The Need For A New Economic System
By John Scales Avery
25 July, 2015
PART 1: LIMITS TO GROWTH
Introduction: The need for reform
The Industrial Revolution marked the start of massive human use of fossil fuels. The stored energy from several hundred million years of plant growth began to be used at roughly a million times the rate at which it had been formed. The effect on human society was like that of a narcotic. There was a euphoric (and totally unsustainable) surge of growth of both population and industrial production. Meanwhile, the carbon released into the atmosphere from the burning of fossil fuels began to duplicate the conditions which led to the 5 geologically-observed mass extinctions, during each of which more than half of all living species disappeared forever.
Economists (with a few notable exceptions) have long behaved as though growth were synonymous with economic health. If the gross national product of a country increases steadily by 4% per year, most economists express approval and say that the economy is healthy. If the economy could be made to grow still faster (they maintain), it would be still more healthy. If the growth rate should fall, economic illness would be diagnosed.
However, it is obvious that on a finite Earth, neither population growth nor economic growth can continue indefinitely. A 4% rate of growth corresponds to an increase by a factor of 50 every century. No one can maintain that this is sustainable in the long run except by refusing to look more than a short distance into the future.
Of course, it is necessary to distinguish between industrial growth, and growth of culture and knowledge, which can and should continue to grow. Qualitative improvements in human society are possible and desirable, but resource-using and pollution-producing industrial growth is reaching its limits, both because of ecological constraints and because of the exhaustion of petroleum, natural gas and other non-renewable resources, such as metals. The threat of catastrophic climate change makes it imperative for us to stop using fossil fuels within very few decades.
Today, as economic growth falters, the defects and injustices of our banking system have come sharply into focus, and light has also been thrown onto the much-too-cozy relationship between banking and government. The collapse of banks during the sub-prime mortgage crisis of 2008 and their subsequent bailout by means of the taxpayer's money can give us an insight into both phenomena - the faults of our banking system and its infiltration into the halls of government. The same can be said of the present national debt crisis in the Euro zone and elsewhere.
One feature of banking that cries out for reform is “fractional reserve banking", i.e. the practice whereby private banks keep only a tiny fraction of the money entrusted to them by their depositors, and lend out all the remaining amount. By doing so, the banks are in effect coining their own money and putting it into circulation, a prerogative that ought to be reserved for governments. Under the system of fractional reserve banking, profits from any expansion of the money supply go to private banks rather than being used by the government to provide social services. This is basically fraudulent and unjust; the banks are in effect issuing their own counterfeit money.
When the economy contracts instead of expanding, the effect of fractional reserve banking is still worse. In that case the depositors ask the banks for their money, which it is their right to do. But the banks do not have the money; they have lent it out, and thus they fail. However, the bankers have insured themselves against this eventuality by buying the votes of government officials. Thus the banks are bailed out and the taxpayers are left with the bill, as in the recent example in which the US Federal Reserve secretly gave 7.7 trillion of the taxpayers' dollars to bail out various banks.
In a later section (on entropy and economics) we will discuss in detail Frederick Soddy's criticisms of the fractional reserve banking system, and his proposals for monetary reform.
The fact that our fractional reserve banking system is stable when the economy is expanding, but collapses when the economy contracts explains, in part, the irrational and almost religious belief of governments and economists in perpetual growth. Also contributing to growth-worship are the unearned profits that investors reap when they own property in growing cities, or shares of growing businesses. But growth cannot continue forever. It is destroying the earth.
Pope Francis has called for economic reform. Our battered earth calls for it. The case of Greece shows clearly that our present economic system is not working; it is destroying nature and at the same time producing human misery. We need something else.
The Club of Rome
In 1968 Aurelio Pecci, Thorkil Kristensen and others founded the Club of Rome, an organization of economists and scientists devoted to studying the predicament of human society. One of the first acts of the organization was to commission an MIT study of future trends using computer models. The result was a book entitled “Limits to Growth”, published in 1972. From the outset the book was controversial, but it became a best-seller. It was translated into many languages and sold 30 million copies.The book made use of an exponential index for resources, i.e. the number of years that a resource would last if used at an exponentially increasing rate.
Today the more accurate Hubbert Peak model is used instead to predict rate of use of a scarce resource as a function of time. Although the specific predictions of resource availability in “Limits to Growth” lacked accuracy, its basic thesis, that unlimited industrial growth on a finite planet is impossible, was indisputably correct. Nevertheless the book was greeted with anger and disbelief by the community of economists, and these emotions still surface when it is mentioned.
