazed by the meta-stability that seems to be inherent in the "system". People have the memory of goldfish, and normalize quite quickly to any manner of situations/deprivations. Or maybe its that we are more like that frog that gets done in by the very very slow boil-the rising temperature passing notice because it does not jar the senses.

For all our lamentations and cryer calls, the industrial economy is just forging right ahead, primary economic metrics be damned. What is it about the Descent that allows it to be so Long and convoluted? That Kunstlerian phrase "The Psychology of Previous Investment" rings true in this stage of the game and is probably the mitigating factor that is keeping the air in the tent.

As much as Doomers seem to be awaiting the Zombie Apocalypse, and Techno-Topians seem to be anticipating the Green Shoots Singularitarian Recovery, neither seem to be in danger of happening anytime soon. It all really is just a big mess to muddle through more than anything.

Put on your boots.

paul said...

Hello JMG
Once again another tour de force...thanks for your time and effort pulling it together its very much appreciated.

John Michael Greer said...

Jan, of course there's no shortage of might-have-beens, but I don't think there's any way the benefits of industrialism could have been evenly shared. Without the massive inequalities fostered by industrialism, you don't have the centralization of capital needed to make the industrial economy work.

Jacques, social systems that don't have pretty fair metastability don't survive long enough to experience the peak and decline we're now seeing. That's the thing that survivalists and Utopians alike never seem to get, and the reason why muddling through is most often the best strategy.

Paul, you're welcome -- thank you for reading!

Ruben said...

Oh boy, next week is going to be good.

Ruben.

Nnonnth said...

I’d go for ‘ecological economics’ in a heartbeat; the last few posts have been absolutely revelatory for me.

What I find hard to see though, just now, is how a monetary system could exist that reliably took into account primary goods, as well as the other relationships you’re speaking of. Not because it’s impossible, I’m sure, but just because I've never thought about it.

It seems to me that the gold standard, incredibly crude placed alongside real natural processes, is the only recent mechanism pegging money supply to some kind of physical limit –- a totally artificial one though, which doesn’t ‘know about’ the primary goods which act as real economic limits.

I guess my question is, how could ‘money know’ about primary goods?

Irony: it seems to me that JMG is becoming yet another ‘religious leader’ who condemns usury! :) Not to put words in anyone’s mouth, but what other mechanism is it that fundamentally drives the idea of growth as necessary and inevitable?

Lending at interest ensures an accumulation of value in tertiary terms, whether or not that can accrue in secondary or primary terms, resulting firstly in ever-increasing desperation, and finally, crash. There’s not much sense of nature’s rhythm there! Why be the yeast when you could be the whole barrel?

How about ‘interest’ that took account of all factors and somehow applied Liebig’s Law as well? Something that breathed with the seasons rather than grow-grow-grow in a nice ever-steeper curve… I look at the graph of compound interest and it seems to me that I see a lot of the source of the ever-faster hurtling of our recent society, and also, its obsession with youth.

JMG: It’s hard to imagine any way in which the results of this absurd extravagance will be anything but ugly, and yet buyers around the world are still snapping up US treasury bonds as though there’s a scintilla of hope they will see their money again.

The interesting thing about the US economy right now is that so much of it is in the hands of China… but China won’t start selling because all its holdings would instantly become worthless.

What kind of value is it that only exists so long as it is not challenged by reality?

Value so easily devalued is no value at all, and globalization itself (which basically means keeping your servants’ quarters a few thousand miles away) is just one more unsustainable bubble, bringing new meaning to the idea of ‘coming home to roost’. :)

skintnick said...

The crafted thread of your posts is a joy and I'm so grateful that you manage to crystallise in words what many people probably sense is true about the global economy. (next week, entropy?)

Commenting on last weeks posting I felt rather foolish when JMG suggested my enthusiasm for quickly establishing local currency was not really necessary as (per book title) it will be a "Long Descent". And yet, bubbles by their nature tend to collapse rather fast... In view of this apparent contradiction is there a better word to use for the rise-and-rise of industrialisation? (i notice Jacques uses the word tent)

Don said...

Like Jan, I was also startled by your assertion of industrialism's being a megabubble. But it makes all too much sense.

