Wednesday, July 29, 2009

The Economics of Entropy

Over the last few weeks, my posts here on The Archdruid Report have tried to sketch out a way of understanding economics that doesn’t contradict the laws of physics or the evidence of history. Perhaps the central concept I’ve been developing along these lines is the sense that there is no such thing as “the” economy in any human society; there are, rather, three economies, each of which follows distinctive rules.

The primary economy, in this way of looking at things, is the natural world itself, which produces something like three-quarters of the goods and services on which human beings rely for survival. The secondary economy, which depends on the primary one, is the collocation of labor, capital plant, and resources extracted from the primary economy that produces the other quarter or so of the goods and services human beings use. The tertiary economy, finally, is the system of social processes by which the products of the first two economies are allocated to people. This can take many different forms, of which the one most familiar to us is money.

The differences between these three economies run deep, and so do the differences in the way they are treated in conventional economic thinking. Unfortunately these two sets of differences do not run in parallel. One way to explore the resulting mismatch is to look at how the three economies, in reality and theory, are affected by the least popular of all the laws of physics: the second law of thermodynamics, more popularly known as the law of entropy.

To call this law unpopular is not to say that it suffers from any lack of recognition by scientists. The comment of Sir Arthur Eddington, one of the twentieth century’s greatest physicists, is typical: “If your theory is found to be against the second law of thermodynamics, there is nothing for it but to collapse in deepest humiliation” – a summing-up so useful that it probably deserves to be called Eddington’s Law. Entropy is the gold standard of physics, the one thing you can count on even when the rest of the cosmos seems to be going haywire. What makes it unpopular, rather, is that it stands in stark conflict with some of the most deeply and passionately held convictions of modern industrial humanity.

For all that, it’s a simple concept to grasp. Pour a cup of hot coffee on a cold morning and you can watch entropy in action. The coffee will gradually get colder and the air around it will get very slightly warmer. All energy everywhere, left to itself, always moves from higher to lower concentrations: that’s the second law of thermodynamics. On the way from higher to lower, the energy can be made to do useful work, and you can even force some energy to a higher concentration by allowing a larger amount of energy to go to a lower one, but one way or another entropy’s price must be paid.

We don’t like thinking in these terms, and for the last three hundred years, most of us in the industrial world haven’t had to. The 18th-century breakthroughs that allowed coal to be turned into steam power, and gave human beings command over amounts of highly concentrated energy never before wielded by our species, convinced most people in the western world that energy was basically free for the taking. In the halcyon days of industrialism, it was all too easy to forget that this vast abundance of energy was a cosmic rarity, a minor and finite backwash in the flow of energies on a scale almost too great for human beings to comprehend.

As far as we know, there are two and only two phenomena in the cosmos that naturally produce high concentrations of energy. The first is gravity. Unlike most physical phenomena, gravity has robust positive feedback: the more mass a body has, the more gravitational attraction it exerts, the more additional mass it can attract, and the more its gravitational attraction increases. This is why what starts as an eddy in an interstellar cloud of hydrogen gas, set in motion perhaps by the shockwave from a distant supernova, can attract steadily more hydrogen to itself until its gravity is strong enough to achieve the fantastic pressures needed for nuclear fusion, and a newborn star flares into life. Even so, entropy still rules; the light and heat that flows out from our Sun over the course of its ten billion year lifespan is still only a fraction of the potential energy of the gravitational collapse that brought it into being and keeps it going.

The second phenomenon that produces concentrated energy is biological life. Life combines positive and negative feedback loops, and so it’s much more fitful and fragile than gravity, but it can still surf the entropy of its neighboring star, tapping a small part of the vast streams of energy that flow entropically from the Sun’s core to the near-absolute-zero cold of interstellar space to concentrate chemical energy for its own use. Over the ages, the resulting concentrations of energy have transformed our planet, pumping oxygen into its atmosphere and burying trillions of tons of carbon underneath the ground in the form of coal, oil, and natural gas. Once that carbon was buried, gravity got to work on it, concentrating it further through heat and pressure. The energy stored in today’s fossil fuel deposits, in turn, is still only a fraction of the energy lost to entropy in the long slow process that brought those deposits into being.

