Dienstag, 23. Oktober 2012

The farmland analogon

Growth is a complex matter. Its measurement as GDP gain has given reason for debate as we now see that GDP gain alone will not define a society’s wellbeing. Herman Daly, growth critic for decades, has summarized the fallacies of growth on the casse website (second part).
Criticism of GDP growth can be summarized in the following arguments:
  • To have more is certainly not beneficial if we already have enough. There is no use in having more washing machines if everybody owns one already.
  • The measurement of the GDP in currency falsely implies a decoupling from physical realities, while money supply might be endless, our world is not. Production needs the physical reality. There is only so much land to grow food on.
  • The future costs of growth are not calculated into the GDP. The total benfits of growth can be smaller than its costs. Waste, pollution, etc. could bind more productivity over time than is gained by wasteful production.
  • Consumption of resources and common goods is counted as growth (income) even if nothing was produced but money. (Cutting down a Forest is growth, depleting fishing grounds is growth, burning oil is growth etc.).
  • Production and services that do not enter the market do not add to the GDP. The people in a rural society producing their own food, the practitioners of the new urban gardening trend or people that help somomebody out of friendship or kinship do not add to the GDP growth even if they produce essential goods and services for the survival of their society.
Growth had its benefits for society in the past, this is not even disputed by growth critics, but to ignore the above "headwinds" of growth is a certain path to ruin and destruction.

These arguments above give rise to the most important questions everybody has to ask himself and the leaders he has chosen:
  • How did we grow in the past?
  • Can we grow this way forever?
  • Are there other ways for growth?
  • Do we need growth in the future?
  • What growth do we need, if any?
  • Who will benefit from future growth who will suffer from it?

Above fallacies of growth and open questions can be formulated as one central question:

Is our (growth capitalist) society so dependent on unsustainable growth that it will collapse if growth comes to its inevitable end?

All these open questions about growth will define our future first and foremost. As long as these questions are not answered all other discussions are moot. How we answer those questions, will affect every aspect of our life.

And yet, the economic and political leaders and our media are stonewalling this discussion. Growth economics are presented as the only possible alternative for our society to thrive.

Behind these false assumption lies the neoliberal ideology. Its mantras are: Growth is the answer to all problems of society, growth goes on forever, the invisible hand of the market will always ensure growth by inspiring innovations that deal with any obstacle to growth.

These assumptions can be falsified easily by numerous scientific studies, basic math or physics and by common sense. This does not impress our leaders at all. The growth doctrine is followed with fanatic fervor.

In the last post I presented a anthropological analysis of the findings of Robert J. Gordon. It might have helped to understand why growth had happened, and what forces drove it. I also tried to explain again why endless growth is impossible and that there is evidence that the end of growth has been reached.

Also, based on the analysis of Robert Gordons findings, I would put forward a systematic flaw in the capitalist growth economy. Growth in a capitalist system steers itself into situation where the friction between the state, the people and the capitalists interests must increase from the moment that growth can no longer keep up with capital gains (the increase of private capital by interests).

I will try to summarize my understanding of growth and to illustrate the inherent flaws of capitalist growth economy in an analogon.

The Farmland Analogon

For this analogon let us picture our society as a small village settling on a little Island. The villagers represent the society or the "state" in my analogon. The reasons for growth to happen, as described by Robert Gordon, were the industrial revolutions happening in our past.

In my analogon of the village, this is represented by the villagers reclaiming farmland on which to grow new crops. Let us say the farmers found a new well in an arid corner of the island. (Science and technology and the evolution of society open the possibility for an industrial revolution.)

Reclaiming this farmland (initiating the industrial revolution) can only be achieved by the villagers (the state) as it does not immediately produce returns (and thus is of no immediate interest to "the market"), but only opens the possibility to do so in the future. All hands have to invest work (taxes) to make the land arable.

To get returns, anybody who wants to produce on this new farmland has to have seeds to sow, and the ability to plow the field and harvest the crop.

In my analogon the seeds represent the investment that has to be made, by investors, banks or the state using "surplus from earlier harvests".

