Peak Oil and Peak Capitalism - Professor Richard Wolff
Posted by nate hagens on March 28, 2009 - 10:43am
Previously, we posted one heterodox economics view of the current global crisis (ecological economics - from Herman Daly, and from Robert Costanza). Below the fold is a guest essay from Professor Richard Wolff, a Marxian economist at the University of Mass-Amherst. He recently gave a very interesting video lecture Capitalism Hits the Fan. (I wish I were as good of speaker as he - I make it through my talks only because I think of the beer at the end)
I have thought for some time that resource constraints, especially energy, would be the end of free markets as we know them. It is now clear to most that government reactions to the popping of the credit bubble have shown no master plan other than one bailout being larger and grander in scale than the unsuccessful measure/attempt that preceded it. I do not know what 'ism' will replace capitalism- but I suspect it will be some socio-political 'ism' that is as yet undefined, something broader than all the heterodox schools which if successful, will need to integrate both our biophysical and biological realities. No discipline has the 'one' answer to our energy, environmental and social problems, which is why we continue to ask and integrate key questions with new data in this forum. (My own thoughts on the importance of Prof. Wolff's graph in relation to energy, debt and society follow his essay.)
Real Wages (CPI adjusted) vs Real Productivity (GDP Deflator Adjusted) 1830-2007
-Source: Professor Richard Wolff - U Mass - Amherst
-Click to Enlarge
Peak Oil and Peak Capitalism
The concept of peak oil may apply more generally than its friends and foes realize. As we descend into US capitalism’s second major crash in 75 years (with another dozen or so “business cycle downturns” in the interval between crashes), some signs suggest we are at peak capitalism too. Private capitalism (when productive assets are owned by private individuals and groups and when markets rather than state planning dominate the distribution of resources and products) has repeatedly demonstrated a tendency to flare out into overproduction and/or asset inflation bubbles that burst with horrific social consequences. Endless reforms, restructurings, and regulations were all justified in the name not only of extricating us from a crisis but also finally preventing future crises (as Obama repeated this week). They all failed to do that.
The tendency to crisis seems unstoppable, an inherent quality of capitalism. At best, flare outs were caught before they wreaked major havoc, although usually that only postponed and aggravated that havoc. One recent case in point: the stock market crash of early 2000 was limited in its damaging social consequences (recession, etc.) by an historically unprecedented reduction of interest rates and money supply expansion by Alan Greenspan’s Federal Reserve. The resulting real estate bubble temporarily offset the effects of the stock market’s bubble bursting, but when real estate crashed a few years later, what had been deferred hit catastrophically.
Repeated failure to stop its inherent crisis tendency is beginning to tell on the system. The question increasingly insinuates itself even into discourses with a long history of denying its pertinence: has capitalism, qua system, outlived its usefulness?
Repeated state interventions to rescue private capitalism from its self-destructive crises or from the political movements of its victims yielded longer or shorter periods of state capitalism (when productive assets are owned or significantly controlled or regulated by state officials and when state planning dominates markets as mechanisms of resource and product distribution). Yet state capitalisms have not solved the system’s crisis tendencies either. That is why they have repeatedly given way to oscillations back to private capitalism (e.g. the Reagan “revolution” in the US, the end of the USSR, etc.)
Moreover, the history of FDR’s efforts to counteract the Great Depression teaches fundamental lessons about capitalism as a system that cannot forever be deferred. Since the New Deal reforms then all stopped short of transforming the structure of corporations, they left in place the corporate boards of directors and shareholders who had both the incentives and resources to evade, undermine and abolish those reforms. Evasion was their focus until the 1970s, and abolition since. Capitalism systematically organizes its key institutions of production – the corporations – such that their boards of directors, in properly performing their assigned tasks, produce crises, then undermine anti-crisis reforms, and thereby reproduce those crises
Hence, attention is slowly shifting to question the one aspect of capitalism that was never effectively challenged, let alone changed, across the last century and more: the internal organization of corporations. Their decisions about what, where, and how to produce and how to utilize profits are all made not by the mass of workers (nor by the communities they impact) but rather by a board of directors. Composed typically of 15-20 individuals, corporate boards are tiny elites responsible to the only slightly larger elites comprising corporations’ major shareholders. Each corporate board is charged by its major shareholders with maximizing profit, market share, growth, or share price. The mass of workers has to live with the results of board decisions over which they exercise next to no control. This is a position they share with the communities surrounding and dependent on those same corporations.
This capitalist organization of the corporation consistently generates investment, production, financial, marketing, and employment decisions that produce systemic instability – economic crises. Much as this bipolar system brought us to peak oil by its expansions, so its contractions have now brought us to peak capitalism. This system’s profoundly undemocratic organization of production demands radical transformation.
Suppose, as one such transformation, that workers undertook to function as their own board of directors. All weekly job descriptions would henceforth specify four days of particular production tasks and one day participating in collective decisions about what, how and where to produce and what to do with profits. Having required political autocracy to give way to democratic mechanisms, workers would then have achieved the same in relation to the economic autocracy that structures capitalist corporations. The economy and society would then evolve very differently from the capitalist pattern. If we are to redesign our interactions with nature taking account of peak oil, why not redesign our enterprise structures to take account of the history of failed efforts to contain capitalism’s crisis-producing dysfunction.
Might we consider a mutually beneficial alliance between critics of abusing our energy resources and critics of abusing our productive capabilities? How about an alliance focused on a radical, democratic, and therefore anti-capitalist reorganization of production? The point would be to make citizens and workers – those who must live with the results of what enterprises do – conjoint decision-makers focused on meeting collective needs, both productive and environmental.
Friday Mar 27, 2009
Rick Wolff
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Prof Wolff's chart was an eye-opener to me and was reason for me inviting him to do a guest post. Here is my interpretation of that chart in relation to the energy and finance discussions we have been having here of late (followed by questions)
Real wages in the US increasing every single decade from 1830 to 1970 (including during great depression), but being flat to down ever since (I am sure there are some demographic explanations). But productivity (adjusted by GDP deflator) since the 1970s due to computers, efficiencies and many other inventions have increased dramatically, and thus so have corporate profits (unless we back out costs for environmental externalities). But remember, we've been on a total fiat system since 1971. So flat real wages in the face of growing overall profits would have resulted in too large of notional wealth disparity which would have lead to social unrest/chaos. There had to be a relief valve, giving the guise that resource limits combined with concentration of wealth had not shut the door on Joe Sixpack. Enter leverage, easy credit, home-equity loans etc.The average person wasn't earning any more, but they were keeping up in positional goods consumption race because of access to debt. Under an fiat system acting only as marker for real capital, a large social wealth transfer (denominated in dollars) was thus camouflaged by leverage and borrowing. As the concentration of wealth got higher, new rules had to be enacted to allow the lower quartiles of social denizens to remain above poverty - low-doc/no-doc loans, further monetary easing, repeal of Glass-Steagal so higher leverage available to wall street, 95%+ LTV mortgages, etc.
Said differently, we have been living well beyond our means not since Peak Oil, but for almost 40 years (and less beyond for longer), - the difference has been made up by borrowing from the future, borrowing from the environment, borrowing from other social classes, and most worrisome, borrowing from thin air.
It is telling that exponential growth in energy production per capita peaked in 1970 (Duncan), US oil peaked in 1970, natural resource backed currency stopped in 1971 and real wages peaked in 1974.
This is all linked. More and more I am thinking the largest aspect of upcoming energy resource constraints is going to be the social inequality that results. The 'free market' will not work if 80-90% of people are broke, and unable to afford the price that energy and other natural resources companies require to make a profit. I suspect that the next round of GINI coefficient and wealth disparity calculations will show a moonshot towards the right tail. How to keep social stability in this environment will be a herculean task, and likely require new institutions. Though I personally see some socialist type safety nets, I ultimately don't find Prof Wolff's suggestion plausible.
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My questions for Prof Wolffe (or anyone else):
1)My understanding of Marxian economics is its centering around a labor theory of value, - the value of a commodity is the socially required labor time invested in it. Under capitalism, the gap between the value a worker produces and the real wage is surplus value. Marx also highlighted out that markets tend to make people highly aware of commodities themselves, while obscuring the social relationships and labor they represent. This sounds like it ignores, but could somehow be integrated with, an energy theory of value (a la technocrats) with the distribution, scale and externality questions addressed by ecological economists? In any case, when one considers that the quantity and quality of joules in a barrel of oil cannot easily be replaced by any amount of human labor - I think there is a disconnect here.
2) won't our biological propensity to move up the mating ladder be present in equal measure for those who rise to top in the 'state' in much the same way as those with large bank accounts have now?
3) Unless the new board of directors of corporations are ecologists/systems analysts, we aren't solving any problem but reducing inequality, etc. Does that automatically assure less resource/energy throughput? Could it result in the opposite? I.e. the cost of reducing inequality is FASTER energy and environmental descent?
4)Won't a given population ALWAYS have a pecking order, and those below the fulcrum will advocate change and those above it will advocate status quo - how would a move towards socialism change the satisficing of all people rather than just be a temporary flip in which side of the teeter totter each of us resides?
5)Isn't profit itself, limited by and defined by our natural capital, irrespective of how it is distributed? How would 'board of directors of workers' change this underlying fact?
I think the notion that wealth disparity necessarily leads to social unrest is mistaken. Can you substantiate it?
Surely you know it has been bigger in other times and places. I also don't know that there's much evidence that the wave of political strikes, mutinies and revolutions in the early 20th century was driven by wealth disparities considering that these events took place practically simultaneously in very different countries. The same can be said about the agitation in the late sixties and the seventies I guess.
I also don't know that widespread indebtedness has actually improved the livelihoods of the lower quartile.
My guess (which might be very wrong) is that it enabled real estate speculation which primarily benefited the middle quartiles.
In my thinking, subprime and payday lending was just the top of the iceberg, and the rates have always factored in a significant default rate.
Finally, I don't know how you figure it's possible to borrow or to live beyond one's means *collectively*. With respect to the environment, finite resources and such, sure... but you were apparently making a much broader point.
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1) About the labor theory of value: so far as I can tell, you're right. The assumption is that the price of commodities reflects the cost of extraction which is true enough in general but it ignores "rent" or the extra profits that low-cost producers make because commodities are priced at the margin. I think marxian theory works better if you ignore money and only consider labor values.
2 + 4) A pecking order doesn't have to translate into large disparities in material consumption. I certainly wouldn't expect prestige or the "mating ladder" to disappear...
3) I think that reducing inequalities is a prerequisite for a halfway sustainable humane society. This is because I expect it would translate over the long haul into less of a rat race, less of an emphasis on status, careers and money, closer-knit communities and such.
Energy use wouldn't increase as long as average consumption is not increased... which would imply lower material living standards for a lot of people.
5) I'm not sure I get your point but profits are not strictly required under socialism. If people have both needs and capital, they can theoretically invest collectively it in businesses that would fulfill their needs without a profit expectation. How would this work in practice though? Junk that people have no real need for wouldn't be produced at least.
I've been thinking about this. Here is a guess. In a world without fractional reserve, leverage or debt, but just 100% reserve requirements and pay cash for everything, etc. (even under fiat), the spigot of oil/gas production would almost by definition been built out slower. A)on the supply side - people couldn't have borrowed as much money to build rigs, equipment, etc. and B)on the demand side, we wouldn't have 'grown' so fast to demand more energy. The physical constraints still existed, but we, as a culture/species, found a way to maximize energy/per unit time as much as our system could handle. Without debt/leverage of last 40 years, I am guessing we would still be on upswing and just be passing 60mbpd or such. It's a guess, but I think the belief that dollars (and leverage upon them) were real accelerated resource depletion (more jobs, higher velocity of money, higher demand, etc.)
Drops in resource per capita have been a major reason of historic violence and war in our species. Sorry can't post any links now because I'm too busy - But my main point was that there exists the perception of reasonable resource acess, that is illusory once debt and cheap energy are backed out - so for many, the disappearance of this illusion will mean REAL drops in resource consumption, while some smaller % is still consuming...
Debt is necessary for the economic system we live in so taking it away without changing anything else would result in a huge depression with very low consumption. I get that... but I thought you had something less trivial in mind. I guess I just don't get your point.