This is why, as I’ve tried to point out in previous posts, those who expect to get some new and even more concentrated energy source to replace our dwindling reserves of fossil fuels are basically smoking their shorts. It took an extraordinarily complex series of processes, more time than the human mind has evolved the ability to grasp, and an equally unimaginable amount of energy lost to entropy, to produce the highly concentrated fossil fuels we’ve wasted so profligately over the last three hundred years. There are plenty of diffuse energy sources left, but raising them to concentrations that will allow them to power our current civilization would require huge amounts of additional energy to be sacrificed to entropy – and once you subtract the entropy costs of concentration from the modest energy supplies available to a deindustrial world, there isn’t much left. Try telling that to most people, though, and you’ll get a blank look, because we’ve lived with abundant concentrated energy for so long that very few people recognize just how rare it is in the broader picture.

Economics, once again, feeds this blindness. Most economic models, interestingly enough, admit entropy into what I’ve called the secondary economy: there’s a clear sense that producing goods and services consumes resources and produces waste, and that energy fed into the process is lost to entropy in one way or another. Most of them, however, explicitly reject the role of entropy in the primary economy, insisting that resources are always available by definition if you only invest enough labor and capital. As for the tertiary economy, most economic theories accept it as given that money is anti-entropic – it produces a steady increase in value over time, which is the theoretical justification for interest.

In the real world, by contrast, the primary economy is just as subject to entropy as the secondary one. Oil that has been pumped out of the ground and burned is no longer available to use as an energy resource, and if enough of it has been pumped out, the oil field runs dry and it stops being a resource too. Natural cycles can keep some resources available at a steady level by surfing the entropy of the Sun, but only if human action doesn’t mess up those cycles – something we are doing a great deal too much of just now. By ignoring the reality of entropy in the primary economy of nature, we are setting ourselves up for a very awkward future.

And the tertiary economy? This is where things get interesting, because the anti-entropic nature of money posited by mainstream economic theories has been accepted even by most critics of those theories. There’s accordingly been a flurry of proposals for changing the way money works so that it loses value over time. This is understandable, but it’s also unnecessary, because money as it exists today has an exquisitely subtle mechanism for losing value over time. The only difficulty is that mainstream economists and the general public alike treat it with the same shudder of dread and indignation their Victorian ancestors directed toward sex.

We’re talking, of course, about inflation.

I’ve come to think of inflation as the primary way that the tertiary economy resolves the distortions caused by the mismatch between the limitless expansion of the tertiary economy and the hard limits ecology and entropy place on the primary and secondary economies. When the amount of paper wealth in the tertiary economy outstrips the production of actual, nonfinancial goods and services in the other two economies, inflation balances the books by making money lose part of its value. I suspect – though it would take a good econometrician to put this to the test – that in the long run, the paper value lost to inflation equals the paper value manufactured by interest on money, once the figures are adjusted for actual increases or decreases in the production of goods and services.

It’s instructive to note what happens when governments attempt to stop the natural balancing process of inflation. In American economic history, there are two good examples – between the Civil War and the First World War, on the one hand, and between 1978 and 2008 on the other. In the first of these periods, the US treasury reacted against the inflation of the Civil War years by imposing a strict gold standard on the currency, and since the pace at which new gold entered the economy was less than the rate at which the production of goods and services expanded. The result was the longest sustained bout of deflation in the history of the country.

Despite the claims of precious-metal advocates today, this did not produce economic stability and prosperity. Quite the contrary, the economic terrain of the second half of the 19th century was a moonscape cratered by disastrous stock market collapses and recurrent depressions. The resulting bank and business failures probably eliminated as much paper value from the economy as inflation would have, but did so in a chaotic and unpredictable way: instead of everybody’s corporate bonds losing 5% of their value due to inflation, for example, some bonds were paid in full while others became worthless when the companies backing them went out of existence. The same calculus has come into play since the beginning of the Volcker era at the Federal Reserve Board, when “fighting inflation” became the mantra of the day; since then we’ve had a succession of crashes as colorful as anything the 19th century produced.