Your comments about all the generations that have lived under industrialism's growth made my mind follow another line of thought, one that might be well worth exploring some day. And that's the fact that the entire history of the United States of America from its founding through its growth, development, and maturation, and now at the threshold of decline, occurred under the industrial umbrella. What would be worth exploring is whether the so-called American experiment of representative, republican democracy born out of a violent severance of ties with the colonial "mother country," could have happened without industrialism acting as a seemingly benevolent Prospero manipulating circumstances in America's favor.

Even Jefferson's view of the American agrarian ideal, an echo of the biblical picture of peace and contentment with every man sitting under his vine and fig tree, might be seen as a dream that could only be possible with the ability quickly and efficiently to develop the "wilderness" that industrial technology afforded.

What do you think?

ariel55 said...

Dear JMG,

Thanks to you always for your posts. I stay up late on Wednesdays waiting for your input for the week. I am toying with the idea that Nero reportedly "fiddled" while Rome burned--because it took so long.

Ariel55

Loveandlight said...

Allow me to indulge an educated guess: That least popular law of which you speak is the Second Law of Thermodynamics, AKA the Law of Entropy, which for our purposes tells us that energy has a tendency to move from higher, contained levels of concentration to lower, more dispersed levels of concentration.

flute said...

Thank you for another brilliant analysis. I have been reading your blog regularly for 2½ years now, and learnt so much from it. Your breadth of knowledge and span of subjects is impressing.

"Flute" from Stockholm, Sweden

DIYer said...

JMG,

Actually there is an analogy to be made between the financial system and an ecosystem. There are various conservation rules, e.g., the powers-that-be will avoid diluting the currency too quickly because it diminishes their share of it. Unfortunately the current trend in economic thinking does not include the study of ecosystems.

The dynamics you (and so many other essaysists these days) describe are essentially L-V dynamics with poorly chosen (poorly for stability) initial parameters. We have the "attofox" problem translated into money.

Bottom line is, our current financial system is having a bit of trouble because it is far too simple. There aren't enough endemic parasites, alternate predators, alternate prey, hiding places, and so forth. You could sort-of consider money as the top predator, and it has gotten out of control, devoured the rest of the system, and is destined for attofox status in the short-to-medium term.

Karim said...

Greetings all,

I have been reading the Archdruid Report since 2006 and I must congratulate Mr. JM Greer on the consistent excellence of his reports. Now for my little contribution...

Industrialism has all the characteristics of a bubble such as exponential growth, exponential consumption of resources, exponential generation of wastes, total dependence on non renewable energies, little recycling of wastes unlike natural systems. The only logical outcome is some form of collapse as limits are breached. How this will happen and unfold across the planet is far from clear as yet. The essential question, from my perspective, is whether it is possible for humanity to make a transition to some form of civilisation that does not outrun its resource base whilst offering some form of material and spiritual comfort to humanity? As Michael said we'll have to muddle through for quite some time, Solvitur ambulando...

Karim from Mauritius

William said...

JMG
I really liked your analysis, and found especially clear the corporate bond illustration of the tertiary economy. The suggestion that we "muddle through" is not clear to me, in as much as it suggests to me that the "other side" will be something like the ephemeral prosperity of the last century. I am sure that's not what you expect, however. I believe, as I think your previous posts suggest, that none of us know exactly how this will evolve, but it is unlikely to be abrupt (5 yr?) collapse, and it won't be a return to unrestrained growth of the secondary and tertiary economies. Society collapse (c.f. Jared Diamond) does seem to have occurred fairly rapidly for some past civilizations (Anasazi?, Easter Island?), however, and high productivity (high Q in the engineering sense) systems come down faster than less efficient, more diversified systems. So my intuition is that life will be a lot different and not better in, say, two decades.

lagedargent said...

Dear Mr. Greer,

A very stimulating and thought-provoking article. I find this three-tier economic theory very insightful, but yet I have a question.
Can you call 'industrialism', as such, a 'bubble'?

As you state yourself: "Still, for some three hundred years, standards of living across the industrial world soared so high that people of relatively modest means in America or western Europe had access to goods and services not even emperors could command a few centuries before."

A system that develops on a tear for three centuries, feeding on an abundance of available resources, overcoming major catastrophes, like world wars, on the fly, can hardly be called a bubble. To me, it seems more like a very successful parasite.

If the West had stayed its true parasitic course, and not squandered its treasures all over the world, engendering an unprecedented increase of the global population, and, consequently, an environmental collapse, western 'industrialism' could've survived the 21st century without serious trouble, it seems, as populations in the developed world stopped growing.