As to drops in resource per capita and wars, it sounds plausible.
It looks like there's been a misunderstanding. I was addressing something else: inequality and social unrest... these are very different things. The counterfactual I was thinking about was "~1960 leverage with supergiant oil fields on line and such", not "no debt and expensive energy".
Inequality and social unrest N=1
I know of people who are considering a tax revolt. Why pay taxes when the system is so corrupt and bailouts are going to the already uber rich?
Then I hear rumors about covert U.S. domestic intelligence fomenting fears of impending gang violence precisely to counter the tax revolt sentiment. After all, even the good shrinking middle class want law and order and know they need to pay for it via taxes.
I have no idea how widespread the revolt sentiments are or whether a domestic psy ops is going on, but simply find these discussions symptomatic of the stress of the time.
Jason-
Just live so simply, you aren't required by the system to pay income taxes.
Works for me, and no revolt required!
My wife has a serious job so this is not an option for my family, but I get your point. I am reading a book called "Radical Simplicity" and his goal was an income below taxable levels. Pretty cool. I will probably do a radio show and possible post here about it (then again, it is April and I am farming).
I look foreword to the show.
But, I have heard the rumblings of the bewildered herd, and many are agitated and need a place to exhibit outrage. Taxes are easily understood, and fit in with our stories of how things work.
I know of people who are considering a tax revolt.
"No taxation without representation"...? Now, where have I heard that before? ;-)
Nate,
If the US was a completely closed economy this graph would have relevance, its not, wages of those on $1 a day have increased over last 40 years, at expense of US workers wages being flat.
Workers have non-wage income, bonds, share dividends and rents on property, and households now often have a second income. There is also the underground economy income, not reported in official figures. Households are smaller so more wealth per person less sharing with 4 children.
Retired population becoming a larger portion of economy, but no salary income.
For all the household borrowing someone held bonds or had $ on deposit( until a month ago when US started Quantitative easing).
Very true and that will dampen the increase in inequality suggested by that graph, as would your other points. It is very hard pinning down wealth inequality numbers. Ed Wolf at NYU has made a career of crunching them out but I haven't seen anything recent - the proof will be in the pudding circa Q4 2009, Q1 2010 when we see what the decile net worth rankings are in USA. Juliet Schor in Overspent American wrote that 50% of population would be broke within 1 month if they lost their jobs - and that book is several years old. I would hypothesize that when this debt unwind ends (if it isn't replaced by hyperinflation end game), that 70%+ of americans will have negative net worth. We are probably above 50% already if you back out illiquid assets (meaning they have positive net worths, but only if they liquidated houses/cars/stereos, etc.)
That above graph isn't the holy grail, but suggests to me that debt replaced wage growth to some extent - whether 10% or 90% I don't know. Bigger picture capitalism has been an effective system at concentrating wealth and accelerating resource depletion. That was how it was implicitly designed, (though Adam Smith cautioned in Moral Sentiments that human envy and a tendency toward compulsions, if left unchecked, could undermine the empathic social relationships that would be essential to his economic model and the successful long term operation of free markets.)
Actually Marx devoted a good many pages on this. The whole third volume of the Capital (unfortunately unread by a lot of Marxists) is concerned with the transformation of surplus value into profit, the generation of average profit, interest, and the transformation of surplus value into rents. In Chapter 46 he also has an unfortunately too short discussion of "rent in mining". Marx surely underestimated the importance of energy, and therefore "energy rent" to modern industrial development - that is, that oil could become so important, and so integrated on a worldwide scale, that it could generate such enormous rents as it does (compared to the more localized energy use in his time). But this point is very important and sorely underappreciated by Marxists up to this day.
You can get interesting results if you do it the other way round and "ignore labour values and only consider money", like Shimshon Bichler and Jonathan Nitzan do. For an example, look at this graph from their article Cheap Wars:
They also argued (in their article called It's All About Oil) that the Iraq war was fought to raise the price of oil.
I'll readily confess I failed to read much of Capital. Then again, I'm no marxist.
Since you seem to be somewhat of an authority about this, can you confirm that Marx ignores "rent" *as far as the theory of value is concerned*? Saying that parasites extract "rent" from the "profit pool" is something else than saying that the value of certain commodities is partly derived from the scarcity of the resource, just like "rent". It's not merely an academic distinction: resources are not likely to be conserved if they're not thought to be intrinsically valuable.
I don't know what the correlation between the price of oil and oil industry profits is supposed to show. It's hardly surprising.
I don't think I am much of an authority, but yes, rent is ignored insofar as it comes into play only much later, when lots of people (some Marxists included) have already stopped reading.
What you write about the value of commodities and them being valuable in themselves is exactly what Marx is criticising in the very first chapter of the first volume of Capital: One needs to distinguish first and foremost between "use value" and "exchange value" (and then also between exchange value and price).
The only value that commodities have in themselves is use value (the physical properties that make them useful to us), but they have this use value independent of whether they are commodities or not - a loaf of bread (ideally) is the same, whether I made it only for my own consumption or for selling on the market.
On the other hand, commodities have exchange value (or for short just "value") only because they are commodities, and they get their value in the process of exchange against other commodities; therefore, their individual value is relative to all other commodities. Gold (or possibly any other commodity) is then attributed a special place in this relation of values because it is used as a "universal equivalent", that is: one central commodity against which all other commodities are valued, and this brings with it a lot of confusion, which is only made worse when, later, money supersedes gold (or what ever commodity was used) as the universal equivalent, seemingly taking on a life of its own, making possible the creation of capital ...
But I really can't explain even the first chapter (and especially not the first chapter) of Capital in some short paragraphs.
If you look closely, the graph does not state a correlation between oil price and absolute profits of the oil industry, but between oil price and relative profits of the oil industry, which means that when the oil price is high, the oil industry gets higher rents, compared with the rest of the economy and independent of how the rest of the economy is doing, which I think is at least a little bit surprising, because the inverse is also true: low oil price means low rent, irrespective of the general state of the economy.
I've read much of the first volume and I think I understand what Marx is trying to say in this particular instance... but I don't think it's a useful way to think about finite resources.
As to the graph, you're right: I misread it.
But you might be misreading it as well: I don't know what data it uses exactly but I guess it's about the profits of companies listed on some exchanges. So the comparison is not with the rest of the economy (listed companies aren't representative). Also, IOC profits comprise more than their rent. Finally, the IOC's rent is not representative of the gross oil rent.
That the correlation is so good over a long period is indeed surprising. But I still don't see why you say it's remarkable there is some correlation. Are you saying it supports Marx's notions?
Well I think it is useful for critiques of Capitalism and as a starting point for thinking about overcoming it (note that Capital's subtitle is Critique of Political Economy).
About the graph: I was just saying that the kinds of correlations one would postulate based on Marx' theories can also be had without the Law of Value. Ditching the Law of Value (which is what Bichler and Nitzan do) makes you a non-Marxist in the eyes of most Marxists.
But, yes, what this graph really means is becoming less and less clear to me. As much as I could gather it is based on some worldwide index of listed companies, so it describes a correlation between a subset of economic actors, and yes, "rent" is wrong, it's just profits pure and simple, but nevertheless an indicator of accumulation.
The first chapter of the first volume of Capital is where the rubber meets the road. If you can get through the first three chapters, the rest is a bobsled ride.
Volume 3 is very interesting, but incomplete.
Ricardo and Rent, are still relevant, and have held up for all these years.
If you actually want to understand what Marx was saying, here is the best place to start
Aren't you really just expanding the scope or maybe narrowing. As you expand into one area of the economy you get a similar set of constraints as at the macro level. The addition for a particular industry is that economies of scale replace fiat currency. Wealth is generated in a sense out of thin air via the concentration effect of economies of scale. When a pyramid scheme runs out of steam if you will you build a bigger pyramid. I think one of the big reasons that the fiat money game lasted so long is we could for a long time build bigger companies that could take on and handle more debt and also extend it to consumers. Next this introduces more irrelevant middle layers of workers that act as marginal producers but primarily consumers. This is our putative middle class and its simply an artifact of the creation of global companies with balance sheets larger than most countries.
When you look at the oil industry one of the largest or any resource extraction industry with a small number of key players they have the additional economy of exploiting resources at a much lower cost basis vs smaller companies. Indeed the energy and transportation industries where the first breed of global company.
What your talking about is the special place these companies hold in the world economy they are effectively given three powerful advantages.
1.) Economy of scale
2.) Hight profitability and thus access to effectively infinite amounts of capitol as long as growth is present.
3.) Access to a significant amount of legacy or cheap production sources.
In many ways these companies act and the seed or nuclease if you will for the formation of similar global customers. Whats the use of a vast oil conglomerate if it can't sell to someone that can pay billions ? This need not be direct but indirect meta globals such as the home auto and road industries. And of course this opens up the creation of a whole secondary pyramid on the financial services side. The profits of the massive corporations at as a sort of bedrock for the fiat debt expansion.
So once you make economies of scale a equivalent force and recognize that they do work esp for resource companies then you can see that you have three equal causes for the formation of our financial pyramid.
1.) Economies of scale and business consolidation
2.) Expansion of the energy supply but with most of the wealth concentrated back into the energy industry
3.) Fiat currencies and debt to fund the ever more massive industries and ensure a steady supply of ever more indebted customers. In effect the company store writ large.
The recessions can be seen as consolidation points and its obvious that after every recession new and ever larger global corporations where created esp in the banking industry.
Thus periodic fairly weak recession acted to reinvigorate the beast allow a bit of churn to cause the creation of even larger global pyramids and its off to the races again.
So the critical factor in the success of our ponzi scheme way of life was the merging of smaller pyramids as they became unstable into ever larger ones and in the process defaulting on a portion of the debt. With the method of ponzi scheme mergers ponzi schemes could last for a very very long time.
Think about Madoff's scheme if he had hooked up with AIG to help fund them Maddoffs ponzi scheme could easily have been buried in a ever larger scheme. His problem was not that his scheme failed but that he did not merge it soon enough with a like minded partner.
You can also see that its critical for some of the debt to be either defaulted on or renegotiated via bankruptcy or issuance of junk bonds or some other method. And on the larger scale this is recessionary.
So not only have we been playing the ponzi scheme we have played the ever grander second order game of ponzi where you merge ponzi schemes into and ever larger one.
Until of course you get institutions that are to big to fail.
I think I've heard something about this recently :)
Nate,
I think you are using somewhat confusing terminology in talking about 'living beyond our means'. It is not possible to borrow from thin air. You cannot build houses, factories or oil wells with money. You build such things with production resources (e.g. labor, fuel, capital equipment etc). If we built such things we must have had the necessary resources. Collectively we cannot live beyond our means except in the sense of building infrastructure which we cannot maintain in the long term. This sort of living beyond ones means is quite possible even under an extremely conservative financial regime.
At the individual level, of course, one can live beyond ones means by contracting huge debts. And you are quite right that depressed wages will tend to increase consumer debt. An inherent contradiction exists in capitalists trying to make money by suppressing wages. You cannot make money unless you sell stuff. Depressing wages depresses demand, so that it becomes necessary to prop up demand by extending credit to consumers. So the middle class has effective possession of great wealth which is formally owed to someone else. This greatly unequal distribution of formal wealth creates great financial instability, but I am not convinced that it does anything to speed up resource consumption. If wages had kept pace with productivity then a lot more of our investment capital would have come from the middle class, but it is far from clear that resource extraction would have slowed down.
Roger, what about "living beyond" our collective means in terms of ecological debt, e.g., resource draw down and unsustainable pollution? That's how I think about it ultimately. I am not sure your "building infrastructure which we cannot maintain in the long term" captures ecological debt entirely, though perhaps it does?
Jason,
Resource draw down, and resource destruction (e.g. loss of biodiversity) are definitely part of my conception of unsustainable infrastructure. If honey bees go extinct our food producing infrastructure will take a gigantic hit.
You raise some excellent points. If we examine inter-group behavior, like between nations, a group can certainly "live beyond its means." Here's a graph of U.S. trade deficit, and as one can see, the U.S. started "living beyond its means" beginning in the early 1980s, the situation greatly deteriorating ever since:
http://www.data360.org/dsg.aspx?Data_Set_Group_Id=91
That's why I think Herman Daly's (linked above in original post) comments about capital flows are so important.