Thirty years of economic policy dedicated to minimizing inflation have guaranteed a sizable second helping of economic collapse in the years to come – it’s only in the imaginations of politicians and publicists that the recent “dead cat bounce” in the stock market, and various modest decreases in the rate at which economic statistics are getting worse, add up to a recovery of any kind, much less a return to the unsustainable pseudoprosperity of the years just past. Still, in the longer term, I suspect inflation will also play a major role in the unraveling of the current mess. With the end of the age of cheap abundant fossil fuels, the world faces a very substantial decrease in the amount of primary and secondary wealth in the world, and the notional wealth of the tertiary economy will have to lose value even faster to make up for that decline. Just how this will play out is anyone’s guess, but one way or another it’s unlikely to be pretty.

41 comments:

BrightSpark said...

How fascinating. Despite spending years looking at alternative economics and theories of money, I had never considered that inflation may provide that all important linkage between the primary and tertiary economies. My research into the area has probably focused on redesigning the money system to reflect entropy, but you seem to be suggesting that this isn't necessary?

I'd probably have to disagree on this point. Whilst inflation probably serves as a useful counter-balance, it seems to act on such long timeframes (ie years, decades) that people will fail to understand the root causes. That's where I see the need for something faster acting in the tertiary economy, and the concept of demurrage is probably the best approach. This isn't to say that some magical redesign of money will solve the problem in itself, it is to use that money system as a way of imparting that understanding of entropy over to the people who use it.

tristan said...

Money creation as it is practiced today is just another form of resource extraction. The difference is that it is a promise of future extraction. The creation of interest bearing debt assumes that at some point in the future we will have the resources to cover the debt plus interest.

But the contraction of resources will make this impossible and eventually that will become more and more obvious. There are only two solutions. The first is to renege (sp?) on the debt. But the problem with that is that we are then admitting that we are incapable of borrowing from the future with any hope of return. That will lead to a forced realignment of our capability of producing/extracting with our need/desire to consume.

I was walking around Seattle today in the 100+ degree heat and walking in and out of air conditioned buildings and the thought occured to me that there is *no way* that American's will accept the drastic reduction in their lifestyles that will be required to live within their resources. So the only other option is to inflate the currency. In the long run, of course, this is a disaterous move. But in the short term it will hold off debt destruction. And we are nothing if not short term oriented primates.

That said I am prediction another deflationary sprial this fall or early Winter. This one will cause such panic that all the stops will be pulled out in order to bring a halt to debt and demand destruction. But that is just a guess.

T

Danby said...

JMG said:I suspect – though it would take a good econometrician to put this to the test – that in the long run, the paper value lost to inflation equals the paper value manufactured by interest on money, once the figures are adjusted for actual increases or decreases in the production of goods and services.

Actually John, the value won't be equal. The value lost will always be greater than the amount of money created. There are inefficiencies built into the system, such as enormous yachts, European vacations, houses in the Hamptons, that sort of thing. This is in fact another expression of the law of Entropy.

Depending on what good is used to push the added money into the market, the inefficiency is anywhere from 1.5 %(sound mortgages) to 20% (the sort of mortgages that have been issued for the last 8 years) to 80% (stock scams) or even 100% (Bernie Madoff). Every parasite in the financial services industry, which you call the tertiary economy, gets paid out of that inefficiency, in commissions, service fees, broker's fees, insurance, arbitrage fees, etc.

Janne said...

John, this was almost poetic. One of your most importantant - and beautiful! - writings so far. Thanks!

flute said...

BrightSpark said:
"Whilst inflation probably serves as a useful counter-balance, it seems to act on such long timeframes (ie years, decades) that people will fail to understand the root causes."

Not true for all times and places. Zimbabwe comes to mind, or Germany in the 1920s.

As for what kind of money we have, John, you mentioned the period of gold standard from the civil war to the first world war as disastrous, since the real economy was outgrowing the money. But perhaps now with dwindling resources would instead be the right time to return to the gold standard. Paper money will probably inflate away when the resource base fades, but a gold standard could perhaps stabilise the economy.