Economic activity is usually divided into two categories, 1) production of goods and 2) provision of
services. It is the rate of production of goods that will be limited by the carrying capacity of the global environment. Services that have no environmental impact will not be constrained in this way. Thus a smooth transition to a sustainable economy will involve a shift of a large fraction the work force from the production of goods to the provision of services.
In his recent popular book “The Rise of the Creative Class” the economist Richard Florida points out that in a number of prosperous cities, for example Stockholm, a large fraction of the population is already engaged in what might be called creative work, a type of work that uses few resources, and produces few waste products, work which develops knowledge and culture rather than producing material goods. For example, producing computer software requires few resources and results in few waste products. Thus it is an activity with a very small ecological footprint.
Similarly, education, research, music, literature and art are all activities that do not weigh heavily on the carrying capacity of the global environment. Furthermore, cultural activities lead in a natural way to global cooperation and internationalism, since cultural achievements are shared by the people of the entire world. Indeed, the shared human inheritance of culture and knowledge is growing faster than ever before.
Florida sees this as a pattern for the future, and maintains that everyone is capable of creativity. He visualizes the transition to a sustainable future economy as one in which a large fraction of the work force moves from industrial jobs to information-related work. Meanwhile, as Florida acknowledges, industrial workers feel uneasy and threatened by such trends.
Biological Carrying capacity and Economics
Classical economists pictured the world as largely empty of human activities. According to the empty-world picture of economics, the limiting factors in the production of food and goods are shortages of human capital and labor. The land, forests, fossil fuels, minerals, oceans filled with fish, and other natural resources upon which human labor and capital operate, are assumed to be present in such large quantities that they are not limiting factors. In this picture, there is no naturally-determined upper limit to the total size of the human economy. It can continue to grow as long as new capital is accumulated, as long as new labor is provided by population growth, and as long as new technology replaces labor by automation.
Biology, on the other hand, presents us with a very different picture. Biologists remind us that if any species, including our own, makes demands on its environment which exceed the environment's carrying capacity, the result is a catastrophic collapse both of the environment and of the population
which it supports. Only demands which are within the carrying capacity are sustainable. For example, there is a limit to regenerative powers of a forest.
It is possible to continue to cut trees in excess of this limit, but only at the cost of a loss of forest size, and ultimately the collapse and degradation of the forest. Similarly, cattle populations may for some time exceed the carrying capacity of grasslands, but the ultimate penalty for overgrazing will be degradation or desertification of the land. Thus, in biology, the concept of the carrying capacity of an environment is extremely important; but in economic theory this concept has not yet been given the weight which it deserves.
Exponential growth of human population and economic activity have brought us, in a surprisingly short time, from the empty-world situation in which he lived to a full-world situation. In today's world, we are pressing against the absolute limits of the earth's carrying capacity, and further growth carries with it the danger of future collapse.
Full-world economics, the economics of the future, will no longer be able to rely on industrial growth to give profits to stockbrokers or to solve problems of unemployment or to alleviate poverty. In the long run, neither the growth of industry nor that of population is sustainable; and we have now reached or exceeded the sustainable limits.
The limiting factors in economics are no longer the supply of capital or human labor or even technology. The limiting factors are the rapidly vanishing supplies of petroleum and metal ores, the forests damaged by acid rain, the diminishing catches from over-fished oceans, and the cropland degraded by erosion or salination, or lost to agriculture under a cover of asphalt.
Neoclassical economists have maintained that it is generally possible to substitute man-made capital for natural resources; but a closer examination shows that there are only very few cases where this is really practical. (See G.E. Tverberg, “Thoughts on why energy use and CO2 emissions are rising as fast as GDP”, www.ourfiniteworld.com, November 30, (2011).)
The size of the human economy is, of course, the product of two factors the total number of humans, and the consumption per capita. If we are to achieve a sustainable global society in the future, a society whose demands are within the carrying capacity of of the global environment, then both these factors must be reduced.
The responsibility for achieving sustainability is thus evenly divided between the North and the South: Where there is excessively high consumption per capita, it must be reduced; and this is primarily the responsibility of the industrialized countries. High birth rates must also be reduced; and this is primarily the responsibility of the developing countries. Both of these somewhat painful changes are necessary for sustainability; but both will be extremely difficult to achieve because of the inertia of institutions, customs and ways of thought which are deeply embedded in society, in both the North and the South.
Population and food supply
Let us look first at the problem of high birth rates: The recent spread of modern medical techniques throughout the world has caused death rates to drop sharply; but since social customs and attitudes are slow to change, birth rates have remained high. As a result, between 1930 and 2011, the population of the world increased with explosive speed from two billion to seven billion.
During the last few decades, the number of food-deficit countries has lengthened; and it now reads almost like a United Nations roster The food-importing nations are dependent, almost exclusively, on a single food-exporting region, the grain belt of North America. In the future, this region may be vulnerable to droughts produced by global warming.