Yesterday, on TOD, I read another very interesting article, The Fall of the Roman Empire" by Mr. Ugo Bardi. In it, he presents a simplified, dynamic model of collapsing societies, and by its method, I daresay, all five major elements - population, agriculture, natural resources, capital investments, and pollution - would've been on much more sustainable levels, than they actually are, had the West only lived up to its parasitic principles, and kept the advantages for itself.

In that imaginary case, "The Limits to Growth" had not (yet) been reached, let alone exceeded, and, if not by its own merit, the Archdruid Report would've had scant reason to exist.

mb said...

Can not tertiary goods be designed in such a way that positive feedback events are minimized. If there are tightly bound relationships( which I do not have the muscle to dream up) between the tertiary good and the secondary goods on which they are based, can not such a device work.
You seem to consider it an axiom that such a design is impossible

Edward Humes said...

This is a fascinating and important discussion, as I believe a thorough understanding of the impact of the tertiary economy, as you've defined it, is critical to the future of climate change policy, conservation and renewable energy production. I really think you're on to something here.

That said, there may be some flaws in your examples that need further consideration. For one, I think the housing bubble example of the tertiary economy at work is slightly off. You imply that it was irrational to assume that housing values would perpetually climb, but in fact, this is not an irrational assumption -- it's an accurate one. From the end of World War II, when widespread home ownership became a middle class reality, home values have steadily climbed. As in the stock market or any other economic activity, there are dips, sometimes precipitous ones, but over the long haul, the trend has been relentlessly upward. If you bought a home ten years ago, it is worth more today than when you bought it, housing bubble or no. This is why our fathers, grandfathers and great-grandfathers always considered investing in land and homes to be a solid, multi-generational investment, and they were right.

What the housing bubble does starkly illustrate is the fatal flaw of the tertiary economy -- its tendency to pursue short-term gain through deceit. The financial sector, freed of oversight and regulation, eluded the constraints of supply and demand's negative feedbacks by codifying mortgages as publicly traded financial instruments. This in turn freed the lenders from the traditionally disastrous consequences of writing scads of risky 30-year loans. Instead, they could immediately pass on the consequences at a hefty profit to others while hiding (for a time) the true costs.

This is what is most dangerous about the dominance of the tertiary economy. It does every day what the secondary and primary economies can't do: It employs deceptive accounting to hide the true cost of things. In the housing bubble, the tertiary economy's positive feedback loop encouraged ever more bad loans to support what amounted to a Ponzi Scheme, as well as encouraging wild overestimation of demand for new housing. The rest is history.

For the same reasons, I think the characterization of the industrial revolution and fossil fuel dependence as the ultimate mega-bubble needs a bit more context, too. There is nothing inherently irrational about the belief that industry and technology can grow ever more powerful, efficient and productive over time. The history of human technology is a chain of discovery of one source of energy after another that has been abandoned in favor of newer, less costly energy sources. The problem we are now confronted with lies in the tertiary economy's ability to hide the true cost of industry, as it did with home loans and as it continues to do with fossil fuels: the environmental and health costs of burning coal and gasoline. Those costs are hidden from view and not reflected at the gas pump or in the stock valuations of energy companies, though those costs are very real and very great.

Were it not for the tertiary economy's constant hiding of the ball, Adam Smith's "invisible hand" would have moved us toward other sources of energy long ago, would it not?

Thanks again for your thought-provoking essay. I look forward to the next installment!

Coyote said...

Once again the development of the concept of the tertiary economy is insightful and illustrates systemic flaws inherent in Keynesian and free market approaches to economics. By identifying tertiary market elements in secondary goods you can really drive home the idea that money is an abstraction of wealth.

If you will allow me to think aloud - Am I any wealthier if I have a nicer house than I used to? No not really, once the house meets the needs of an acceptable shelter, any further development of the house is not really an increase in wealth. If the “improved” house allows me to produce more by allowing me to house my animals, or grow more food, reduce my commuting time, etc. You could say I am wealthier, but it is through the secondary economy not tertiary. If I use my house to enter the tertiary market, the “wealth” represented by the house is only available to me if I no longer own the house. If the “improved” house requires more capital to maintain (or to service debt), then I am actually less wealthy than I was in my former house. (If my nicer house makes me happier or more content, then you could say I am wealthier, but you have stepped outside the “science” of economics.)