Elizabeth M Rimmer said...

Very interesting! Coherent, informative and readable - how cool is that?
Where does nuclear fusion fit into this? At the moment they are putting in enough power to light a small town and getting out the equivalent of a mars bar!Do you see it as ever being viable?

gamedog said...

Hello JMG, I only recently discovered your writings, and now look forward to your Wednesday updates. I thank you for your time.

"in the long run, the paper value lost to inflation equals the paper value manufactured by interest on money"

I agree with tristan.

I see inflation as an insidious tax on human labour, an inescapable bondage akin to slavery.

Further, I would say the hidden "profit" taken by the issuing private banks for the privilege of printing our money supply seems to be used to further corrupt societies, pillage resources in the form of "black budgets" financing coups, hidden agendas, and starting wars to control the diminishing resource base.

As sovereign peoples, we should not be charged to use a means of exchange. If we taught children how money is created in schools, I believe the corrupt system would be dismantled within a generation!

tom said...

Steady inflation as the alternative to boom-and-bust ...JMG is channeling Keynes now? Seriously, he says this in the General Theory, including the consideration of monetary demurrage.

DIYer said...

One big big difference:

While entropy always increases, and while energy is conserrved, the tertiary economy does not necessarily obey either of these rules.

We may soon discover that it can cease to exist altogether, while the primary and secondary economies continue in some form.

Shadowfax said...

Is gravity the massive force we think it is?A small magnet can counteract the gravity of the entire planet.
I have been reading a lot about plasma and the electric universe.
The electric universe explains what we see in the sky without resorting to things like the big bang,expansion,dark matter,dark energy and black holes.

James Andrix said...

Physics nit:
The sun is not being powered by the energy of its collapse, and it's lifetime output will be quite a bit greater than that energy. It's using potential nuclear energy. On average, it's energy production at every second is enough to keep it's outer mass from falling back in on itself due to gravity, plus the light and heat output.

And for better or worse nuclear fission is another concentrated energy source we have access to.

Robert said...

JMG,
Your best so far of a very substantial body of work. You're getting to the marrow. I have to read it a few more times (along with the comments), think some more and then maybe I can write an insightful comment. I hope you continue to read these after the end of the week. It'll take some reflection.

Right now, I'm unfortunately a wage slave and the people who own my computer are paying me to do other things with it.

John Millen said...

Energy concentration: the earth’s hydrosphere does a wonderful job of concentrating radiation received from the sun into such energy forms as lightning, tropical storms and, more usefully, as energy stored in elevated water bodies. Flowing water and wind are sources of energy that have long been exploited by society. This system requires gravity as a framework to function (but so does life).

The second law may serve as a useful analogy for considering the workings of money, but metaphysics rather than Newtonian mechanics is probably the approach with the best prospect of success in understanding the tertiary economy.

Seaweed Shark said...

You wrote: "There are plenty of diffuse energy sources left, but raising them to concentrations that will allow them to power our current civilization would require huge amounts of additional energy to be sacrificed to entropy – and once you subtract the entropy costs of concentration from the modest energy supplies available to a deindustrial world, there isn’t much left."

While this is, strictly speaking, likely to be true, you flit past the term "our current civilization" a bit quickly. You've acknowledged that compared to the amount of energy streaming out of our sun into space, any concentration of energy on planet earth is a miniscule eddy. Which suggests that other or larger eddies could be stimulated on the edges of that vast stream. By this logic it becomes quite possible--given enough patience and time and know-how--to concentrate enough of some diffuse form of solar energy (OTEC, tidal, whatever), to concentrate some fuel, leverage that, build larger capture mechanisms and so on. If you can generate a net gain--even a small one--on a human scale, you can eventually get where you want to go, just as a man can cover a thousand miles by walking.

Your escape clause (a valid one, I believe) is the phrase "our current civilization." Leaving aside the matter of lifestyle expectations, one may well wonder whether our current civilization produces people capable of sufficient unity, forbearance, patience, obedience and shared cooperative purpose to achieve such a thing. It seems to me that as always, the greatest untapped potential resource is human beings.

daniel said...