An analysis of the global ratio of population to cropland shows that we probably already have exceeded the sustainable limit of population through our dependence on petroleum: Between 1950 and 1982, the use of cheap petroleum-derived fertilizers increased by a factor of 8, and much of our present agricultural output depends their use. Furthermore, petroleum-derived synthetic fibers have reduced the amount of cropland needed for growing natural fibers, and petroleum-driven tractors have replaced draft animals which required cropland for pasturage. Also, petroleum fuels have replaced fuelwood and other fuels derived for biomass. The reverse transition, from fossil fuels back to renewable energy sources, will require a considerable diversion of land from food production to energy production.
As population increases, the cropland per person will continue to fall, and we will be forced to make still heavier use of fertilizers to increase output per hectare. Also marginal land will be used in agriculture, with the probable result that much land will be degraded through erosion or salination.
Reserves of oil are likely to be exhausted by the middle of this century. Thus there is a danger that just as global population reaches the unprecedented level of 9 billion or more, the agricultural base for supporting it may suddenly collapse. The resulting ecological catastrophe, possibly compounded by war and other disorders, could produce famine and death on a scale unprecedented in history, a catastrophe of unimaginable proportions, involving billions rather than millions of people. The present tragic famine in Africa is to this possible future disaster what Hiroshima is to the threat of thermonuclear war a tragedy of smaller scale, whose horrors should be sufficient, if we are wise, to make us take steps to avoid the larger catastrophe.
At present a child dies from starvation every six seconds. Five million children die from hunger every year. Over a billion people in today's world are chronically undernourished. There is a threat that unless prompt and well-informed action is taken by the international community, the tragic loss of life that is already being experienced will increase to unimaginable proportions.
As glaciers melt in the Himalayas, threatening the summer water supplies of India and China; as ocean levels rise, drowning the fertile rice-growing river deltas of Asia; as aridity begins to decrease the harvests of Africa, North America and Europe; as populations grow; as aquifers are overdrawn; as cropland is lost to desertification and urban growth; and as energy prices increase, the billion people who now are undernourished but still survive, might not survive. They might become the victims of a famine whose proportions could exceed anything that the world has previously experienced.
It is vital for the world to stabilize its population, not only because of the threat of a catastrophic future famine, but also because rapid population growth is closely linked with poverty. Today, a large fraction of the world's people live in near-poverty or absolute poverty, lacking safe water, sanitation, elementary education, primary health care and proper nutrition. Governments struggling to solve these problems, and to provide roads, schools, jobs and medical help for all their citizens, find themselves defeated by the rapid doubling times of populations. For example, in Liberia, the rate of population growth is 4% per year, which means that the population of Liberia doubles in size every eighteen years.
Under such circumstances, despite the most ambitious development programs, the infrastructure per capita decreases. Also, since new jobs must be found for the new millions added to the population, the introduction of efficient modern methods in industry and agriculture aggravates the already-serious problem of unemployment.
Education of women and higher status for women are vitally important measures, not only for their own sake, but also because in many countries these social reforms have proved to be strongly correlated with lower birth rates. Religious leaders who oppose programs for the education of women and for family planning on “ethical” grounds should think carefully about the scope and consequences of the catastrophic global famine which will undoubtedly occur within the next 50 years if population is allowed to increase unchecked.
One of the most important keys to controlling the global population explosion is giving women better education and equal rights. These goals are desirable for the sake of increased human happiness, and for the sake of the uniquely life-oriented point of view which women can give us; but in addition, education and improved status for women have shown themselves to be closely connected with lowered birth rates.
When women lack education and independent careers outside the home, they can be forced into the role of baby-producing machines by men who do not share in the drudgery of cooking, washing and cleaning; but when women have educational, legal, economic, social and political equality with men, experience has shown that they choose to limit their families to a moderate size.
Sir Partha Dasgupta of Cambridge University has pointed out that the changes needed to break the cycle of overpopulation and poverty are all desirable in themselves. Besides education and higher status for women, they include state-provided social security for old people, provision of water supplies near to dwellings, provision of health services to all, abolition of child labor and general economic development.
Social Values and Levels of Consumption
Let us next turn to the problem of reducing the per-capita consumption in the industrialized countries. The whole structure of western society seems designed to push its citizens in the opposite direction, towards ever-increasing levels of consumption. The mass media hold before us continually the ideal of a personal utopia filled with material goods.
Every young man in a modern industrial society feels that he is a failure unless he fights his way to the “top”; and in recent years, women too have been drawn into this competition. Of course not everyone can reach the top; there would not be room for everyone; but society urges all us to try, and we feel a sense of failure if we do not reach the goal. Thus, modern life has become a struggle of all against all for power and possessions.