However, if we look at intra-group behavior, the picture gets much fuzzier, as this comment of yours acknowledges:
To illustrate the point, take the following three families, all of which have the same income of $45,000 per year (approx. the U.S. national median):
Family A:
Has a $150,000 mortgage
Has $20,000 in consumer debt
Pays $9,000 per year in mortgage interest
Pays $4,000 per year in interest on consumer debt
Saves no money
Family B:
Has no mortgage
Has no consumer debt
Has no savings
Saves no money
Family C:
Has no mortgage
Has no consumer debt
Has $170,000 in savings
Saves $9,000 per year
So which family consumes more natural resources? I would say Family B. But Family B lives much more "within its means" than Family A.
How do you get to that conclusion? For one thing, I don't think you provide enough data. If A and C's expenses are way beyond what the $45k income support, there might be no limit on what they consume. Assuming it's not a typical pathological American income/expense level - and that they all average out at $45k per year expense, then one could argue they are the same long term.
However, I'm not so sure about the debt and savings. Both of those represent claims on the future tied to present activies. A has a house AND a mortgage. He has to keep grinding up natural resources to pay for the mortage, even though natural resources adequate to build the home were already ground up. [I'm not sure it's fair to tease that apart so much, but imagine that B's family cut their wood and built their own house, though that screws around with the $45k income.] And C has accumulated 4 years of income, perhaps by cutting down some virgin old growth forest. When he cashes that in and spends it, then someone else has to go out and overfish some depleted species.
OTOH, if he burned that money, then he might avoid the destruction of that forest. But better never to have earned the money in the first place. That's the whole fallacy of turning bad money to good - there is no amount of good that can be done by bad money; better not to have generated the funds in the first place. [Thermodynamics.]
The problem with the savings C has accumulated is the same as with pensions [or large cash amounts of any kind]. It's possible C is causing less damage than B - if expenses are equal - but when he spends that money he will catch up.
cfm in Gray, ME
Roger
Imagine that 30 years ago (circa 1975), before any average blogger or corporate executive really understood the implications that financial capital is just an abstract marker for natural capital, the following scenario: hedge funds could leverage 30 times, people could buy houses for no money down, anyone could get a mortgage and then use the equity from their house to buy 'other stuff', and that instead of US debt only being 5 trillion in 1975 it was the 60 trillion shown in the above graph, everything else being equal, and that Europe and other OECD nations had similar leverage levels in their own currencies. (i.e. that the debt orgy took place 20 years earlier). There would have been inflation, probably asset price inflation, but the amount of workers, projects being approved, airports being built, factories working over time, iron mines and workers expanding creating more steel, etc. all because everyone was 'richer' in the terms their generation had defined as rich (dollars). In this scenario, the natural resource endowment on the planet would not have changed, but the social system extant, would have drilled more holes and sucked out more resources QUICKER because the difference between marker wealth (dollars) and real wealth (oil and natural resources) would have become larger.
Yes there are physical limits irrespective of whether we have $1 trillion invested in oil or $1 quadrillion, but in the short run (<20 years), more abstract wealth rippling through the system would have thrown more ambition towards resource extraction (assuming technology kept pace).
What would our max oil production have been today without leverage? I think it is an impossible question to answer - but I am confident it would be less than 86mbpd.
Yes you can. For now. Because money is primary motivator for social ambition and it collects, concentrates and accelerates use of yet-to-be found resources
You're saying that consuming non-renewables quickly is "living beyond one's means" in a sense.
OK, but then so is consuming non-renewables slowly. So, again, I don't see the relationship with debt, especially since the same amount of "marker wealth" could just as well have been printed by the governments of the world without recourse to debt.
But it wasn't, at least until recently. That is my point.
Well not quite it wasn't but we did have a significant number of people that had lived through the Great Depression either as adults or later children. Also for a while you had the direct aftermath of WWII to contend with the world could effectively use anything produced then some.
And of course the US was still growing its own oil supplies along with overseas possessions.
And of course you had the gold standard.
Overall even for some years after we moved to fiat currencies you really had a number of factors still in play from the last major economic collapse esp if you reasonably assume it went through 1950 before WWII was at least basically recovered from. The experience of this generation acted is a real damper on attempts to blow up the economy again. In fact the real damage was only done once the baby boomer generation started taking on power. Not only was it a significant population increase but also this was the first generation to generally live through almost continuous growth.
Since the intrinsic problem is lifestyle don't underestimate the human factors.
Money is a symbolic right to obtain outputs from our economic infrastructure. People who have lots of money (or people who can create it) have the right to direct economic outputs to the ends which they desire. However, it is the actual production resources (labor, machinery, fuel, etc.) which produce value. Whether the directing of such resources is done by hedge fund managers leveraged to their eyeballs or by gold backed deposits in banks with 100% reserve requirements, the goal is still to get as high a return on investment as possible. If the returns are insufficient then the enterprise in question will crash and burn. After the oil price shocks of the seventies it was inevitable that oil production would look like an attractive opportunity to anyone who had money to invest.
The ability of a relatively small group of people to create financial leverage skews the benefits of productivity growth towards that small group, but productivity growth has been the constant and unvarying goal of capitalism for centuries. In the years between the end of WWII and Nixon's trashing of the Bretton Woods agreements the U.S. economy was growing vigorously. Car ownership was expanding. Airline travel was expanding. Suburbia was expanding. The ownership of home appliances was expanding. The military industrial complex was expanding. Do you have any evidence that the average percentage increase of resource consumption was lower in those years than it has been since?
I am not disputing that capitalism is hell bent on producing current wealth without much regard for future wealth. I am just doubting that excessive speculation does anything to speed up the process, and may in fact slow it down by producing financial disruptions such as the great depression and the current financial crisis.
Nate,
Good questions.
Be aware that the labor theory of value was not Marx's -- Marx attributes it (if I recall correctly) to Ricardo. Marx's contribution was his theory of surplus value. Mainstream economics has long since abandoned the labor theory of value precisely because it leads straight to Marx's theory of surplus value.
Despite some obvious similarities between labor and energy, I don't think it leads to an energy theory of value. Energy requires labor to access it, that's how it acquires value. Air (so far) has had no value, water is only now acquiring value, etc. The issue is the labor needed acquire them. Were energy freely accessible, oil bubbling up out of the ground around us, it would have no value even though it would still have use, just as does air.
Questions 2-5. Marxists are like Catholics -- no two agree, not even with the Pope sometimes (Marx). So I go in a different direction from Prof. Wolff on these issues even though I am, among other things, a Marxist. Marxism was formulated during the ascendancy of industrialism (and capitalism). That ascendancy is now over, and we are in decline. This has huge implications for what our goals must be. It is no long a matter of simply fighting for power against capital in whatever way -- it is a matter of adapting to an entirely new reality, the decline and eventual end of industrialism, and a radical scaling back of global trade and interchange. It is no longer a matter of only striving for a more just society, for some form of socialism or democratic capitalism, but a matter of fighting for survival.
This means a return to the soil, but in a new way incorporating some of the things hinted at in the BBC video Gali posted the other day, dense communities, locally and regionally as self-sufficient as possible. There will be less and less possibilty of a return to the factories and offices for the millions that are now being thrown out of work. Where will they go? Where can they go? How can they eat? Only in one way.
The problem with capitalism is that it cannot deal with this. It can only think to grow its way out of this. There is no talk at all of the scope of the problems that we face. Therefore it will oppose letting millions of people out of the market system and letting them seek survival in the only way possible. It will keep them in tents or camps or on the dole, let them rot, but it will not let them escape the market system. It will oppose this, not help them.
None of this is to say that the continued struggle for equality, a safety net, for control where possible is not only justified -- it is necessary. But, even if the Soviet experiment had succeeded, no gulags, free speech and democratic, no thieving apparatchiki, it would still have also confronted a world of diminishing resources and a degraded ecology, and the prospect of declining industrialism, no matter that it was eqalitarian. It too would have stopped working. Marx didn't forsee this.
It's interesting to read and think about what went wrong with the various socialist experiments -- and believe me I have in the past spent a lot of time doing so. But to a certain extent it is now irrelevant. History took a turn we didn't anticipate. Who thought we'd wake up one day and realize -- hey, this isn't going to last? (Well, some foresaw it in the 70s, but good times continued and we all forgot about it.) The key thing now is survival, and the issues raised above. The obstacle to survival is capitalism, but the issue is not primarily exploitation and inequality, though real enough, but it's inablity to allow, much less guide us in the direction we must go to survive.
One can then ask, ok, dense, agricultural, mostly self-sufficient shared-facility communities -- what then? Who's boss? I say whatever works, it's a matter for experiment. But what's necessary is to allow those experiments to take place. What is true is that people will need to be deeply involved in all aspects of their own and collective survival in a way that we are not today -- or yesterday, when the system was still working.
P.S. I do NOT advocate dropping all other struggles and issues in the meantime. I simply say that we must get going in this direction ASAP, yesterday.
Edit: PPS - I don't even get into the issue that capitalism has worked, more or less, for only a billion or two of us. The rest have been left in abysmal poverty, a poverty we might have the opportunity to examine closer up in times coming.
Ricardo had a predecessor:
Both Ricardo and Marx went well beyond Smith in regard to commodity and rent.
What Smith did get right was human nature.
You talk as if capitalism (and the "market system") really existed and could act upon the world, as a mystical force of history or something.
It's people or institutions who think, allow, refuse or guide. Yet there's no Mr. Capitalism or any department of capitalism.
So who's denying us a future? Who's failing to guide us? Who's even supposed to guide us?
In short, I don't understand how, concretely, capitalism or the "market system" is going to be the sort of obstacle you're talking about. Therefore I can't do anything about it.
Excellent comments, Dave. My thoughts run very similarly to this.
Re your question ("One can then ask, ok, dense, agricultural, mostly self-sufficient shared-facility communities -- what then?"): The traditional answer is feudalism.
Someone else said up-comment that a post-capitalist society will have to be fairer. Not true. The long-lived civilisations -- ancient Egypt and China being two examples -- were feudal in form. They were perhaps fairer in the sense that their elites were a smaller proportion of the population, but that was the only way they were "fairer". These are the best models we have for a sustainable post-capitalist civilization (Which isn't to say I'm happy with the prospect).
feudal could be fair, just not equal.
Perhaps I was thinking "consistent" when I said fair -- similar standards and methods of justice from place to place, similar taxation by the local elite in each locality, and so on.
Yes, that's the question I ask. "What is fair and who will decide?" A feudal system could be fair, I guess, maybe as easily as a capitalistic system can be regulated [not to put words in Prof. Wolff's mouth]. Bear in mind, that we talking about throwing out the whole Enlightenment. Not just the economic system, but the whole culture and society changes. [It strikes me that's where Jim Kunstler was going in "World Made By Hand". He has the feudal lord and the oracle.] In other words, if material stuff isn't the end-all of our system, then we get into non-material.
A fair feudal system. That's essentially warlords, global guerrillas and the anarcho-syndicalist peasants in the Monty Python skit. "What knight lives in that castle. More seriously, the Zapatistas, Hamas, the narco states, etc....
cfm in Gray, ME
I think that because of the requirement for a much more skillful and science based form of agriculture, a new form of labor and therefore organization will be required. It won't be possible to restore feudalism because we will not have the soil fertility and the natural resources that were still abundant then. I think the advantage will go to those communities which are able to most fully unleash the skills of their inhabitants in dealing with and restoring a much impoverished ecology. I do not think that the overhead of an elite will be affordable any more. All this could be wishful thinking, I admit. But I don't see that it's impossible.
Well, I thought I might stray from EuroTrib for a while for such a tasty morsel....
My take is that we reached a point of Peak Credit in mid 2007 when the productive economy was no longer able to meet the financial claims piled upon it.
These financial claims - which Marx and others term Finance Capital - consist of the legal protocols of Debt (ie interest-bearing credit created by credit institutions aka Banks) and Equity (ie shares in the Joint Stock Limited Liability Corporation).