Intelligent, erudite, articulate, beautiful--each post demolishes my belief that I couldn't enjoy a post more than I enjoyed the previous one. Thank you x 1,000!

In the antepenultimate paragraph, I believe the penultimate and ultimate sentences should be combined.

BrightSpark said...

Flute - "Not true for all times and places. Zimbabwe comes to mind, or Germany in the 1920s"

Yep - you are right here. Hyperinflation can and does occur at times of crisis, however the two occasions that you describe were primarily political, rather than ecological in origin. I think this point is important, if people see high inflation they are likely to assume that it is the problem of political leadership, and therefore act to change the leadership, when the underlying problem is far deeper and more systemic.

It's also hindsight - for instance, once we are well on the way down the far side of Hubberts Peak we will be able to look back and see any hyperinflation for what it is, but at the time, most people won't be thinking that.

Hence my concern and want for something more immediate, to help people get through.

Matt Holbert said...

I think that this article should help me convince the tertiary haves to deposit money in my proposed equity bank. No interest is earned on deposits but depositors have access to the bank assets -- some of which will be productive gardens, vineyards, and farmland -- at cost (reduced inflation!).

Of course, in a limited resource, entropic world, it is best not to build up anything other than a small reserve. That's why the gardens, farms and vineyards will be run by a sort of hedonistic, monastic order. JMG commented months ago -- years? -- that something like this would probably have to have religious underpinnings. As a consequence, I intend to apply for tax-exempt status as a new religious order -- one in which the stated goal is to tap into the wisdom of every other religious organization that has ever received tax-exempt status. Might make Tim's minions squirm, but they'll have no option but to approve as all past approvals are embedded.

"Though the problems of the world are increasingly complex, the solutions remain embarrassingly simple" --Bill Mollison (Source: http://kamiahpermaculture.com)

Paula said...

Since I consider myself a defrocked economist, I have been reading the Report with interest and delight. Thank you!

Two points: First, at least in some reaches of economic theory, the situation is even worse than you have stated here. A common assumption underlying theoretical proofs of the wonders of market is that waste can be disposed of costlessly. Of course, this is never true. All waste ends up somewhere, at best as fertilizer for the primary economy, but
commonly as a contaminant in the primary economy. We've gotten a little better at reducing this contamination, but only by imposing significant economic costs on the producers of waste in the second economy. I suppose this is another example of the Second Law in action.

I'm not certain that your treatment of interest and inflation is universally true, however. Essentially you are asserting that the real interest rate (interest - inflation) is always zero in the long run. In the simplest possible case, where I lend you $1000 to buy a set of
tools to build a house and you pay be $1030 at the end of the year when the house is built and sold, the $30 is compensation for the increase in your productivity that the tools provided. The fact that in the long run we're all dead, the tools will deteriorate into a pile of rust, and the house will return to the earth does not invalidate the value of the
tools and the house. A world in which finance is this simple works
pretty well, I think.

Of course, in a world where I sell this loan in the form of a bond,
which a thousand people bet on the value of, and then sell their bets in order to buy the house...well, I think we know what happens there.

Draco TB said...

For inflation to be considered as entropy on the tertiary economy the return to financial capital would have to be less than the rate of inflation. This is patently untrue. Wages though, aren't doing so well.

tristan said: Money creation as it is practiced today is just another form of resource extraction. The difference is that it is a promise of future extraction. The creation of interest bearing debt assumes that at some point in the future we will have the resources to cover the debt plus interest.

This is true. Economic theory holds that, due to growth, the future economy will be richer than the present economy and thus can afford to pay for our present profligacy. Anyone with a basic understanding of resource extraction and depletion will comprehend the fallacy in this which is why, as I said earlier, economists seem to treat money as the primary resource.

James Andrix said: And for better or worse nuclear fission is another concentrated energy source we have access to.

For a short time. If we went nuclear we'd run out of fissionable material before the end of the century. Actually, I believe we'll run out by the end of the century at present usage rates. Either way, we'll still have left some rather dangerous sites for our descendants to deal with.