To sow and harvest the village will have to find somebody or something to do the work (The farmers, the work force of the population).

They would also need water and minerals for the crops to grow (resources like oil, ores, etc.). Without it the new farmland can’t produce yields at all.

If the village has all those things, the success of the undertaking is determined by the efficiency with which the workload is handled. It’s measured in the productivity they have invested in relation to the products returned per worker (unit labour cost).

"Governments will always play a huge part in solving big problems. They set public policy and are uniquely able to provide the resources to make sure solutions reach everyone who needs them. They also fund basic research, which is a crucial component of the innovation that improves life for everyone." Bill Gates

How market forces drive innovation (or not)

In any society, be they "capitalist" or "socialist", these steps are the same. Market mechanisms did not come into play so far. The "market forces" and the "invisible hand" make their entry when the efficiency with which the claimed new marked is exploited is determined. (increasing production per worker).

If the village has a capitalist system the "market forces" will drive the invention of new machines for more efficient plowing and harvesting or an entrepreneur might invent new ways to enhance the harvest. (Fertilizers, Pesticides etc.). In a state socialist system this might take longer as the motivations for finding new efficient ways for production are lower.

But there are restrictions. The  farmland is of a certain size that can’t be expanded and it will need water, sun and minerals to produce crops. This represents the natural boundaries of earth and the fact that resources are limited and efficiency can not exceed a maximum. So efficiency will rise steeply at first but to be more efficient will get harder with time.

Please refer to Stefan L. Eichner if you would like to know more about market forces, innovation and growth:

Thanks to S. L. Eichner for his great work explaining the
mechanisms of growth and innovation in market driven economies

In the long run the villagers will have optimized all ways of producing crops on this newly claimed farmland. Production will not rise anymore but stay constant, provided I have enough farmers, water and minerals and my climate is stable. (market saturation is reached)

In the end, the field will only provide the village with the same amount of crops every year if they can somehow sustainably supply all the factors that are needed.

In our current economy, the "water" we use is oil. We are taking it from a finite resource. If the villages new found well runs dry the crops will wither and die no matter how many farmers they use to plow or harvest.

To rely on the market will not help if your production depends on finite ressources. Increasing efficiency will not fight the drought or "invent" new water.

(For explanations see my posts about the limits of growth due to finite ressources here, german only, or this one about the problems with compensating for peak oil, in english).

Even if the ressources are in endless supply the invisible hand will slow progress because it is attached to the arm of capitalism.

Why capitalism impedes innovation and growth:

When the end of growth is reached (either way) it depends very much on how the village has organized itself as a society. In western capitalist societies this land is now surely owned by some landlord. (The owner of the means of production and large capital, the capitalist in the classic sense).

Source: H.Genreith, Dead Man Walking Model (german)
This landlord is by now accustomed to the fact that his share of the yields grows every year (by the exponential effects of interest) and he thinks that this will go on forever (because he can’t see why not or does not care). His firm believe is, that he is entitled to an ever increasing share of the harvest. Many years growth only ensured the rise of his share and finally got to be the only reason why growth was needed (see here or here for scientific arguments for this development, german only).

To satisfy his greed the workers share will finally decline every year that growth did not keep up with the landlords demands (or they are laid off and less workers work overtime). The village that is raising taxes from all the workers (not the landlord) is getting poorer despite the successes of raising production for years and being the power that made reclaiming the field possible, while the landlord accumulates riches. (The neoliberal growth capitalist ideology holds to the myth that low taxation, especially low taxation of the very wealthy is benefitial to growth, this is untrue as this study shows.)

Due to the dropping taxes the impoverished village is no longer able to afford to send out a geologist (scientist) to search for a new well, even if the well should fall dry. If the village did not find a well then now it might be too late. Also, finding the next well will be harder and will proabably provide less possibilities for new growth. (productivity growth was less for every cycle of industrial revolution.)

The landlord though is not at all interested in a new patch of land reclaimed or a new well found.This new field would belong to some other landlord and his profits and power would decline. Instead he raises productivity by carelessly endangering future yields. I.e. as the soils minerals are depleted he uses lime that will bring him more yields for some time but ruin the field for years to come.