These combine as the twin drivers of economic growth:
(a) through the mathematics of compound interest on money created as debt; and
(b) the profit motive - which was first codified through the creation of double entry book-keeping around the end of the 13th century; supercharged with the advent of the Joint Stock Company around 1600, and turbocharged with the advent of limited liability in the 1850's.
I think that the anthropocentric (ie the Sun of Capital goes around the Earth of Labour) assumption of conventional, Marxist and other Economics has been adopted because it is convenient for those in power. The reason it is convenient is that it justifies the taxation of Labour rather than Capital.
There are heterodox splinters of Economics such as Binary Economics which assume that in fact Capital is independently productive of Labour. When a factory employing 100 people is automated through capital investment, then the assumption of conventional economics is that the guy who switches the factory on and off is almost infinitely productive. Complete bollocks of course. But it's bollocks which suits the people who own the factory.
I go further than Kelso's Binary Economics in that I believe that it is the RELATIONSHIP between Capital and Labour which is productive ie it's all relative.
But more than that, I think we need to look again at what exactly we mean by "Capital".
Mason Gaffney's book "The Corruption of Economics" documented how Economics was almost literally rewritten and redefined to airbrush from history not just a man - Henry George - but his idea of the "Single Tax". George took the view that land is a Commons and that those who have exclusive use of it should compensate those they exclude, through what he called the "Single tax" on land rental values.
But, first by conflating Land with Capital, and then through the adoption of the assumption of Labour Value, those who have the privileges, endowed the Universities,and owned the media, ensured that George and his ideas were first discredited and then forgotten, and also ensured that their wealth remained largely untaxed. So, with the aid of leverage, wealth has gradually become concentrated in fewer and fewer hands during a long recession disguised by debt secured against inflating land prices.
Both of the presentations below set out how IMHO the Credit Crunch came to a head, and the first one sets out an alternative to secured debt for property financing
http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-cre...
while the second takes a look at energy financing
http://www.slideshare.net/ChrisJCook/financing-energybeyond-peak-credit-...
I believe that the solution lies in the direct connections of "Peer to Peer Financing" combined with simple but radical partnership-based agrements/protocols which enable us to monetise value in new ways.
The Carnegie Institute recently published this article of mine on the subject
http://www.policyinnovations.org/ideas/innovations/data/000085
I believe that the mechanism which will enable a transition from carbon-based energy to renewables is the adoption of an "Energy Standard", combined with the unitisation (ie the issue by producers of units redeemable in energy) of energy, and a networked International Energy Clearing Union.
The result would essentially be energy accounting, as advocated by the Technocrats, of whom Hubbert was of course one. But note here that I do not believe, as I think the Technocrats do - that all value comes from energy - far from it.
While transactions may well be denominated in energy through the use of an energy standard, a very large part of the value in circulation will be the value of land/location use. Some two thirds of the money created is in fact credit created by banks and secured against land/location. The rest of the value in circulation is essentially based upon Knowledge, whether it be our accumulated skills and experience (which dies with us) or our objectified ideas - the "Intellectual Property" which lives on after we die, but which nevertheless has a value in use which may be exchanged.
In summary, I believe that the current system is finished, because even though it is possible to create an infinite amount of credit to replace that destroyed as asset prices collapse, the problem is not a shortage of credit, but rather a shortage of the creditworthy.
So no monetary solution can work IMHO and in fact we must look to systemic fiscal and monetary reform. I think that the reforms necessary lie in rebasing the monetary system upon the value of location, energy and knowledge, and to rebase the fiscal system through taxes on the privilege of the exclusive use of these commons:
(a) a Location Benefit Levy - or tax on land rental value
(b) a Carbon levy - ie a carbon tax;
(c) a Limited Liability levy - a tax on the privilege of limited liability, and also capturing the use value of the knowledge owned by Corporations, through a levy on GROSS corporate revenues.
Treasuries would then be in a position to issue redeemable credits backed not by income taxes but by simple and fair taxes on the exclusive use of Commons.
I won't hold by breath for this, but rather work to implement the Peer to Peer solutions which, when implemented within partnership frameworks are, I believe, capable of achieving a new synthesis of Public and Private which will incorporate the principles underpinning such reform
I hope all that makes sense, and adds to the debate.
I've argued that this is effectively what is going on right now. In general you need not focus on energy but a generalized asset backed currency. In a sense a mortgage is money created out of thin air but then attached or backed by a real object a house. Thus all mortgages have some value because that are a claims to the title of a real resource.
Now this value could well be negative and the exact amount of real money i.e money backed by and asset that has been created varies. Overtime of course as the loan is paid down not only is the loan itself to some extent money but also the interest is "real" money.
If the notational amount of outstanding loans increases and the LTV ratio decreases the total amount of real money decreases esp in the distressed market that would result if you suddenly had a sharp increase in defaults.
Now I argue that the people in power recognize that at this point esp if resources are constrained that they have three basic choices that can be made.
1.) Simple default and restart.
2.) HyperInflation
3.) Return to some sort of asset backed currency i.e something like the gold standard.
What you outline was a special case of and asset backed currency in the general case the currency would be backed by a wide range of assets from energy to land to factories. In a very real sense our current currency is partially and asset backed currency.
Of the three choices door number 3 represents the arguably best approach. Its I'd argue the one we seemed to have come to a consensus on in posts on the oildrum. And its similar in spirit to the Sharia laws which under the covers are effectively an asset backed scheme.
However this does not mean that it need be implemented in a fair matter. The fact its the correct solution says nothing about how to transform our current financial system into and asset backed one which can create wealth in a resource constrained world. Looking back in the past although gold was the marker if you will for currencies for thousands of years this gold was itself backed by title to land and dwellings and factories so the old gold standard was itself and asset backed currency gold just worked as a store of value before investment in some other asset or in the case of commodities a way to recycle wealth.
In any case my argument is simple our banking system recognizes that at the minimum that have to significantly increase the amount of assets backing the outstanding debt and if peak oil is real then they would need to move to a 100% asset backed currency and no fractional banking.
As far as I can tell they are doing this and the game is fairly simple the assets are sold to the Government at inflated prices then those with any value are bought back at pennies on the dollar. Eventually of course the banking system effectively owns most of the assets in America that had a debt associated with them and have any nominal value. Thus not only is the banking system recapitalized but they own the assets. Eventually they will have to deal with the fact that the US Government has the power to seize assets and just like in the past ages of asset based banking the power of the government to seize assets has been problematic. However having saddled the Government with massive debt they have positioned themselves well to ensure that at some point the Government relinquishes the right to seize assets.
The next big problem is of course that most of the fiat currencies are themselves tightly tied to Government Debt although the banking system has manage for the most part to gain a lot of freedom. The other half of the problem is of course to split the fiat currencies from the debt held by the US and other Government denominated in these currencies. They have no choice but to set things up that a default by any government will not collapse the currency again this goes a long way to taking the power of eminent domain away from the governments.
Eventually of course you would simply create a new fiat currency not encumbered by government control and revalue the debts and assets and this new currency.
Via this process the banking system now has converted itself into one thats a asset backed system and even more important they will probably have managed to take over imminent domain from the governments.
If peak oil is real then this asset backed currency would be working in a environment of declining wealth creation but thats ok since they can now fully control interest rates and maintain a fairly steady cash flow even if the assets themselves deflate in value. Indeed asset deflation becomes far less important. As far as commodities go I'm assuming that they will dramatically increase in cost but this money eventually cycles back through the banking system so intrinsically expensive commodities are not in and of themselves a huge issue.
To continue to make money of course the one place where you have room to cut is wages given the population levels real wages can be cut till they are effectively slave wages indeed there is no reason that they cannot offer only food and primitive living as wages for a lot of the work force.
So the right answer can readily be implemented in such a way that most people will fail to see the difference between 3 and 1 and 2.
And as far as I can tell this seems to be the solution that has been chosen by the banking system.
The audio rip of Prof Wolff's lecture is available here:
http://www.mininova.org/tor/2424775
This is the audio track in mp3 format of the video lecture. Size about 23MB.
Nate, you could just as well have invited an "Intelligent Design" guy talking about how "evolutionism has hit the fan", mentioning peak oil (and perhaps "abiotic origin") once or twice only to try to justify his presence here. It can only serve to give TOD pariah status.
I'm probably going to get blasted for not substantating my critique or proving my claims, but I don't care.
1. This guys graph over productivity versus wage is simply misleading. Clearly, profits are much smaller than wages, but the graph might lead us to believe profits are at least five times higher than wages. Also, wages has not been flat, and it is not due to debt that living standards are much better than in the seventies.
2. Nate, you suspect that the next round of GINI calculations will be worse. Sorry, but anyone who has some intuition for economics understand that crises decrease income and wealth inequality. Rich people's incomes and property values simply falls much faster than others.
3. Capitalistic organization of production will handle peak oil very well, at least in the sense that no other system will do it better. The prof's awful idea that workers should do 20% of their working hours in meetings, voting for the most charismatic guy's suggestions about how to mismanage the companies' resources ... won't really help.
(If he thinks that would be more efficient, he needs to explain why worker-collective owned businesses doesn't already dominate the market. They have lots of advantages, right? No profits who eats into investments and wages, more satisfied workers, more public goodwill and so on. In an evolutionary market economy such as ours, they should get on top in no time, right?)
4. Turning to socialism to get rid of market economies' fluctuations is a really bad idea. I'd rather have good growth with small setbacks such as this, than standing predictably still in a repressive environment.
a)We've been in stealth socialism for quite a while in US. You have real socialism in Sweden and your country is one of the biggest success stories in world, you have the highest tax bracket and one of the highest subjective happiness, on average of anywhere. It must be REALLY nice to be a rich guy living in a country will great social safety net, and post comments denigrating socialism...;-)
b)I invited Prof Wolff to do a guest post - that is what he sent. I disagreed with it but posted it anyways - that is how things work. Please feel free to submit a counter proposal. What we post and by whom does not define who we are or what we believe in. The fact that I don't agree with his plan is secondary to the fact that his essay brings up equity - which is not brought up in these discussions nearly enough.
c)
First of all, GINI relates to income not wealth. Also, in this case I wasn't referring to absolute wealth drop but relative to some minimum required to be 'normal citizen'. Take the following example. 4 equally distributed quartiles in a society that needs 10 units of wealth (plus income) to 'feel equal, and have access to basic goods without stress, etc.'. Group A has 100 units of wealth, Group B has 50, Group C has 20 and Group D has 10. Enter credit crisis and everyone drops - as you say the nominal % of Group A by the largest. Group A loses 70%, B 60%, C 50% and D 30%. The new wealth numbers are Group A 30, Group B 20, Group C 10, Group D 7. 50% of society is now at or below poverty level. Thanks for calling this to my attention - it illustrates that GINI needs to be 'risk adjusted'.
d)'predictably standing still'? The world could be so lucky...
a) I'd say all national economies are mixed, to some extent. I don't really understand what you mean by the US having "stealth socialism" and Sweden "real socialism". Both countries have some elements of socialism - though somewhat different. Sweden has an exceptionally free and competitive business and trade climate, highly developed financial markets and guaranteed property rights. Sure, the government is quite big and so are taxes, but we aren't like Cuba, you know.
Btw, about happiness, take a look at this graph:
I think Sweden is one of the dots in the top who aren't named. But the most happy country seems to be Denmark, which is like Sweden, but lacks labor rights and has a slightly smaller government. The U.S lies high also, despite you being a country consisting of immigrant religious nuts, former slaves and oppressed indigenous people. You being where you are is an enormous success-story in my book, and that would simply not be if you had our system. Sweden is quite homogenous, we kept out of WWII, and we are very practical and disciplined/obedient, so that we are ok is less of a surprise. However, please realize that our unemployment figures when it comes to youth under 25 and immigrants were around 25%, even before the crisis. Safety nets and labor rights have their flip-side.
b) It's your call, obviously. I just think the concept of peak oil might be hard enough to sell without getting associated with pseudo-scientific and polarizing (even hateful) ideology. On the other hand, I guess anything is ok as a starting-point for a discussion, so if you are not concerned with such perceptions, you can ignore my whining.
c) I don't think the 10-level stays constant at such a drop. (You just need to go back a decade or two, and 7.5 would seem just fine.)
d) If you think standing still, or "no growth", mean less environmental stress or less resource use, please think again. Just look at the Eastern Bloc. I think the single most significant environmental improvement in human history might have been the fall of the iron curtain and the dismantling of the extremely wasteful and polluting industries of the communist countries.