Robert said...

Your linkage of the thermodynamic concept of entropy with economics is certainly interesting, but perhaps a bit dangerous. After all, thermodynamics and specifically entropy has been the bane of many an aspiring engineering student.

It is not clear to me that the concept of entropy is applicable to economics, and it seemed to confuse the issues discussed rather than illuminate them.

That said, you again made me think, and that's why I keep coming back to your writing.

Fed up completely said...

Are ideas subject to the second law of thermodynamics? If so, your theory holds true. If not, it falls apart, since money is primarily an idea based upon the concept of trust. If the social structure works then money also works.

Dissolve the social structure and the idea falls apart. Is this the second law in action?

hardhead said...

Hmmm ...

Seems you threw a curve with this one - very thought-provoking. Good job on that account.

Like Robert, I've been stimulated to think, deeply, about what I really think. This post is from a perspective new to me, and does not lend itself to quick understanding - I have to read a while, then think a while, then come back later and read again.

But then what more could a writer ask? Again, good job - and again, stay with this subject.

blue sun said...

JMG- At the risk of sounding critical, I think you have room to dig further into this topic. I would especially like to hear more of your thoughts on how the uber-resource we call energy fits into the picture. And I’d like to make a couple more points:

There are people working in the tertiary economy who deliberately make decisions based on the reality of the primary and secondary economies: they’re called value investors. That said, they are few and far between (although there are many who claim to be but aren’t).

This brings me to my second observation. Your distinction of the tertiary economy helped me crystallize an idea I’ve grappled with for some time. I’ve long been fascinated with investing, and realists like myself wonder, to put it crudely, how perfectly smart people can work day to day with perfectly fictitious stuff. (Is there such a thing as an “honest businessman”?) But once you defined the tertiary economy, it was like delineating some boundary.

To borrow a term from the book ‘Cradle to Cradle’ (McDonough and Braungart) the tertiary economy is like a “monstrous hybrid” of fact and fiction. Many investing types are well aware of this but most just ignore it. In defense of true value investors (ala Warren Buffett and Charlie Munger), they are actually able to concentrate real value (just like plants concentrate energy) because they deliberately look for real (primary and secondary) value. The rest of them—especially the mainstream “experts”—gladly mix their falsehoods with their truths. However, there is no real “purity” in the tertiary economy (even Warren Buffett purchased part of Goldman Sachs).

It is clear to me now how the tertiary economy inculcates and fosters fraud. It’s nearly impossible to pull the wool over one’s eyes in the primary or secondary economies for very long. A potato farmer’s customers will realize real quick if those are rocks in the box, and not potatoes. But in the tertiary economy whole businesses can flourish for years that are based on half truths (and occasionally whole falsehoods).

Fraud is more than just easy to hide in the tertiary economy: it thrives there. It lives in the tertiary economy like mold in a damp cellar. What’s more, as a society we’ve collectively agreed that growth is good, so we’ve added a psychological expectation of growth. It’s like we’ve decided to run a humidifier down there continuously. Those familiar with J.K. Galbraith will recognize that complaining about fraud in the tertiary economy is like complaining about the heat on your Caribbean vacation.

ChristineStone said...

There might be a way to test whether inflation equals interest on a micro-level. Take some goods which society uses roughly the same amount of over the years - ones which neither suffer shortages nor go out of fashion - for example a loaf of white bread plus a pound of potatoes. Check the price of these a hundred years ago and today, to caculate inflation. Then take the price a hundred years ago, calculate the interest that would have been earned, using an average of simple savings account rates over the time period, and see whether the money plus interest would still buy the bread and potatoes today. I suspect you would be short of money to make the purchase today, because the interest on the savings accounts has to be less,to allow the bank staff and shareholders to be paid. Perhaps a better measure would be to calculate what the initial money would now be worth had it increased in line with stock market shares.
A further interesting comparison would be to compare the price of the bread and potoatoes then to the hourly wage of a very junior administrator in a large company, and a domestic cleaner/home help, and make the same comparison today.

flute said...