Although I think you state it much more clearly, I think that on some level Keynes recognized that there are tertiary market elements that are poorly controlled by market forces by calling for government manipulation of the economy. Unfortunately, government manipulation has it own positive feedback requiring ever increasing regulation in proportion to the size of the economy. A larger government requires a larger economy to support it, and now the positive feedback is looped, and the economy consumes ever larger amounts of primary resources.

Excellent work Mr. Greer, I gain a new insight almost every week. I am anxious to read that new book of yours.

Joel said...

Maybe we should simplify the naming scheme:

primary goods --> goods
secondary goods --> neutrals
tertiary goods --> evils

Who's with me?

:)

Dan and Carrie Williams said...

I am reminded of a quote from your Long Descent:

"It's a mistake to expect hallucinations to obey the laws of gravity"

So, what effect WILL the US Treasury's effort to sell $235Billion in bonds have on the hallucinated market of IOU's???

Anyone's guess.

Great post today, as always.

Dan and Carrie Williams said...

Also, applying your comments on bubbles (over-shooting on the descent as far as they did on the rally) to the overall bubble of Industrialism...is that to say that we will most likely experience a deterioration in realized living standard much greater in magnitude and accelerated in frequency on the far-side of the peak than we did on the rise?

Numerically:

1875 to 2010 was a much longer process than 2010 to 1875 will prove to be.

It takes a while to inflate a hot-air balloon...but when the fuel gives out or a hole is torn, you feel the effect pretty sharply.

And yet, we'll muddle through. The Royal We (the Editorial We), of course.

As for you and I, the future's not ours to see.

Lili said...

I found this post especially helpful, particularly the metaphorical sadistic thermostat. You've inspired me to read Small is Beautiful, which I've been meaning to do for some time.

David said...

JMG,
I personally appreciated your differentiation of goods between 1st deg, 2nd deg, & 3rd deg. The 3rds are intangibles and, as you note, decisions involving them are made in a different way than others. There are decent theories about the biology of this. You might find www.socionomics.net interesting... or not.

Your comment suggesting the poor countries are poor because the rich countries are rich may sound poetic, but it makes more sense to me that poor places are poor because the energies of their people are wasted by kleptocratic gangs (AKA governments), the more kleptocratic, the poorer. As rich countries get more kleptocratic (helped along by the recent and ongoing crony-capitalist financial frauds, murderous military adventures, and strangling regulations led by the criminal nomenklatura in charge), they too will get much, much poorer. Then we can all be poor together...just like mankind has been for 99% of its existence. Of course, 99% of us will starve to death without the industrial society that is required to leverage the division-of-labor economy. I'd prefer this didn't happen. Call me an idealist.

bmerson said...

"It’s long been popular to compare the tertiary economy to gambling..."

Actually, I think the more accurate comparison is to "gambling with other peoples' money (in the form of their platinum Amex card)". As such, some of those negative feedbacks aren't so big. ;-)


"...It’s inaccurate to claim, as some of its cheerleaders have, that everybody benefited from it...

You're right of course. It seems to me that few people realize that capitalism is, for the most part, doing precisely what it was designed to do. Capitalism, in pretty much all its forms (but certainly in the growth-reliant, debt-based, fiat-currency-focused form we have been using during Industrialization) is designed with one express purpose.... to move and concentrate wealth up the pyramid. That is what the system was designed to do, and that is what it has always done (and continues to do). The system is working perfectly.

Now, given that the system is working as designed, it does seem to beg the question as to whether it might be time for a new system (e.g., ecological economics, etc.).

Brian

tata_23 said...

If the Gaia Theory has any merit at all, it's close to being seen true. The planet is running out of what the industrial economy needs - raw resources of all kinds. But, when the planet balances itself out from all this resource harvesting, pollution and general disrespect, what will happen to the industrial economy and society? I'll give it one word, much like the various bubbles - poof. Crash is another one. Or, at best, a free fall like a glider. The only place to go is down.

John Michael Greer said...

Yes, I thought this one was going to get some lively discussion going. Glad to see that it did.

Ruben, you'll like it.

Nnonnth, I know there are a lot of proposals just now for new currencies structured to avoid the problems of today's monetary system. My thoughts are a bit different, and will be covered in a future post.

Skintnick, bubbles actually deflate at about the same speed they rise -- it took about as long, for example, for the 1929 crash to bottom out as it took for the 1929 bubble to rise in the first place. My guess is that the industrial megabubble will follow the same pattern.