Another happiness graph is here, at figure 2. Rich or catholic - happy. Poor or ex-communist - unhappy.
Sweden don't stand out that much. Perhaps we all should strive to be more like El Salvador or Columbia?
I listened to the whole lecture, then fell on the floor when I heard his suggestion at the end. And this guy calls himself a Marxist!?
First of all, the reason some people may leave a big company and start their own is so that they can, in turn, own a company and through an IPO get fabulously wealthy on the back of poor investors and the long labor hours of all the rest of their workers (who may be induced to work for the company through meager stock options).
Second, a bunch of entrepreneurs does not a Marxist system make. The entrepreneurs still have to form a corporation (so as to transfer any debt or obligations to a fictitious person and away from themselves), appoint a board of directors (lured by stock options), run the company for the benefit of shareholders, and hire workers at the cheapest price possible (usually, again, luring them with promises of vast wealth when the IPO comes along).
Third, any reform of the current system of capitalism is going to have to include some recognition of the value of natural resources that we currently take for granted and extract for "free," and is going to need to recognize the need for social value and social responsibility of the economy. The laws governing the organization of corporations need to be changed, but that isn't enough, for without a recognition of the social component of work, we'll just end up with worker-controlled capitalism.
Fourth, the primary thing we need to ask is: What is the best or the good life? Is it a life of work or of leisure, labor or play, making time or making money?
Agreed, I pretty much fell on the floor at those suggestions. Though they are much better than Al Gore's "change your lightbulbs" at the tail of Inconvenient Truth. Wolff made a rather timid case for replacing corporations with producer and membership owned cooperatives. There's been a lot of work exploring that over the years and the concepts have been fairly well sketched out. Bringing externalities within the entity. Making the political, social and economic boundaries coterminous. Address scale and distribution - not only allocation.
Worker controlled capitalism doesn't work without the social angle and the valuing of good work for its own sake as part of the calling of man and woman. When one makes only the head of a pin, one is not likely to decorate it. Much of what we do is "too efficient" to be human.
One version of such an entity would be the community investment trust. It's interesting to think through how pensions invested in a local community investment trust might rebuild and repair the commons and thereby make provisions for retirement by improving public health, free fish in the rivers and cheap housing. That would be pensions under a "pay it forward" scheme.
But the ability to build these coops doesn't replace the need to kill off the corporations. The entity is wrong as Wolff points out. Charters need to be stripped, corporations returned to entitites that bear liability, and those "too big to fail" need to be broken up. Among those, the Fed.
cfm in Gray, ME
Hi Nate, again nice to see you got in touch with Wolff and that the ensuing discussion led to this intriguing guest post.
I'm most interested in the first of the five questions you asked, particularly the elements of value. I've found it fascinating that, even amongst those that study complex systems, we still always tend to try to pare a relationship down to the impact of one or two independent variables. For instance:
V = aL + bB
Where V is value, L is labor, B is built capital, and lower case letters are proportionality constants. Reality can certainly be simplified for modeling purposes, but I think that an attempt to simplify to a single or even a few variables is prone to error, and is also prone to bias. The bias that arises when people believe that value originates from only a couple sources causes us to overvalue the included variables in the economic process above all others. This leads to errors of judgement, regardless of which factor of production you overvalue. A typical Cobb-Douglas production function, for instance, includes labor and built capital. By only including these variables in our conception of what creates value, we've systematically ignored all others (natural capital, human capital, social capital, energy, etc.) and have made what most of us would recognize as biased decisions leading to the degradation of forms of capital not included explicitly in the production function.
A more reasonable way of conceptualizing value, in my mind, might look like this:
V = aL + bE + cN + dB + eH + fS + gF
Where V is value, L is labor, E is energy, N is natural capital (including ecosystem services and natural resources), B is built capital (akin to the capital in a typical Cobb-Douglas production function), H is human capital (which I use synonymously with technical prowess and skill), S is social capital (people's willingness and ability to share the above amongst each other), F is financial capital (money to buy stuff, which seems to be in short supply right now), and all lower case letters represent proportionality constants.
The above way of formulating value (really another way of defining a production function) expresses the reality that many elements go into creating value (or production), and we can't get a sense of what real value any particular product or service has unless we take account of everything that went into it. Some of the above elements (i.s. human capital, social capital, ecosystem services), are hard to put a number on, so it's probably best that we, as a human species, start getting used to the idea that we aren't going to be able to come up with a meaningful, unbiased number for the value of any particular product or service. We just need to broaden our perspective on what goes into things, and develop a sense of relative value from this exercise.
-Eric
Nate,
As per the work done by (forget her name now, but a video of one of her speeches has been posted her, originally by Leanan, I think - I have far too many links, and they are poorly organized), the first step wasn't straight to debt, but to working mothers. This is an important point, I think, for it says much about the resulting social fabric, or lack thereof. This is even more absurd when we note that it takes two incomes to equal the same level of economic activity per family.
She also noted that families had lost financial flexibility as inflexible costs had taken a greater share of finances and the person who might have gone to work when the primary worker lost their job is now already working.
A brittle system is far more likely to shatter, no?
Cheers
Um... It's Fractional Reserve Banking which is the problem... Simply stop basing money on debt.
If you don't fix that, it doesn't make a blind bit of difference whatever else you do. And if you do fix that, everything else will fall into place.
(I don't really believe for a second that the nature of the banking is actually going to change.)
css- Fractional Reserve Banking is just capital getting more efficient at increasing, and is part of an ever expanding system.
The problem is with the system itself, and the continual need for capital to grow or die, that makes continuos expansion in a finite system impossible (any smart 10 year old can explain it to you).
I haven't finished reading the post or Nate's comment and I probably shouldn't be writing but here's a quickie:
The chart is hard to read and I think that looking at real wages so far back is misleading anyway since so much has changed since 1900. Here's a couple of examples:
Many more married women are now paid for the work they do, and that is enabled in part by productivity gains in the household.
Wages are also not the only benefit people get from their (and other people's) work as the taxes that employers and the rich pay also fund stuff that benefits the working man.
In any case, I think the chart there is less problematic (it starts in 1960 and includes some benefits) and easier to read:
http://www.leftbusinessobserver.com/Stats_earns.html
The article there also gives some useful context and details.
Thanks - I agree it is not perfect metric - but even your graph shows flat wages since 1970s and since 2000 it has been worse. The main point however is that concurrent with the flat wages has been the beginning, and ultimate orgy of debt/leverage to (attempt to) make up for it:
US total stock market cap now is around $10 trillion. It is unclear how much stock/bond value the people making flat wages have accrued.
I certainly didn't mean to debunk the notion. I just think Doug Henwood's chart is clearer.
As to leverage, from my perspective it doesn't make up for the flat wages but rater makes up for the large profits. I think there's a glut of financial capital because most of the profits aren't consumed and there are relatively few opportunities to invest them into actual production as the lower wages depress demand.
I've seen figures for who owns stocks and such, possibly from the census. I could try to find them if you want but the gist is that financial assets are very concentrated.
Well the problem you have with Mega Corps in profits is that they increasingly must look for billion and multi-billion dollar deals. As these companies grow they have a harder time generating meaningful growth. IBM is a fantastic example.
At some point the only way they can grow is via mergers and acquisitions and they get large enough to have their own internal recessions. Understand these individual companies support a economic system the size of many countries so they have their own internal financial pyramids going. Sometimes of course they give up and do spin offs.
Whats important is that past a certain point all your doing is transferring various ponzi schemes back and forth moving them around can no longer result in a increase in scale.
My opinion is we hit this limit and the next step is to form true global companies independent of any nation. The nation state can no longer contain these entities and they have no choice but to "eat" the nations in order to increase the pyramid base.
NAFTA and the EU are examples of this. Where the national boundries had to be destroyed to continue growth.
Obviously these new ever more powerful meta national entities like AIG need a banking system unencumbered by pesky national laws so to support the continued growth the banking system now must become extra-national or global.
The washing of gold effect of horse trading and merger games and consolidation and splitting of various ponzi schemes hides the simple fact that these companies are now forced to double the base of their pyramid schemes to grow ever larger and now this base is bigger than any single national economy or monetary system for that matter. Cars on a oval race track may be flashing buy you at high speed but if you look at it from above obviously they are going nowhere.
And of course today and indeed for some time these monsters have been hitting real hard resource constrains in the form of dwindling or slowly growing commodity supplies.
PBS Frontline did an interesting and highly informative segment on how one piece of the household debt pie--credit cards--was peddled to the public:
http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/
It's interesting to cross-reference your chart with historical GDP figures to get US debt as a fraction of US GDP:
It's not at all clear that debt was increasing unusually rapidly all the way back to the 70s. Indeed, the data seems to strongly suggest that there's been a fairly recent surge, mostly in "Domestic Financial". If we factor that out, total 2007 debt is 250% of GDP, which is not much more than in previous decades.
So what is "Domestic Financial" debt? Is that hedge-fund leverage and the like? If so, it seems like 2009 will see substantially less of that than 2007 did.
Agree ... disagree ...
I'll agree with the declining relative wage observation and also with corporate reorganization. Ralph Nader has been arguing this for twenty years, that's why I voted for him in ... 2000.
I don't agree with either the contest between labor - capital which is old school MarxISM and is really besides the point; Euro- style bourgeois and landed feudal aristocratica and Ricardan labor value, etc. What sorts of profits? They are no less ephemeral than wages! To be a billionaire in 2010? Where? Where will a billionaire be comfortable, Uganda? Haiti? China? Where to find nice sandy beaches and easy women and other billionaires .. not the mob with ropes and hooks and hot blinding irons and knives and axes to chop of hands and feet and billionaires that are flayed and burned alive and hunted down like animals.
Some profits.
I'm not making this up; French Revolution, America's first export.
Marx was fighting an 18th century ideological battle from the 19th century. He was obsolete in other words. His description was of a Ricardan economic space that was both antiquated and not particularly a good model. Carl Menger and marginal utility arrived fifty years after Das Kapital:
Now, the Keynesians are bankrupt ...
The other disagreement is the socialization of production; it's naive.
The autoworkers are a group that has defied the trend of lower wages relative to speculation - purchasing power - productivity. The auto industry is insolvent because of overcapacity and an obsolete business plan. Will the workers or anyone else in Detroit start to build ... streetcars? Electric rail? No, they will wait for someone to tell them what to do and agree to pay them a much lower wage. Too bad; in Detroit there are lots of factories, skilled workers a central location, raw materials; Detroit could build streetcars and the entire systematic necessary to install them in every city and town ... and the Detroiters will sit on their ditty boxes and complain of no handout.
And there would be resistance @ every level, govt, municipal and the surviving auto manufacturers; "NO! We cannot go back to trolley cars!!" and they lobbyists would come up with some derogatory name for streetcars like 'Death Cars' or 'Auto Baby Killer Cars' or whatnot and the idea would be/is bankrupt out of the box.
The is where I feel Wolff stumbles; the given of rising standard of things being the way they have to be is not critically examined; McDonalds and Walmart and Target and lotsa cars and trucks and 'Easy' and 'Convenient'. Brainlock, in other words. Things have to be the way they have to be ... the weight of all that is arrayed against socialization of production. The two ideas are irreconilable
This is more a political problem then an economic one but the idea of political systems is broken, too ...
HFat I think your wrong.
Historically women managed as partners the game of finding food clothing and shelter and of course raising the children. It does not matter if its a neolithic society or a modern New York socialite. The cost of house keeping is just that a cost either you support your household with labor and locally made implements or you purchase the goods and labor.
If you purchase the goods and labor your simply montetizing if you will the cost of maintaining the household this is not and addition to the economy and in fact its a negative.
Look at it this way if what your saying is true then we could run a succesful economy where all people did was build houses for each other. ( We tried it failed). The reason of course is the households are a cost center not a productive use of money.
Next of course by expanding the labor force via having more women enter you exapand the labor pool obviously and this puts downward pressure on wages. On top of this because of bigotry women where often paid substantially less and thus forced wages down even further.