One of the central problems in reducing consumption is that in our present economic and social theory, consumption has no upper bound; there is no definition of what is enough; there is no concept of a state where all of the real needs of a person have been satisfied. In our growth-oriented present-day economics, it is assumed that, no matter how much a person earns, he or she is always driven by a desire for more.
The phrase “conspicuous consumption” was invented by the Norwegian-American economist Thorstein Veblen (1857-1929) in order to describe the way in which our society uses economic waste as a symbol of social status. In “The Theory of the Leisure Class”, first published in 1899, Veblen pointed out that it wrong to believe that human economic behavior is rational, or that it can be understood in terms of classical economic theory. To understand it, Veblen maintained, one might better make use of insights gained from anthropology, psychology, sociology, and history.
The sensation caused by the publication of Veblen's book, and the fact that his phrase, “conspicuous consumption”, has become part of our language, indicate that his theory did not completely miss its mark. In fact, modern advertisers seem to be following Veblen's advice: Realizing that much of the output of our economy will be used for the purpose of establishing the social status of consumers, advertising agencies hire psychologists to appeal to the consumer's longing for a higher social position.
When possessions are used for the purpose of social competition, demand has no natural upper limit; it is then limited only by the size of the human ego, which, as we know, is boundless. This would be all to the good if unlimited economic growth were desirable. But today, when further industrial growth implies future collapse, western society urgently needs to find new values to replace our worship of power, our restless chase after excitement, and our admiration of excessive consumption.
The values which we need, both to protect nature from civilization and to protect civilization from itself, are perhaps not new: Perhaps it would be more correct to say that we need to rediscover ethical values which once were part of human culture, but which were lost during the process of industrialization when technology allowed us to break traditional environmental constraints.
Our ancestors were hunter-gatherers, living in close contact with nature, and respecting the laws and limitations of nature. There are many hunter-gatherer cultures existing today, from whose values and outlook we could learn much. Unfortunately, instead of learning from them, we often move in with our bulldozers and make it impossible for their way of life to continue. During the past several decades, for example, approximately one tribe of South American forest Indians has died out every year. Of the 6000 human languages now spoken, it is estimated that half will vanish during the next 50 years.
In some parts of Africa, before cutting down a tree, a man will offer a prayer of apology to the spirit of the tree, explaining why necessity has driven him to such an act. The attitude involved in this ritual is something which industrialized society needs to learn, or relearn.
Older cultures have much to teach industrial society because they already have experience with full-world situation which we are fast approaching. In a traditional culture, where change is extremely slow, population has an opportunity to expand to the limits which the traditional way of life allows, so that it reaches an equilibrium with the environment. For example, in a hunter-gatherer culture, population has expanded to the limits which can be supported without the introduction of agriculture. The density of population is, of course, extremely low, but nevertheless it is pressing against the limits of sustainability. Overhunting or overfishing would endanger the future. Respect for the environment is thus necessary for the survival of such a culture.
Similarly, in a stable, traditional agricultural society which has reached an equilibrium with its environment, population is pressing against the limits of sustainability. In such a culture, one can usually find expressed as a strong ethical principle the rule that the land must not be degraded, but must be left fertile for the use of future generations.
Today, the whole world seems to be adopting values, fashions, and standards of behavior presented in the mass media of western society. The unsustainable, power-worshiping, consumption-oriented values of western society are so strongly propagandized by television, films and advertising, that they overpower and sweep aside the wisdom of older societies. This is unfortunate, since besides showing us unsustainable levels of affluence and economic waste, the western mass media depict values and behavior patterns which are hardly worthy of imitation. We need to reverse this trend. The industrialized countries must learn from the values of older traditional cultures.
The wisdom of our ancestors, their respect for nature and their hospitable traditions of sharing, can help us to create a new economic system founded on social and environmental ethics.
John Avery received a B.Sc. in theoretical physics from MIT and an M.Sc. from the University of Chicago. He later studied theoretical chemistry at the University of London, and was awarded a Ph.D. there in 1965. He is now Lektor Emeritus, Associate Professor, at the Department of Chemistry, University of Copenhagen. Fellowships, memberships in societies: Since 1990 he has been the Contact Person in Denmark for Pugwash Conferences on Science and World Affairs. In 1995, this group received the Nobel Peace Prize for their efforts. He was the Member of the Danish Peace Commission of 1998. Technical Advisor, World Health Organization, Regional Office for Europe (1988- 1997). Chairman of the Danish Peace Academy, April 2004. http://www.fredsakademiet.dk/ordbog/aord/a220.htm. He can be reached at email@example.com
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