Don, excellent! Yes, America is the bubble nation par excellence, and the whole fantasy of American exceptionalism is a product of the factors that enabled us to surf the rising wave of the industrial megabubble. Where that will leave us on the downward arc is a hard question.

Ariel, equally good. "That red light over there, Caesar? Oh, probably just a trick of the sunset."

Loveandlight, your crystal ball is working, I see. Entropy is the Rodney Dangerfield of scientific laws: it don't get no respect.

Flute, thank you for reading!

DIYer, that's certainly one way an ecological analogy could be constructed.

Karim, nicely put. I think there will eventually be societies that support a relatively advanced technology on a sustainable basis, but we'll likely have several very rough centuries before we get there.

William, no argument there. We are moving into a crisis period of the same scale as the one that shaped world history from 1929 to 1945, and the same dynamics of economic depression, political instability, and war -- among others -- will likely play a part. If the usual pattern plays out, there will be several more of these periods, separated by brief times of partial recovery, over the next couple of centuries, bottoming out into a dark age several centuries more in length. It's after that, I think, that a more sustainable future can really get going.

John Michael Greer said...

Lagedargent, the difference between industrialism and a financial bubble of the more usual sort is simply a matter of timescale. During the upswing of a bubble, a lot of people become very wealthy, and not simply on paper -- they can cash that paper in on products and privileges, though those may prove ephemeral. The same has been true of industrialism all along -- present prosperity was always being bought at the cost of future poverty. We just convinced ourselves, as participants in bubbles always do, that this time was different.

MB, I don't think it's impossible at all. I'm simply calling attention to the fact that as it presently exists, the tertiary economy doesn't work that way.

Edward, you're missing the difference between investment and speculation. Our great-grandparents bought land and homes to provide themselves with a secure place to live, or if they were well off, a steady income. They didn't buy them to flip them for double the purchase price two years down the road, or to pump increases in paper value out of them via home equity credit cards. The latter factors drove the recent bubble; deceit played a role, yes, but most participants in the housing boom deceived themselves.

Of course the period from the end of the Second World War to the end of the 20th century in America also saw an immense boom driven by the tribute economy of a global empire -- it's exactly equivalent to the boomtimes in Spain that followed the conquest of what is now Latin America -- and the 65-year boom in land prices was one consequence. As the US empire falters, I expect that to reverse.

Still, you're quite right about the dominance of the tertiary economy and its effects, especially on the energy front. It will be interesting to see just how long governments keep trying to fix what is ultimately a problem with the primary economy by playing games with the tertiary economy.

Coyote, that's an excellent point; the positive feedback loop of government regulation is something that needs to be woven into this analysis. While I think it's hopelessly simplistic to claim, as some libertarians do, that government is the problem and its abolition would solve all our woes, it's by no means wise to assume that government is the solution, either.

Joel, well, I think that oversimplifies a bit, but a case could be made...

Dan and Carrie, the Chinese have already admitted that they're taking the cash we're sending them and using it to buy up primary and secondary goods around the world. At what point does this shift in the primary and secondary economies affect the hallucinatory tertiary realm? Anyone's guess.

As for the timing and depth of the deindustrial decline, that's an intricate problem already discussed here at some length. The short version is a ragged decline of one to three centuries in which most of the achievements of industrial society are lost. "Dark age" also sums it up pretty well.

Lili, now that's encouraging! You'll enjoy Schumacher -- he and John Kenneth Galbraith are very nearly the only recent economists who could write compelling prose.

David, Third World kleptocracies are usually put in place and propped up by industrial nations that profit from cheap raw materials and open markets; they're part of a broader pattern. That broader pattern is the wildly unbalanced patterns of exchange that funnel wealth from the Third World to the industrial world.

Brian, I'm not at all sure it's accurate to say that capitalism was designed to do anything, because it wasn't designed; it evolved -- and its addiction to positive feedback loops that cause a lot of very rich people to lose their shirts, and sometimes their lives, in downturns suggests that it may not be all that successful of an evolutionary experiment, either. It's worth noting that the concentration of wealth decreases sharply during depressions.

Tata, no argument there. We've all witnessed the peak of the industrial age. From here all roads lead down.

Nnonnth said...

JMG: Nnonnth, I know there are a lot of proposals just now for new currencies structured to avoid the problems of today's monetary system. My thoughts are a bit different, and will be covered in a future post.