This happens whenever a new labor pool is ready willing to work for less than the current pool. In fact women entering the work force simply acted to decrease the real purchasing power of the labor force as a whole as productivty gains where lost to lower wage increases in and inflationary environment.
Look at globalization obviously the tapping of vast pools of cheap labor has not created any sort of nirvana and it can't in a inflationary environment. In fact all it did was force the old labor pool negative in terms of wages vs debt.
The ever widening search for cheap labor is yet another big part of economies of scale and keeps ever larger corporations profitable. Once the current labor force becomes strong enough to demand wage increases and the local labor market tight the labor force is destroyed via opening a new labor pool.
You can readily look at the jobs that women initially took and still form a large precentage of the work force. Most of these used to pay a wage that allowed them to be gainful employment for a head of household ( Women or Man ) However once women entered the work force the real wage for many positions was reduced to a second income required to get buy.
Now in a non fiat fractional reserve world any worker regardless of if their work was monetized would have contributed. Staying home and cooking all the meals etc would have generated as much real wealth as working for pay and vice versa I might add. Small landholdins would be profitable etc. However as I tried to outline expanding the labor pool in a inflationary environment is a negative not a positive.
I think the basic concept is philosophically attractive but not at all practicable in an economy with large, interconnected structures. This is what I see as Wolff's (and, for that matter, Marx's) main omission: the assumption of ever larger, ever more concentrated structures as a law of society.
Under such conditions worker management of such structures seems a fanciful idea. Professional capitalist cadres often seem unable to competently do the job. (For example, it seems to be an open question whether these bank holding behemoths can ever be effectively run by anyone; they've never lasted long without triggering disaster.)
I suppose an orthodox Marxist would place socialistically-inclined relocalizers in the category of "utopian socialism", but I would argue that classical growth economy (capitalist or socialist)will turn out to have been a feature of the upward curve of fossil fuel production, while post-Peak nothing will seem more utopian than the notion of still trying to "get big or get out" (or the siren Marx pictured beckoning to the capitalist: "Go on! Go on!").
If true, this makes it all the more tragic that America seems dead set on squandering what time and real wealth it has left on trying to prop up a zombie system.
I think the structural size issue engages some of Nate's questions. It's obvious to me that real reform must start with dismantling the erstwhile "too big to fail" structures, and that if this can be done then the best ounce of prevention for the future would be to prevent such size and concentration from ever cohering again.
As for the issues of animal psychology and basic social drives, I agree that no socioeconomic order could ever do away with these. Nor would we want it to, since much good comes of them as well.
But hopefully among decent people there could be a healthy enough community that the worst manifestations of greed, rancor, pecking order bullying etc. would be suppressed through simple opprobrium.
And if that doesn't work, there's always the Ancient Athenian institution of ostracism designed for exactly this purpose (though unfortunately it was often politically abused).
For anyone who's interested, last week I wrote a series of blog posts on some of these same issues:
http://attempter.wordpress.com/2009/03/24/the-bailout-war-part-i-aig/
http://attempter.wordpress.com/2009/03/24/the-bailout-war-ii-too-big-to-...
http://attempter.wordpress.com/2009/03/25/the-bailout-war-iii-corporatis...
http://attempter.wordpress.com/2009/03/26/the-bailout-war-part-iv-toxic-...
http://attempter.wordpress.com/2009/03/27/the-bailout-war-v-nationalizat...
I've been writing about these issues for some time now. The collection of relevant posts are at Question Everything: Biophysical Economics. On about the third page, toward the bottom (organized by most recent posts first) is a series called "Sapient Governance". There are two series, actually, much older is the description of sapient - wise - governance followed by a series of 'implications' articles.
The fundamental thesis is that we can take a lesson from nature's way of handling the evolution of complex, dynamic systems (like animals and their brains) and apply systems thinking to the design of an intentional hierarchical control structure to government, markets, and institutions (like corporations). You can go right to the last article in the series on Sapient Governance. There are links there to the rest of the series.
Nate muses that some new kind of 'ism' is needed to replace or amalgamate our current dichotomous approaches to political economy. I would rather think of the replacement as not an 'ism' but a scientific approach based on our best understanding of how nature handles the complexity problem. The 'isms' approaches do not scale well! We need to completely re-think how we approach organizing and managing our economic decision processes. The combination of peak oil and declining EROEI have set us on the track to rapidly declining net energy available to do economic work. So we had better get cracking on this soon.
George
won't our biological propensity to move up the mating ladder be present in equal measure for those who rise to top in the 'state' in much the same way as those with large bank accounts have now?
This is what the Anarchists, such as Bakunin and Goldman, saw as the flaw in Marxism. No one was better at examining capitalism (the extraction of profit from the relation of user and exchange value, in the form of surplus value has held is own).
Hardt and Negri have made some interesting analysis in Empire as postmodernist marxians, but, contrary to their self stated titles, they are not marxian.
Marx was much to optimistic about human nature, and as Bakunin pointed out, in hierarchical organizations (such as marxism and capitalism) the scum always rises to the top.
Marx assumed humans were molded by their environment, and were "blank slates". Our knowledge does not support this assumption.
So much to know. Seriously. One needs 3 lifetimes to assimilate it all. (but then there would be new stuff...;-)
There are a lot of things going into the declining share of wages going to labor. I think part of it relates to women entering the labor force in larger numbers starting about 1970, because of the push for fewer children and the availability of better birth control methods. Part of it later reflects competition with overseas labor, and sending of production overseas, holding wages down.
These are some graphs I found. According to the Census bureau, men's median real wages have been flat since the early 1970s. Women's wages have been rising, but are still much lower than men's.
Median family income has risen, but much of this is from having more workers in the workforce.
According to Economic Report of the President,
real wages of college graduates have been rising, but real wages of high school dropouts have been declining, and wages of high school graduates are closer to level. Since most people are not college graduates, this means that the folks most involved with manufacturing have seen their wages level or declining. Part of this is from globalization, I expect.
Also, "other compensation" has been rising faster than wages. I think this is the case because health care costs have been rising so much (partly because of higher wages of doctors and dentists, partly because of more intensive treatment).
Real median household income chart shows that household income drops before the official start of recessions and continue to drop well after the recessions end. If recessions are then are not the first cause of an income drop but the consequence of it then what is it that causes the initial income drop?
If we go back to the chart showing the separation of productivity gains from wage gains starting in the 1960s an widening even more as time goes on. What happened in the 1960s was the introduction of digital electronics in the workplace first in the financial sector and then more and more into manufacturing and retail sectors. At the same time this was happening we see high wage manufacturing jobs moving to low wage sweat shop countries. Automation has probably caused more of the failure of productivity gains to provide wage increases than imports from low wage countries have. For instance in the retail sector the use of UPC technology has reduced the demand for labor in retailing. Could it be that technology improvements have more to do with the onset of recessions than machinations of financial manipulators?
The timing issue you noticed with recessions and income drop is probably an artifact of the way recessions are defined.
As to wages lagging behind productivity, I think you're right to link that to unemployment (by the way of automation). But if you look carefully it really started in the 1970s (see the link I posted above). If you look at the real hourly earnings growth, the impact of the oil shocks is clearly visible. It looks like wages first took a hit from inflation.
What then happened in the 80s is that right-wing administrations jacked up interest rates and promoted unemployment as a way to get rid of inflation.
There's almost certainly something to your argument but there were actually a number of factors at work which reduced the bargaining power of labor and allowed employers to implement stealth pay cuts.
Gail, the charts don't tell the whole story. The official deflators are understated.
In 1970, one median head-of-household income was enough to support a family of four or five with savings of about 9% of income. Real wages have not been flat; they have declined enormously.
This post reminds me of what I heard while waking up this morning: http://www.npr.org/templates/story/story.php?storyId=102443902&ft=1&f=1008
Full poem is here: http://noescapenoexcuse.blogspot.com/2008/11/some-further-words-by-mr-we...
The notion of having workers involved deeply in decisions about what and how stuff is produced reminds me of the story of Jack Stack, who took over International Harvester. I heard him speak at a BALLE conference in 2007. Some links:
http://business.missouri.edu/649/4103.aspx
http://www.livingeconomies.org/conference/past-conferences
Apparently this was a terrific success. It also involved "Open Book Management" which basically meant all workers had access to all the information about allocation of resources. They would indeed spend a lot of time meeting and discussing ways to improve allocation and it was not a management decree, but a worker collective decision process. At least that's what I remember about the talk. Haven't read Jack Stack's book.
Consulting firms are generally employee owned. So are professional corporations of various sorts, and I am sure law firms. While not all employees of the firms are owners, it does help get wages up.
I can't help but think of mythology when I consider our human plight.
The Tower of Babel stands as a sign and symbol of our current predicament.
Babbling and confused, our wisdom proves to be folly. We are like God most high, and we have built a stairway to heaven -- almost there now -- oops! --damned overshoot! -- damned over-reach!
There are other myths that relate -- Prometheus comes to mind as well.
Too big and too complex to manage -- not only is the universe too big and complex for us to manage, but so is our planet.
Not only is our planet too big and complex to manage, but so is our species.
We follow the patterns of other species like yeast and pond algae, but with our own complexity.
E. O. Wilson has suggested that we need to make allies of religion and science if we are to have any chance of survival.
I do not think that we ultimately control our own species or planet, and that the impacts external to any local efforts will outweigh our efforts to establish local "arks" for survival. We've multiplied and filled the earth -- or the planetary petri dish, or the global pond.
So what to do? Live and love and make every effort we can make to make things better with an awareness that we control only our own efforts and not ultimate outcomes.
Sustain absolute vulnerability.
I cannot predict how things will go, but I can see generally what lies ahead. Our species has been there (here) before if old myths and stories have anything to tell us at all. We may not have been as global or wielded quite such dangerous technology in prior manifestations of hubris -- that may be a key difference.
Again, wed spirituality and science. Sustain absolute vulnerability. We control our own efforts, but have no control over outcomes.
The chart shows hourly productivity up by a factor of about four or five from the 1950s to now. And by the nature of a per-hour view it can't include the effect of the considerable increase in working hours due to the 'liberation' of women and other factors.
Taking those factors together, "we" should be producing six or seven times as much per person per year as "we" did in the 1950s. But apparently "we" aren't actually using that productivity, as real wages are shown as flat.
So where did the balance, the five or six times as much that we're producing but not using, disappear to? Sure, we have the conspicuously consuming rich, but they've been around since time immemorial. Is there a black hole stashed somewhere? Was the productivity in the chart simply hallucinated?
Or, on the other hand, at least until a few months ago, "we" lived in a society where every stupid nebbish who couldn't ever figure out that "noon bus" means stow the iPod and get underway when the big hand and little hand are both on the twelve seemed nonetheless able to afford a gargantuan palace complete with a commute of countless miles. Certainly Ralph Kramden couldn't even begin to think about such otherworldly consumption in the 1950s. Flat real wages?
On the face of it then, the chart seems preposterous, utterly beyond any conceivable plausibility, utterly out of touch with reality, completely out of kilter, self-inconsistent. Other bits of the thesis might seem dubious as well. For example, "one day [a week] participating in collective decisions about what, how and where to produce and what to do with profits." Oy vey, the mind reels, the eyes roll over, the stomach churns, the body keels over, and that's just at the mere thought. Good gawd, haven't you ever heard the mind-numbing droning on C-Span or at any city council meeting? They never learn the meaning of "let's move on". Would any Amherst professor really stay on under such conditions? Or are Amherst faculty meetings magically and uniquely blissful? What could you possibly 'meet' about for a whole day a week, week after week after grinding week, without going crazy from the sheer numbing boredom of interminably stamping over ground long-since trodden to utter sterility?
Did you just fall off the turnip truck? Yes, Ralph Kramden could have afforded a McMansion if he had transferred out of the metropolis, put Alice to work and picked up a nice no money down mortgage with a teaser rate. The new wheels could have been put on the credit cards.
Nah, the turnip trucks are still frozen in for the winter.
"Ralph Kramden could have afforded a McMansion if..."