In the real world "lime" stands for the harmful byproducts of growth that last longer than its short term benefits, like fracking waste, CO2 production, radioactive waste, etc. described by Gordon as the "downwind" of growth or by Herman Daly as uneconomic growth.

Source: CASSE (steadystate.org)

It is obious today, that unchecked, the growth capitalist system will not work to the benefit of mankind. Instead of heeding the warnigs of a climate collapse and investing into renewable energy, established giants in the (i.e. oil) industry intensivate production (fracking etc.) and increase the tremendous overshoot allready existing.

These big (i.e. big oil) players in the market use their considerate power to impede the development of alternative renewable energy sources. Meanwhile oils spills, toxic waste, radioactive waste, CO2 emissions etc. will bind future productivity in an ever increasing amount, denying future generations the benefits of growth or even the standard of living we have today.

Whenever a societies consumption is higher than its carrying capacity (overshoot),
 it reacts with intensivation that decreases the future carrying capacity.
(Marvin Harris,Orna Johnson, cultural anthropology)

In the end something happens that everybody thought would never happen again when the new field was reclaimed. The harvests decline and can no longer feed the grown population. Most people might still be better off as before the new well was discovered but now they are used to a higher standard of living and are getting angry, but some even might be facing starvation and get desperate.

Here the analogon ends. How the populace of the village reacts is random and we will see what the future will bring.

Montag, 22. Oktober 2012

Innovation Growth and Capitalism

Robert J. Gordon (Northwestern University) recently published this wonderful peace of science that was immediately and widely admired, discussed and then discarded. The reason why it has been discarded is obvious, Gordons point being:
“Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.”
Of course this is not acceptable to anyone in the establishment, as growth ideology has “no alternative” in politics since the days of Thatcher, Reagan and Kohl.

To understand the patterns of growth in the past 250 years, Gordon defines three Industrial revolutions in this period of seemingly endless growth:
"The analysis links periods of slow and rapid growth to the timing of the three industrial revolutions (IR’s), that is,
IR #1 (steam, railroads) from 1750 to 1830;
IR #2 (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum) from 1870 to 1900;
and IR #3 (computers, the web, mobile phones) from 1960 to present.

It provides evidence that IR #2 was more important than the others and was largely responsible for 80 years of relatively rapid productivity growth between 1890 and 1972. Once the spin-off inventions from IR #2 (airplanes, air conditioning, interstate highways) had run their course, productivity growth during 1972-96 was much slower than before. In contrast, IR #3 created only a short-lived growth revival between 1996 and 2004. Many of the original and spin-off inventions of IR #2 could happen only once – urbanization, transportation speed, the freedom of females from the drudgery of carrying tons of water per year, and the role of central heating and air conditioning in achieving a year-round constant temperature.”
This is very consistent with the arguments I have presented here in this blog in which I have applied the Ideas of Marvin Harris Cultural Materialism to understand our society and provide an outlook to our future.
The described Industrial revolutions have several things in common:
  1. All industrial revolutions have not been initialized by market forces but are the result of infrastructural investments made by “the State”. Providing the populace with access to water, electricity, sanitation, means of transportation, health care, free access to the internet are clearly in their essence of socialist and egalitarian character. I would also add, that the basis of these revolutions has been laid by government funded research and science and also needed a social revolution and the invention of the welfare state to come to pass.
  2. After the groundwork of an industrial revolution has been laid, the private sector and market mechanisms made use of it to provide the applications needed to benefit from this revolution. As households had access to water, gas and electricity the private sector could start selling them washing machines and dish washers, electrical stoves, central heating, electric light bulbs etc., freeing productivity for more and more production and thus growth.
  3. All revolutions depend on each other, take away energy and the returns of transportation or information technology will be taken away also.
  4.  When a saturation of the markets opened by a revolution has been reached (the moment everybody has a washing machine) further inventions in this market provide less growth until the market degenerates into a consumer market that rather satisfies status symbols than freeing additional productivity.
  5. The returns of each industrial revolution, meaning the amount of freed productivity, diminish with every revolution. It is very probable that no future revolution will bring us the same returns that the beginning of the age of fossil fuels has brought us.
  6. The longer the basis for the industrial revolution has been established and the markets saturated, the more the private sector gained control over the distribution of the commodities to increase their profits. As this devolution has progressed, the less the private sector has contributed to growth by providing new applications of the revolution. Today more and more people are denied the commodities that led to freeing productivity by the private sector, making the private sector itself an important reason why real growth slows in the saturated industrialized societies and worldwide.