Hadn't actually heard much about that... investigated a little and, interesting. Will look forward to your views on it.

Also, is there by any chance a good source about the Greek pagan nature ceremonies you mentioned last week? (Sorry to be OT but I asked on that thread too I think.)

Don said...

JMG wrote: "We are moving into a crisis period of the same scale as the one that shaped world history from 1929 to 1945, and the same dynamics of economic depression, political instability, and war -- among others -- will likely play a part. If the usual pattern plays out, there will be several more of these periods, separated by brief times of partial recovery, over the next couple of centuries, bottoming out into a dark age several centuries more in length. It's after that, I think, that a more sustainable future can really get going."

If rampant planetary warming occurs (fueled by unstoppable methane release from the continental shelves and the permafrost--talk about positive feedback loops!), then all bets are off.

John Michael Greer said...

Nnonnth, I don't have access to my books on that subject right at the moment -- will get back to you when I do. It's not a matter of ceremonies, though, so much as traditional land use patterns with a strong religious element. One example is the placement of sacred groves to Demeter in precisely those places best suited to control soil erosion.

Don, periods of sudden global warming and cooling as rapid as the most extreme estimates of the effects of anthropogenic global warming have occurred countless times in the history of the planet. Our species has already been through one of them, at the end of the last ice age, when global temperatures spiked at least 15 degrees F. in under a decade -- that's what the latest Greenland ice core research shows. Yes, the decades and centuries ahead of us will have to deal with dramatic climate change, and our descendants will live on a warmer and wetter world in which ice caps and glaciers will very likely no longer exist, but that doesn't mean all bets are off; an adaptable generalist species like ours will very likely survive the transition well, and the forces pushing toward an ecotechnic future remain viable even on a future jungle Earth.

Nnonnth said...

JMG: It's not a matter of ceremonies, though, so much as traditional land use patterns with a strong religious element. One example is the placement of sacred groves to Demeter in precisely those places best suited to control soil erosion.

Fascinating; look forward to any info you can give as and when.

blue sun said...

This blog contains the most reasonable thinking about our world I’ve ever encountered! I must confess I turn here when I need a dose of sanity.

I live in a 75-unit apartment complex, and earlier this week I made a humble request to “the board”---could we *begin* recycling paper? I wasn’t asking them to compost, God forbid, merely to comply with town recycling ordinances. But I was told that after some thought, they decided against it because the required dumpster would remove one precious parking space from our lot. Aaarrgghh!!!

Regarding the topic at hand, there is a letter written by investment advisor Jeffery Gundlach that dovetails nicely with this post. Although he neglects to acknowledge peak oil (he probably has a degree in economics), I’ll compliment him for being one of the few investors that has something of a handle on the state of our economy. See this site:

http://www.ritholtz.com/blog/2009/07/the-jalopy-economy/

JMG, if you do look read it, I think you’ll agree that the “debt bubble” is just another way of referring to the oil exploitation phenomenon that began in the 1980s.

hardhead said...

It's a kick watching this thread unwind ... 8>D

I detect, in many of the comments to this week's post, a connecting of previously unconnected dots - something like a supersaturated solution behaves when a tiny impurity is introduced: Everything starts crystallizing like crazy. It's really encouraging to see, and I would only hope that it would happen to vastly more people than just those who read this blog.

I urge everyone to take the insights gained here and apply them to what they see going on in the world. I also urge everyone to not miss next week's post on the Second Law, because it's the key to it all. When you connect what's been said so far to the entropy dot, then you should begin to get a clear picture of where we are, how we got here, and why it's gonna be so hard to get out.

Here's something to think about in the interim: The only "profit" any form of life on this planet has ever had, has now, and will ever have, is from the energy streaming down around us from our local star. Every other "profit" is theft from someone or something else.

Think about it ...

lagedargent said...

>> ... the difference between industrialism and a financial bubble of the more usual sort is simply a matter of timescale.<<

But there's a consideration of perspective, too.
Along your line of reasoning, one could call "agriculturism" a bubble from a hunter-gatherer's view-point. This bubble was blown in Sumer 7000 years ago, won predominance, and may deflate in accordance with the proceeding of soil erosion and desertification of the planet.

I mean, one can call 'industrialism' a bubble, only from the perspective of an agricultural society. When this industrial bubble deflates, society will remember its agricultural roots, and reorganize itself accordingly.