If it would have been that easy in the 1950s, then the four-or-five times increase in productivity is simply nonsense. Or, more likely, the two of them together might have gotten a small house in Levittown or out on Long Island or Staten Island, but a nicer one than a similar single-earner family would have had. The McMansion sized houses were mostly for hi-falutin' business owners, big-name doctors, mafia dons - consider the Todt Hill house used in The Godfather - and so on.
In reality, the modern Ralph Kramdens have mostly been living very well indeed, far better than their fictional predecessor, and that makes a nonsense or an artifice of the flat real-wage line. In the real world, the stuff has been being produced, and all but the poorest of the poor have been consuming it like there's no tomorrow. For many years, the latter-day Kramdens have been enjoying the good life irrespective of the computer bits and financial markers, and that's what counts. Now, maybe things are a-changing, but the chart only extends to the recent past.
So I'm still alleging that the extreme divergence between the lines makes no sense. Either the productivity is a hallucination, or the extra stuff that it implies is being produced is nowhere to be found, or some of each. Now, to be sure, I'm uncertain about where the truth lies on that spectrum...
Paul, all you really have to do is find an old newsreel of a 1950's auto assembly line, and compare it to a state-of-the-art toyota, or Honda line. Then compare the end-products.
On a side note: My daughter passed out in front of a small hospital in Chicago. They took her in, ran her through an advanced MRI, and, immediately, did deep-brain surgery, and removed a rapidly-growing tumor. She's fine, today. In any era previous to today's she'd be dead. My father suffered from an acutely painful ulcer (he was a sandy-land farmer.) He was never more than a dozen steps from his bottle of Maalox (which didn't help much.)
Today, I take an omeprazole tablet (about $0.40) once a day. Every man in my family died from a heart attack before age 65. I take an 80 mg. simvastatin (generic zocor,) once a day. My arteries are "shedding" plaque as I type.
I used to get up at 5:00 in the morning and run out to the outhouse (Feb was tough.) Today, I chat with people from all over the world on my laptop. I can feed myself very well on what would be less than 10% of an average man's income, and clothe myself on about 1% of same. It took more hours of work to buy a new car in the 60's than it does now; and it was even money that the engine, or transmission, or both would go out before it hit forty thousand miles. Now, I have no idea how long an engine will last because I can't seem to wear one out.
I don't care what that chart says; There's no comparison.
'better off' was not the comparison. The comparison is relative as opposed to absolute. We are wired to compare (once basic needs are met). If we thought we were in middle of pack but now see that only 10% have the goods, instead of 80%, this is going to have consequences, irrespective of whether there is enough food and medicine.
Most people are smart enough to look at East Germany (Communist Era) vs West Germany (same era,) and realize that under Capitalism they have a CHANCE of attaining "Top 10%" status, whereas under Communism there is no "top 10%" worth aspiring to.
The thing is: both Marx, and Smith were pre-industrial revolution philosophers. Smith publish Wealth of Nations in 1776. Marx published The Communist Manifesto in 1848, I believe.
Neither could have imagined ......
Just like some Christians have predicted the second coming of Christ and the end of the world for over two millenia, Marxists have been predicting the end of capitalism for over a century and a half.
And to some degree the Marxists have been right:
But in many instances, the Marxists have not been right. In the past capitalism has proven more adaptive and resilient than Marx predicted:
In the 1999 edition at least, Heilbroner hardly considers the idea of capitalism running up against limits to growth. He seems to think these problems are no different in kind to those that capitalism has faced before. Marx's great contribution was to recognise that capitalism's structure means it must fail in the face of hard limits. This insight was developed and explained by Jay Forrester and the Club of Rome. Before Marx, Adam Smith and John Stuart Mill both realised that capitalism is not sustainable, but they optimistically imagined a smooth transition to a society operating stably, within its environment's carrying capacity. Too late for that.
Unless a transition to some new miracle energy source is successfully made, allowing continued exponential growth in natural resource consumption -- well, it might be called capitalism in 2070, but I don't think we'd recognise it.
Yes, Marxists have been wrong repeatedly with respect to timing. Like everyone else, they failed to allow for the immense time delays built into the system they were analyzing. This does not mean Marx's analysis is fundamentally incorrect.
I've got the 6th Edition which looks like the latest copyright renewal was in 1989.
In it Heilbroner does explore such dissident viewpoints as those of Malthus:
Were Malthus' followers also "wrong repeatedly with respect to timing"? I believe probably a majority who frequent TOD, including myself to some degree, believe that they were, and that Malthus will ultimately be proven correct.
That said, we must always re-examine our own beliefs and ideologies. As Heilbroner goes on to explain:
Can we reign in population? Is the need to plant our seed in the next generation so hard-wired that it cannot be overcome?
The laws of Smith, Ricardo and Malthus have not proven inviolable, as Mills rightly pointed out:
Isn't debt just a way to (via an economic system) allocate energy, materials, and labor going forward in time? All materials are essentially molecules and atoms arranged by energy into more useful forms, i.e. the value of a material is largely dependent upon the amount of energy consumed in processing dispersed atoms into something useful. Labor's value, in today's world, is largely dependent upon how much energy can be manipulated by the laborer. Take away the computer, the power drill, the stamping press, and the laborer will find himself in the pre-fossil fuel era, having little to no "productivity".
So debt could be considered solely as a way of allocating future energy availability.
So what is likely to happen in a future of declining energy? There will be less ability to mine, harvest and manufacture materials no matter how much debt is issued. The more debt that is issued, the less each dollar of debt will be able to accomplish, for each dollar will be competing against the other for less energy. If excess debt is issued, some of that debt will will be unable to acquire the energy to accomplish the desired task. This will result in bankruptcies and failed projects.
Isn't this exactly what is happening in the world's economy? Isn't the total amount of economic activity declining so as to coincide with the amount of energy to power that economic activity? Aren't the highest energy using processes in the most trouble?
Why do the fools in charge of our economy think they can make it run faster when the energy to power the economic engine is declining? What are the risks in trying to make it run faster when it can't?
These are a couple of additional charts from the Economic Report of the President.
I don't know quite what to make of this first graph. It looks like non-farm output per hour has been growing less rapidly than the proportion of college graduates and the amount of capital spending. Not exactly a good combination. I wonder how one measures non-farm output--burgers flipped, number of (unnecessary) medical procedures, insurance policies issued, mortgages issued, etc.
The other gives detailed median wage data. Median wages haven't been growing since 2000 in total, or for men. Women's wages have had some growth, but from a low base.
Also, in the columns to the right, I can't help notice the big difference between averages for all workers, and for workers with full time year around jobs. There must be an awfully lot of people with part time /non-year around jobs, often because they cannot find full time, year around jobs.
http://en.wikipedia.org/wiki/-ism
it is our sytematizing of systems of thought that is the problem. This is unfortunately typically human and an inescapable genetic defect of an intellectual animal.
The issue of flattening of wage and increasing productivity will show up on another issue I have been bothered by a while: work (employment) for everyone on earth (US). If we go about in calculating all the necessary hours of works needed to sustain life (food, cloth, housing), how much hours of work per week do you really have to do. In today world, 40 hrs per work week and increasing productivity, a lot of people will not have the job to sustain themselves. While it's "good" for people to have jobs producing junks (TVs, etc..); at some point in the future, nature will constraint the amount of junks we produce. This will exacerbate the problem a lot more. With so many in needs of jobs to feed their family, capitalism will sure to find a way to exploit this. We are seeing a lot of that already with a lot of manufacturing being shifted to China, India, and other poorer countries.
Something has to give. I can't see capitalism going forward the way it has been going in the US for the past 100 years. With peak oil, may be in the near future, we will see the "productivity" fall down to match the earning wages.
productivity increases/ inflation only occur with technological advance = increaing amounts of cheap energy. When FFs are gone then all we have as an economic driver is animal muscle power and renewable energy sources so that there will be no growth or inflation. The amount of work muscles do would be only productive possibility.
So quality over quantity will be the future. Enjoyment of culture, literature, etc. will be the height of life. science is a measurement of quantities and therefore a product of increasing mechanization/dehumanization. So therefore all the "isms" occur, due to concentration on rational mind to mentally "control" a perceived unnatural "productivity" beyond the genetically predetermined rate of chemical energy production of muscle powers.
As for the suggestion that workers spend one day a week in management type activities, I think it was Walter Reuther who said something to the effect that "to expect workers to manage as well as work is to place an intolerable burden on them". Why only workers? Why not have management do the same type of thing by spending one day a week doing what their workers do? I suspect the latter would be more productive than the former.
Clearly American capitalism is evolving with the wide acceptance of the too big to fail idea. It looks to me we are following a variation of the Chinese model of one country two systems only in reverse. In China the socialist system is for the masses on the mainland while the capitalist system is for the the rich, Hong Kong and Taiwan. In the U.S. what seems to be evolving is socialism for Wall Street and other large corporations, while capitalism is reserved for small corporations and the masses.
We need a name for this system. How about neosino capitalism?
X
when you don't mention ethanol in your posts, you are often quite reasonable and have good insights...;-)
Well, the fateful day has come...we are in agreement. Now I'm getting scared. Thanks x.
Awesome post, Nate.
Here's my two cents on your first two questions:
1. Energy sensitivity fits within the labor theory of value because human labor remains the ultimate motivating factor. Energy doesn't matter if it isn't drawn into human activity. The key to reconciling this is the phrase "socially necessary," which was Marx's unique contribution to the labor theory of value. He recognized that what human labor entailed differs wildly under different conditions. The fact that capitalism competitively maximizes the substitution of machinery and energy for human labor is the core problem now. Marx didn't address that, but we certainly could and should, as you suggest. The labor theory of value is in no way threatened by this prospect. It's heyday approaches, in fact, IMHO, as sheer geology forces us to go back and appreciate our own foolishness.
2. What "breeding ladder" and what propensity to climb it? There is no breeding ladder and there is no propensity to climb it. We choose mates based on cultural learning that is wholly independent from Darwinian forces. Social climbing can be explained entirely in terms of logical individualistic choice within artificial social hierarchies. Darwin is irrelevant. Read your Stephen Jay Gould.
Meanwhile, a point for PaulS: Productivity is not production. The former is a rate. That latter is an outcome. The vast majority of the productivity shown in Wolff's excellent, stunning chart has gone into unemployment. It explains why the Fortune 500 have 80 percent of the sales on 20 percent of the workers.
The Real Wages part of the chart is, of course, whacked; but the Obvious takeaway is:
"People (in manufacturing) aren't a Lot more productive, but "Capital Components" (machinery, computers, etc.) are.
You don't know what 'ism' will replace capitalism? I suppose I don't know either. I wonder whether anybody has a theory about it. Maybe the future is open. Maybe the eventual winner is already thinking about that. Does the name of the ism matter, or the thing?
http://www.youtube.com/watch?v=mnVUSsWoN_Q
I am a bit disappointed with this essay. I understand that capitalism is used every day to describe the US economy but that is a mislabeling at best and a great deal of misdirection at worst.
Cheaters will always be the loudest proponents that any system is fair and this is the problem here. We don't have capitalism, this ended with the federal reserve act of 1913. Central planning of the economy and an unbelievable growth in central government. That is not capitalism. The federal budget in 1932 was 4 billion dollars, and now its 3 trillion.
Marxism (maybe fascism) IS the current economic system. Whatever you want to call it we certainly have not had free market capitalism in a long time.
Thanks Richard for writing this, thanks to Nate for posting it and thanks to TODers for good comments.
As a Marxism-watcher for several decades, could I make some general comments?
1. Exposure to thoughtful Marxism raises the IQ by about 20 points, even for committed capitalists (e.g. Schumpeter). People keep discovering issues that have already been explored in depth by Marxists and their opponents. This is especially true in times of crisis.
2. The "labor theory of value" is not that useful. Marxists go through contortions to make it work out (for example stipulating that the labor be "socially necessary". Even then, it hasn't proved a rich source of insights.
3. As someone upthread mentioned, there are a multitude of Marxist schools of thought. (And Marxism is only one of many types of socialism.) Professor Wolff is a clear and articulate spokesperson for one of the most reasonable schools. A good source of Marxist thought is Monthly Review. Editor John Bellamy Foster and others are fully aware of peak oil, and have been trying to bring a greater degree of ecological awareness into traditional Marxism. For more discussion of the contrast, see Deep greens vs Marxists.