ChristineStone said:
"There might be a way to test whether inflation equals interest on a micro-level. Take some goods which society uses roughly the same amount of over the years - ones which neither suffer shortages nor go out of fashion - for example a loaf of white bread plus a pound of potatoes."

The problem with potatoes and grain is that the processes to produce them have changed so much with the advent of modern agriculture. Therefore their costs are not easily comparable over 100 years.

As for interest vs inflation, interest rates vary very much between different loans (e.g. government bonds and junk bonds), because the lender apart from inflation also adds a risk premium to the interest. Therefore it is hard to calculate the average interest paid over a period and compare it to inflation.

Sxxxxxx said...

1) two and only two phenomena that naturally produce high concentrations of energy--gravity and bio. life.

Perhaps, but do we have any life w/out gravity? Also, what about crystals? Oh--formed by gravity?

2) wealth--this concept comes late in the piece, first as "paper wealth", then as "primary and secondary wealth" and as "the notional wealth of the tertiary economy."

Recall Bucky Fuller and his concept of wealth as developed in "operating Manual for Spaceship Earth"--he was pretty handy with entropy and feedback loops, also, yet his vision "in the longer term" would seem to be quite at variance with JMG"s--can we understand why?

eknudtson said...

Sxxxxxx, Buckminster Fuller believed that even though resources were being depleted our ability to use them increased because of our understanding of science and design.

Also, regarding his long term vision here is a great quote:
"If humanity does not opt for integrity we are through completely. It is absolutely touch and go. Each one of us could make the difference."

hapibeli said...

Where are you John? !! There's some clarifin needed herebouts!

hapibeli said...

Where be ya John? There's kweschins aplenty!

John Michael Greer said...

Note from your friendly neighborhood temporary moderator, piggybacking on JMG's login: our host is out of town, and will be back Monday. In the meantime, please talk amongst yourselves. *grin*

Roboslob said...

It's way too analcritical for me. What about partying at the campfire instead of trying to snuff the flames with a teacup?

maros.ivanco said...

Robert - the concept of entropy is pretty applicable here. Not many people realize, that common "eco" in economy and ecology is not just a coincidence. You can look at both as the concepts to describe redistribution of resources.

Fed up completely - also ideas are vulnerable to entropy. Think about great cultures that collapsed. Or a history of science. After all, ideas are 'products' of memetic ecosystem.

JMG - I think you should be more specific. I wonder, are your statements based on some calculations, a model, research, or are they merely your guesses/wishes?

And, I want you and others point to Eric Drexler's Engines of Creation. The book is (of course) not about economy, but at the beginning it deals with issues like inevitable shortage of resources on the planet and the calculations based on the population growth are... very grim...

Looking forward to you next post ;-).

Timothy said...

Hello, JMG.

I think your premise that inflation balances over-issuance of currency over time is true, but it's also disastrous. This allows the government, who, via the proxy Federal Reserve, by default sets the inflation rate and to spend money that otherwise would be unjustifiable in advance, and then let the "auto-stealing" effect of inflation suck the wealth out of the people to pay it off.

It would be as if the nation were issued a credit card with an unlimited balance and, when the interest on the balance was unwieldy, it was able to simply pay it back by drawing on two (or more) zeroes to the end of every one of their twenty dollar bills; converting them to $2000 and the same for the other bill denominations. The nation might numerically pay off the balance, but it's devalued everyone's wealth who holds dollars.

Therefore, the tendency to "balance" is more of a tendency to "proactively steal" because people are fixated only on their taxes being raised after the fact and not their money being stolen ahead of time.

Circa 1815 - 1890, the dollar bought an equal amount of wheat, wool, or other goods. Once we let the Central Bank and its inflation policies take over, the dollar was devalued at 98% rate over the last approximate century. Ultimately, what this does is punish savers. You are forced to become a speculator in order to prevent the entropy of your money.

The dramatic booms and busts you speak of without inflation only happen to the speculators/investors and not to the saver. The former knows he/she is taking a risk but the latter doesn't expect it. Inflation forces everyone to become speculators/investors and that's a recipe for disaster. Saving money should be a safe pasttime.