What I tried to argue in my former post was, if limits to growth had not been breached, and this century humanity had reached a higher stage in its development - say, fusion technology, or expansion into space, or whatever - would it still have made sense to call "industrialism" a bubble?

tristan said...

Maybe we should simplify the naming scheme:

primary goods --> goods
secondary goods --> neutrals
tertiary goods --> evils

Who's with me?

:)


Wait can we get another axis with "Chaos and "Law" in there?

T

John Michael Greer said...

Nnonnth, will do.

Blue Sun, thanks for the link, and I hope your apartment board gets a clue one of these days.

Hardhead, I have similar hopes, and for that reason am working on a book on ecological economics. More about this as it proceeds!

Lagedargent, thanks for clarifying. I don't think it was ever possible for industrialism as such to be more than a bubble -- that is, I find it implausible that it could ever have reached a stable plateau at or above, let's say, today's level of technology. It's possible, I think, for some forms of technic society to do that -- and my forthcoming book The Ecotechnic Future spends a fair number of pages discussing the prospects -- but industrialism as a social form is too tightly tied to exponential growth and excessive centralization to escape the boom-bust cycle.

Tristan, only if you make your saving roll!

Car Free Mile-End said...

Thank-you. the clarity and precision of your words is inspiring. keep up the good work.

Don said...

John:
I'm sorry I didn't clarify my comment about "all bets being off" in the event of runaway climate change. I wasn't referring to the survival of the human race, which, as you said, has survived other climate upheavals in the past and can be expected to survive a future one. I was, rather, referring to the pace of industrial collapse. Runaway climate change might cause your predicted pace of centuries-long, gradual decline to accelerate.

On another, but related topic, did you see the article from Andrew Gavin Marshall posted on the Energy Bulletin site late last week? Here's the link: http://www.globalresearch.ca/index.php?context=va&aid=14464
This article posits a future capitalist/industrial one-world totalitarian government.

I didn't read Marshall's entire article, but I've been in conversation with some friends on this topic who believe that the world bankers and financiers are indeed in the process of setting up precisely this kind of worldwide tyranny. While at first I wanted to dismiss this notion as conspiracy mongering, Marshall's article seems more sane than that. However, after reflecting on your discussion of the tertiary economy and hallucinatory wealth, I'm not sure I can go along. It seems to me that the world banking system is bankrupt and is unraveling. It's currently and temporarily being held up by hallucinatory money from the equally bankrupt US government, and we won't be able to sustain that much longer. What say ye?

I look forward to your entropy discussion later this week.

Case Wagenvoord said...

Beautifully put. On a grand scale, the Age of Oil will barely register as a cosmic fart on the geological timeline.

John Michael Greer said...

Car-Free, thank you.

Don, my model is gradual only when seen in overview; what I've been suggesting all along is a ragged downward movement punctuated by assorted crises and breakdowns. A period of climate chaos could, and indeed quite probably will, drive some of those crises. Thanks for the Marshall post; everything I've seen leads me to believe that the current political classes are basically clueless about the causes and consequences of the unfolding crisis, and will be replaced in the usual way by local warlords once the system that gives them their power comes sufficiently unglued, but it's always interesting to read an opposing viewpoint well argued.

Case, succinctly put. It's only in our collective imaginations that the events of today are any more important than those of the time of Hammurabi or, say, the successor cultures that will rise from the ashes of the industrial world centuries from now -- and let's not even talk about geological time scales, in which we don't matter at all. (I find that fact oddly comforting, I have to admit.)

Nnonnth said...

JMG: let's not even talk about geological time scales, in which we don't matter at all. (I find that fact oddly comforting, I have to admit.)

A statement of true Stoic apatheia. I'd call JMG a closet Marcus Aurelius, but he's long out of the closet of course!

What a fraction of infinite and gaping time has been assigned to every man; for very swiftly it vanishes in the eternal; and what a fraction of the whole of matter, and what a fraction of the whole of spirit. On what a small clod, too, of the whole earth you creep. Pondering all these things, imagine nothing to be great but this: to act as your own nature guides, to suffer what Universal Nature brings.

{Meditations XII.32, tr. Farquharson]

das monde said...

JMG clarifies the “demand” side of financial markets very well. In theory, financial markets should move capital where it is most needed. In practice, capital surpluses create more problems than solutions, especially now. The governments are not solving people’s problems - they are “solving” problems of paper credit demand. They are far from giving a comparable value and attention to primary goods and laboring people.