4. One of the most compelling characteristics of Marxist thought is its insistence of observing what is going on in the world. Instead of inventing abstract schemes and trying to foist them on the world, Marxists ideally study and participate in popular movements, hoping to shape their direction to be more effective.
5. The history of Marxism and socialism is a valuable set of examples of what can go wrong. As the economic crises become more heated, we will soon see history repeat itself, as ideas and movements from the past are recycled.
Bart
Energy Bulletin
Thanks for the insights. Politics is not really my specialty.
If we had political actuaries, everything would be in ship-shape...
yes, many types of marxism existed.
but also many types of capitalism.
and many types of feudalism.
With the number of labor hours in a barrel of oil; the number of indentured servants and slaves previously required to maintain equivalent elite standards of living; and the number of sociopaths per 100 people; the number of sociopaths who make it into the elite; and the male-dominant principles still in effect in all societies on earth;
the future will be neither fair nor equal.
Neofeudalism, then.
I am adding my thanks for the links and insights.
These led me to John Bellamy Foster's most recent piece in Monthly Review, (A Failed System: The World Crisis of Capitalist Globalization and its Impact on China). This article includes summary of Keynes' thinking concerning the characteristic failure of Capitalism to deal with uncertainty:
to quote Bellamy on Keynesian thought
http://www.monthlyreview.org/090302foster.php
Professor Wolff's conclusion about the need for employee governance is accurate, but still falls short. What is really needed is "stakeholder governance". This would include employees, but also could include customers and suppliers, and should always include public representatives that correspond to the scale and scope of the corporation. For example, a multi-national corporation should include a global representative, as well as representatives from the major nations that are involved.
One way to do this, that would also limit stock market gambling while maintaining entrepeneurial activity, is as follows. The idea would be to put a 20 year time limit on new or existing shares, with an automatic transition of share ownership to a stakeholder board from year 16 to year 20 (20%, 40%, 60%, 80%, then 100% stakeholder ownership). However, corporations would not begin the transition until they have reached a certain size. Anticipated dividends would be the primary value of shares, not capital gains.
A Corporate Governance agency, government chartered and regulated, would oversee this transfer. A similar Corporate Finance agency would provide financial oversight of all businesses, but especially those that are not stakeholder governed, to prevent excessive debt, illegal compensation, fraud, and tax evasion, etc.
It seems that throughout this discussion there is an idea that there is more value in the world today than yesterday and that there is a possibility that there can be less value in the world tomorrow than today (ecologic debt). It is my feeling as a one time construction worker, anthropologist, business man and as a geologist who has worked in the oil and gas business and the environmental remediation business, that folks have a very small view of the world, its resources and a very exaggerated view of mankind’s current effect on things.
As any student of the physical world knows, the current understanding of the working universe continues to show that the energy to make things happen is a “0” sum game. That means, in effect, if trillions of dollars (in whatever value scheme you are going to use) passed through hands to make this current financial debacle, those trillions are still out there. True, they have been redistributed by fanciful and probably false means, but they have not ceased to exist, ask any US construction worker (whether he has, in turn, squandered his newly found “wealth” or not is besides the question).
The only real loss seems to be in confidence that the “powers that be” did not guarantee a level playing field and have actually been found to have no clothes. In “olden days” this comment would have been met with a resounding “Duh.”
The observation that problems stared back in the seventies is also a thread throughout this discussion. If the comments of the US citizenry is living beyond its means being the source of the current foundering, then one might make the observation that easy credit might be the cause, read the 1960’s universal advent of “credit cards.” Easy credit, possession today for a promise to pay tomorrow, has always been a bugaboo for homo- sapiens. Every historic culture has, as one of THE Rules, tried to discourage this. Each has eventually failed. We are, after all, a very imaginative, forward looking, optimistic species and with that comes good and bad.
However, as everyone acknowledges (though seems to ignore at times) the band has to be paid. The energy used has to be replaced. Value is basically derived from time spent or saved and energy spent or saved. There is no value if someone makes something no one cares for (the basic problem of a state run and state determined economy where a few people determine something’s value). A person who spends his life looking around for rare gold, which people like because of one attribute or another, has invested TIME and Energy (actually energy is personal time valued) and the gold has a value equivalent to those. The gold has a value equivalent to the desire another has for it who doesn’t have the TIME and ENERGY to get his own.
If so, just as a person takes on a promissory note to pay back, a culture does as well. It seems as though economies go through the cycles of borrow and repay. At least to me, that is what recessions and depressions are. Nothing more or less.
BUT, a very large BUT, the universe is very large. The amount of energy to be lent makes our use of it vanishingly insignificant…were we able to tap into it. Well, in fact we are. True, this is on a small scale, that of using stored solar energy or the use of the leakage of the material energy used to make radioactive minerals. But those are examples.
It seems that the discussion we are having needs some boundary definitions so that we don’t all go off and commit suicide.
My toughts tend toward an approach of the issues of economics from a position where we acknowledge we are borrowing from tomorrow, that what we take will have to be paid back, and we have to do this in a way that does not overburdon our current ability to pay the installments.
As far as the Marxism/Capitalism issue, the former Minister of Justice of an Eastern European country once told me that when a few people determine something’s value you have communism or socialism, when everyone (with the lack of predictability and control that suggests) determines the value, you have capitalism. I have yet to see that definition fail to explain how things work economically.
Just as the subprime, commercial paper derivative trillions are still out there still, just not in the hands of those who wish they had it back, the future economy is still there. The only thing in doubt is who will have the most. We will have to spend TIME and ENERGY to reach it. But no one has ever been able to stifle this genomic desire for long. We simply have to be wise how much we borrow at any one time to do so. The decision as to who will spend what they have to get there will be determined by who is willing to risk. I am afraid that an economy like Norway’s is unlikely to kick up a Bill Gates or a Gossamer Condor.
Alan
Well it all has to do with rates I'd say thats what is important.
Forests for example are renewable but to maintain and old growth forest in something close to its original condition the rate of cutting has to be really small basically you take say 1% or less of the trees. Similar applies to the bottom lands used as farmland you would really need to leave land fallow for at least 100 years to not have a huge impact on the ecology.
So effectively zero impact use of renewables has time lines on the order of 100 years or so.
Or you could look at it as footprint i.e use less than 10% of the resource.
Above this you have a still renewable society but it alters the ecology say uses 20% of the forest cover and replaces it with new trees and 30% of the land. This suggest this economy is using renewable resources on about a 50 year timescale.
From here on out more intensive usage is probably not renewable and the question becomes how long to exhaustion slightly above and it could be 1000 years higher and higher and you get to 50 years.
A similar situation applies to non renewable resources i.e oil but again if the rate that they are used up or become scarce is low enough then as long as some substitution is possible in a sense it does not matter so much that they are non-renewable on any reasonable human time scale. Also one you readily see you don't have to use them.
And thats the real crux of the matter as near as I can tell if you have a society that is willing to limit its population there is no intrinsic reason it can't choose a solution that impact the planet at a very low level. Next as far as maintaining a technical civilization goes the population requirements to meet the complexity level are fairly low between 30 million and 1 billion. For simple species survival you probably want at least 300-500 million.
And finally on the technical side micro engineering can replace many of our large engineering solutions. By this I mean for example titanium one of the harder metals to extract can readily be produced in a bench top process.
http://www.nature.com/nature/journal/v407/n6802/full/407361a0.html
Practically everything we need for a complex society can be produced in small batches sometimes of course this requires research but its possible. And of course you can readily replace materials with ones that are easier to manufacture.
And example because of economies of scale in the microelectronics industry many novel processes are discarded or left unused because that can be brought into our current fab lines. In particular since the goal is manipulation of information photonic research proceeds slowly.
http://en.wikipedia.org/wiki/Optical_computer
Various organic molecules also hold great promise so longer term a organic photoelectronic computer is probably going to be the best solution.
And we also have fluidics my own personal favorite.
http://en.wikipedia.org/wiki/Fluidics
This could readily be combined with micro-chemistry.
http://en.wikipedia.org/wiki/Lab-on-a-chip
All of this technology is low impact and could replace all kinds of processes used today.
Analysis and quality control are critical for high tech manufacturing and using these methods low energy physically small high tech manufacturing can be done in a distributed fashion using low impact local energy sources.
And last but not least Nano tech will eventually contribute even more novel solutions.
http://en.wikipedia.org/wiki/Nanotechnology
The point is economies of scale can readily be rejected if society chooses if you decide to not play the game of economy of scale large swaths of your high energy use cases simply no longer exist.
A simple example is with these approaches the need for large concrete boxes dissipates and a return to natural materials wood/stone makes sense sky scrappers are no longer needed for this sort of society.
So what I see is for a society that wants to live a comfortable live you end up really choosing two routes use our knowledge to develop what are in effect small universal manufacturing plants or use it to support large scale high volume duplicators with the resulting high impact society. Both or possible and what I'm suggesting is really simply a return to the blacksmith model albeit with a lot more knowledge.
And last but not least many of our household items can be replaced with hand made works of art.
http://www.ecogeek.org/content/view/62/1/
Even these examples which are a forced mixing are pleasing consider if the manufacturing process themselves where changed to incorporate use of wood and glass and stone and copper or silver and of course shrinking of electronics or methods I outlined above.
And last but not least one can imagine that such a society would readily adapt to using communication instead of physical meetings for a lot of its needs. This leaves the need to travel long distances. Well sailing ships and solar powered airships could readily be used for transportation that does not require high speeds. Electric rail would form a part of the transport needs but its not clear its really needed if the population is small enough we literally have no need to even use land thats not near a navigable waterway.
One is left to ponder the last problem that really requires energy which is high speed transport at the global level its intrinsically energy intensive and can't readily be solved with the methods I've outlined.
So you seem to really have two choices limit your population and develop universal fabricators and extensive use of hand made goods wherever possible or your stuck regardless of what you do in the growth/ economies of scale route and resulting debt based economy.
Both don't really answer the question of high speed international travel or how much its needed most of the travel in the growth economy is a side effect of its structure not a need.
I cannot speak about the technical aspects, what few there were, of this talk, but only register my impression, which was extreme disappointment.
I followed the entire lecture and looked forward to what he would say about the "cure" for the current capitalist crisis--and what he offered was: The cure is to do more of the same, engage in entrepreneurial capitalism, the same sort of capitalism that led to the 2000 net bubble and bust. Marx rolled over in his grave and cried himself to death.
The final "suggestion" leads me to discount the entire lecture by 100%. The lecturer does not apparently understand how entrepeneurial enterprises work, nor their purpose.
All companies are started by entrepreneurs, then they get big and "corporate." When you start such a company, you never, and I mean never, work three or four days and spend a day away from work discussing your strategy and products. Rather, you work like you've never worked before because now your paycheck depends on yourself--and your few co-founders. Usually you work 7x18, if you're lucky. You put your family and close friends, and maybe a potential investor, on your board, because you need it, legally. You don't have any income, so you offer shares--and everyone works like hell so they can luck out from any IPO. Workers are just that--workers. Oh, sure, you may have game rooms and allow frisbees and foosball in the office--but not because you are concerned about your workers, but because you know that helps them be more productive. All the founders and chief players work like dogs when they start, and all new hires are expected to follow the culture--all with a carrot of shares and stock and IPOs dancing before their eyes.
Sorry, but the solution to the capitalist crisis is not more of the same. We need to, first, determine what sort of life is worth living, then develop an economic system on that basis. What the capitalist crisis shows us is that working all the time, working just for money, working on products that may harm people, producing useless junk--all of this is not worth living for. Not only that, it's not sustainable.
What you're describing has nothing to do with capitalism. If you're going to demonize capitalism, at least understand what it is and what it is NOT. Under capitalism, people default on their debts, and are thus rendered incapable of doing any further damage to the economy with their malinvestments. We cant have these huge boom and bust cycles under capitalism, because the huge amount of credit can only be produced through massive anti-capitalist interventions.
Defaults of bad debt are the price we must pay to have true capitalism. If the government and other anti-capitalist forces would simply stop attempting to intervene, then these defaults would be relatively small, and would occur more regularly, leading to a stronger system that rewards good investment by flushing out the bad investment. There is no proven economic system that works better than this.