The purpose of money is to facilitate the exchange of goods, nothing more. When the value of money changes over time, its primary purpose is destroyed.

Sxxxxxx said...

maros.v: "eco" as in -nomics & -logy comes from the Greek OIKO--means "home".

John Michael Greer said...

Greetings all! I haven't been able to comment on your comments, due to having been at an event with no email access, and will be nearly as incommunicado for a couple of weeks from now -- more on this in a bit. Still, thank you all for some thoughtful responses, which would have gotten responses if time had permitted.

Gene Shinai said...

@Danby,

While I agree with your assessment that our transit options are more limited in the NW, I am not sure that Western Legacy farming methods are the way to go either. True, I do not see hay growing very well west of the Cascades. And your analysis of Eastern Oregon is I'm sure spot on. But no one on this comment thread has mentioned use of wild or native grasses as an alternative for animal feed. I think that a survey of edible native plants would be a good Idea. Since I am currently lacking Knowledge in this area, I suppose I should get busy and educate myself. -Gene

Gene Shinai said...

JMG,

Best of luck to you in your new home. My only concern with your choice of places to settle is the precarious situation regarding clean Water, see links below:

http://www.nytimes.com/2009/01/07/us/07sludge.html

http://www.youtube.com/watch?v=YK-E4p0aneU&eurl=http%3A%2F%2Fheadonradionetwork%2Ecom%2F&feature=player_embedded#t=28

-Gene

trucks said...

The Universe is made out of energy .
The idea that we are running out of energy is a joke , a lie .

John Michael Greer said...

Trucks, your reality check just bounced. As any physicist could tell you, the fact that the universe is made of energy doesn't mean we can draw on it at will!

John M├ędaille said...

I hesitate to critique this, because it is brilliant in several different ways. However, there are several questions that come to my mind. The "three economies" is a useful concept. I would not quite describe them in this way. The first economy is surely analogous to Wendell Berry's "Great Economy," but that is an economy self-contained within nature. It doesn't actually "produce" any of our goods. Or rather, they don't become our goods until they enter the second economy, which is the application of human labor and capital to nature to produce something useful to man. Nature produces trees, but man uses chairs, and must use labor and tools to transform the one into the other. (This economy, Berry calls the "little economies," plural, because differing versions are possible, but none are sustainable unless they are in conformity to the rhythms of the Great Economy.)

The little economies can be divided up into primary and secondary, direct production of goods, and services supported by those goods (education, finance, arts, etc.) All production results from the application of the work of man to the gifts of nature, from the use of the little economies to extract wealth from the Great Economy. This relationship is properly governed by the "Law of Return," in that whatever is extracted by the little from the Great must be renewed. That which can't be renewed (like oil) must be treated as a capital account, and not as income; burning up our oil does not add wealth, but subtracts it, and should not for frivolous purposes (like responding to a blog? oh well.)

But the key here concerns inflation. I think you are correct (and your history is certainly better than 99% of the BS one hears from economists), in the current environment of wealth extraction. But inflation is a natural part of any expanding economy (not to say that expansion is necessarily a good per se). Production must be financed, and financed from new money, or else by reallocating existing funds from consumption to investment. But this narrows the markets, which make investment less necessary. Further, since some investment is necessary to replenish capital, it is unlikely that there would be enough savings to BOTH replenish capital and support new production. Savings rates that high would shrink consumption so drastically that expansion would be unlikely. (China, with its high savings rate, gets around this by massive gov't recycling in a hyper-stimulative spending spree.)

Hence new money is created by Fractional reserve lending. But as there is a gap between spending the new money and the actual production of new goods, there is some inflationary effect.

There is actually nothing wrong with this. Since money represents goods, and goods naturally depreciate, money too should depreciate (inflate) to reflect the "real" world.

But all in all, an interesting article.

John M├ędaille said...

BTW, my comment on Berry's Great Economy at http://www.frontporchrepublic.com/2010/08/wendell-berry-and-the-great-economy/