The dynamics of industrial, financial and globalization bubbles is surely interesting. They can provide a large empirical basis for wrong conclusions: the technology will always develop, or stock values will only rise. But on the other hand, did we really have technology improvements exactly on survival demand? The stone age ended long before we could possibly running out of stones... Why should we expect that we will be able to replace oil “just in time”?

The technical or industrial evolution might be sustainable if we do the right things. But we allow ourselves no social structure or time to gather the public “know how”. Many futurists wondered, why wouldn’t technology allow people to have better and more educated time, instead of frantic “rat race”, joblessness desperation or great indebtedness worries. But the industrial revolution was framed into the Western agricultural frame of property enforcement and unequal wealth race from the get go. Extreme capital accumulation was not necessary, as the Dutch East India Company, the first joint stock company in the world, was successfully designed to gather capital from disparate sources.

The “government is a problem” excuse is a much too convenient (and manipulative). Not so long ago, governments were building dams, highways, Manhattan and Apollo projects - and they were straight effective in those purposes. Among other works, the Golden Gate Bridge was build at the height of the Great Depression - and no one would regret. In contrast, modern governments seem to be improving the art of playing fools. Voluntary “printing” of money is not automatically disastrous, as the inconvenient example of the Nazi Germany shows. (Hyperinflations like in the Weimar Republic actually happen with full assistance of “authoritative” assessments of outside investors.)

The industrialization and globalization look a lot like suicidal races to me - and this escalating course was unnecessarily decided quite recently. If this is our “natural” destiny, the wonder is why human consumption was much slower before. If the emerging global predicaments are terrifyingly clear to our “responsible” elites, they might choose to cover it by financial busts, or most optimally, by wars. Since when are we counting failed states, actually?

By the way, the historical scale of this financial crisis is deeply unsettling people like Edmund Phelps and George Soros.

Bill Real said...

I've heard it argued (Radio Ecoshock, can't remember the particular quote) that humans have NEVER experienced the current likely climate-change scenario. Periods of fast warming as you described -

"Our species has already been through one of them, at the end of the last ice age, when global temperatures spiked at least 15 degrees F. in under a decade -- that's what the latest Greenland ice core research shows."

Have been times when the earth went from a cold to mild temperature - we are going for the first time from a mild to hot world.

Was interested to hear James Lovelock predicting a 90% cull in the human race this century due to climate change the other day (same show) ... And I don't know if he's aware of factors like Peak Oil coming into play.

John Michael Greer said...

Nnonnth, that's a high compliment; thank you.

Das Monde, well put. I think, though, that what's been driving the wild surge in mostly imaginary tertiary wealth in recent decades isn't some sort of coherent elite plan, but rather a futile attempt by people with a hammer to keep treating every possible object as a nail: that is, repeating something that worked in the past, even though it doesn't work in the present and shows no signs of working in the future. Toynbee talks about that habit at length in A Study of History.

Bill, of course you've heard that argued; that doesn't make the statement true. Read some original sources in paleoclimatology, and you'll find yourself in a very different world. The Earth has repeatedly bounced back and forth between hot, tepid, cool, and cold phases, and those changes for which we've got high-resolution data -- which means mostly those that show up in ice cores -- have quite often been much faster and more severe than anything the IPCC is predicting for the present case.

Dan and Carrie Williams said...

JMG:

I'm wondering if you would consider doing a post about possible "careers", for lack of a better word, to consider as we head down the far-side of the peak?

Specifically, what can someone who is in a career they view as unsustainable or incompatible with an energy scarce future do to train or educate themselves to transition to something that can 1) pay the bills and 2) provide a fulfilling and beneficial existence?

More simply:

From Cube Jockey to Organic Farmer/Brewer/??? in 5 Easy Steps.

I've just finished "Long Descent" and read your blog for a long time, but my wife and I are still saying "ok, now what?" as we try to set some goals for the next 5-10 years based on what we all here generally see as the most-likely scenario to unfold.

fred said...

This is the clearest and most convincing explanation I have ever encountered of an economic theory that actually makes sense! I have been groping towards this understanding myself, but the prevailing economic theories out there are terribly confusing - mostly because they are wrong! I hope your way of thinking about these matters will become widely known. I think it is the only theory that can help humans deal with the challenges we have created for ourselves in ways that won't just make things much worse.