As we can see from the above graphic, Gordon predicts growth to go on but to slow in the future.

In the near future we will need to invest more and more productivity into compensating the loss of cheap energy resources that led to this chain of industrial revolutions. Freed productivity by cheap energy will so be lost to us for a long time until we have finished compensating, if we can compensate the decrease of oil production at all.

There are no efforts under way to find a new source of cheap energy. It is very likely that growth will not only stop, once oil production declines, but we will be thrown into the greatest recession of all times.

We will also need to invest more and more into dealing with the negative effects of earlier revolutions and past growth. The effects of wasting fossil fuels will have to be faced. For this, there is no end in sight and climate change can go on to harras us for hundreds of years and bind a lot of productivity.

Dealing with these negative effects of past growth can only be achieved by a joint social effort and not by "the markets" which produced the problems we face today. Achieving the current productivity in the future without further exploitation of common ressources will require an industrial revolution itself, dealing with the climate crises another.

Benefitial innovations by "the market" will probably only deal with compensating these negative effects of past growth and not provide a new industrial revolution. These will have much less return in freed productivity, examples are energy efficiency, digitalization or automation. Most innovation though will try to cope with the ever decreasing sastisfaction of new consumer products in satuated markets by finding new excessive ways for wasteful consumption.

Economists and politicians promising endless growth do not have an answer to the arguments written here. The TINA (there is no alternative) propaganda is, of course, a lie. The assumption that only the invisible hand of the market provides the innovations we need for growth is also not only false, the neoliberal market ideology is very much opposed to real innovation.

Past growth was an interplay of investments by society and market mechanisms providing new means to free productivity based on innovations in science, social organisation and infrastructure.

Capitalism can be viewed as the part of the system that has provided individuals and companies the means to profit from the achievements of society by profiting from finding new ways of making use of these achievements or making production more efficient. As the mutual benefits of new applications of technology decline by the law of diminishing returns, capitalists seek also profits in disregard of the common good.

Today capitalism is a problem for society as profits of this interplay of society and the market accumulate in the hands of very few capitalists only. Capitalism today prohibits growth by draining ressources and productivity for wasteful production and accumulation of wealth and is not by itself able to start a new industrial revolution. Accumulated capital and power that was formed from the exploitation of achievements and ressources of society is itself wary of change as it undermines its means for profit and power.

State controlled socialism on the other side would be a problem as the benefits of this interplay for the individual and private company and thus the motivation for finding new applications are nonexistant and potential for productivity gains might not be realized. The political elite in state socialist systems is wary of change as it potentially undermines its source of wealth and power.

Corruption of the government and stagnation are the result of either of the two extreme ideologies, it seems.

This interdependence between state and markets is ignored by neoliberal economic ideology. the state is always pictured as inefficient and the private sector as the only source for innovation. Looking at Gordons analysis of growth we can only conclude that liberalisation, privatization and austerity are clearly in total opposition of what has provided us with growth in the past. It will take away freed productivity by controlling and taking away the commodities we need (water, gas, electricity, health care, education, homes). It is implemented solely for the sake of private capital gain and in disregard of the common good.

This course will inevitably lead to a new social revolution and it does so right now as many see that the chicago boys concepts are a total failure.

What social revolution the end of growth will bring us can only be guessed (the Bolivian water war could be a hint though) and I have tried to do so in this blog. I can only urge my readers to understand that endless growth is a dream and policies and ideologies that base themselves around endless growth will fail.

In short, the current policies ensure not only the end of growth but the collapse of society.