Page 1 of 2 Economics can open to new realities
By Joe Costello
The power to become habituated to his surroundings is a marked
characteristic of mankind. Very few of us realize with conviction the intensely
unusual, unstable, complicated, unreliable, temporary nature of the economic
organization by which Western Europe has lived for the last half century. We
assume some of the most peculiar and temporary of our late advantages as
natural, permanent, and to be depended on, and we lay our plans accordingly. On
this sandy and false foundation we scheme for social improvement and dress our
political platforms, pursue our animosities and particular ambitions ... [John
Maynard Keynes, The Economic Consequences of the Peace], 1920
These thoughts opened the book that first gave Keynes renown.
They remain critically relevant. The Economic Consequences of the Peace was
a devastating and accurate critique of the 1919 Versailles Peace treaty. Keynes
showed how the smallness of men, combined with the ignorance of actual
underlying economic and political conditions led to an agreement that was
punitive and self-defeating.
The truly horrendous consequences of the treaty would take two more decades to
come to fruition and Europe would be plunged into an even more horrendous and
destructive war than the one they hoped not to repeat with Versailles. Just as
the Versailles Treaty in 1919 showed the victorious allies to be hubristic and
blind to the realities of post-war Europe, thus helping induce a catastrophic
result, today every action thus far taken by the United States government in
reaction to the "credit crisis" leads only to one conclusion: its leadership is
both fatally arrogant and removed from the underlying realities of our time.
Instead of addressing the fundamental problems underlying the American
political economy, the US government attempts, in vain, to keep inflated a
financial bubble built over a couple decades. Just as Versailles failed to take
in the realities of early 20th century Europe, Washington's bail-out of Wall
Street and the banking system fails to take in the political and economic
realities of early 21st century America.
While Versailles was too punitive on defeated Germany, Washington is too
conciliatory to Wall Street. Each dollar now spent to keep this unsustainable
bubble inflated, drains the resources and saps political will for necessary
change. Each dollar spent by the Federal Reserve and the Treasury over the
course of the past year institutionalizes the status quo, placing the future in
debt to a failed past, insuring our future decline just as the Allies fated
Wiemar Germany's.
Keynes stated, "Very few of us realize with conviction the intensely unusual,
unstable, complicated, unreliable, temporary nature of the economic
organization by which Western Europe has lived for the last half century" -
this goes double for America today.
At the end of World War II, the United States was militarily, politically, and
economically pre-eminent on a historically unprecedented scale. On a material
basis, for several generations we created a societal standard of living that
was as widely shared and opulent as any civilization in history. Yet, it is not
simply the results of a "half century" of industrial capitalism by which
America prospered, but a century and half.
However, in the past two decades, much of the wealth created by America was
nothing more than debt, glorified as Croesusian profits in the books of the
financial industry. Amazingly, financial profits accounted for 31% of all
American profits in 2006, compared to only 8% just four decades before.
Increasingly, the United States resembles an old landed aristocratic British
family at the turn of the 20th century, keeping up appearances and position
only by mortgaging the estate. In the past two decades, this avalanche of debt
disguised as paper wealth averted attention from America's very real problems.
Over the past six decades, the American economic experience can be divided
relatively neatly into two parts. The first 30 years saw the increasing growth
of American manufacturing, a strong balance of trade, and the continuation of
the United States as the planet's greatest creditor nation. The second half,
which we can divide neatly, though not completely accurately, with the 1973 Oil
Crisis, found the United States with a declining manufacturing base, declining
balance of trade, and a shift from the world's greatest creditor to the world's
greatest debtor.
The oil price spike as demarcation between these two periods is not
coincidental. What we deem modern society, what Keynes would call our "nature
of economic organization", was built on our ability to harness the power of
fossil fuels. Wealth in the United States was based on unlimited access to
cheap oil. This started to change in the 1970s. In 1973, oil prices spiked,
inflation grew at historic levels, and much of the post-World War II political
economy consensus was challenged. For an American economic infrastructure
dependent on cheap oil, it was reckoning time for the established order.
Unfortunately, limited attempts to begin weaning America off oil were soon
abandoned. Instead, another trend was founded in the late 70s that not only
continued but exploded over the next three decades - the unbridled growth of
the financial industry and the corresponding and necessary peddling of debt as
wealth.
Deregulation a go-go
In 1980, Washington deregulated the interest rates banks could charge, a
historically important event marking the beginning of the soon to be Neo-Go-Go
years for finance. For the next 25 years, the continuous deregulation of the
financial industry removed, or better, untethered financial profits from any
connection to the real economy. Keven Phillips' essential book on the
financialization of the economy, Bad Money, points out that by 2004-6,
financial services represented 20% to 21% of gross domestic product,
manufacturing just 12% to 13%.
In order to grow the financial industry so fantastically, one thing was
necessary, debt, and debt became pervasive across the economy. The Financial
Times writes, "The aggregate stock of US debt rose from a mere 163% of gross
domestic product in 1980 to 346% in 2007. Just two sectors of the economy were
responsible for this massive rise in leverage: households, whose indebtedness
jumped from 50% of GDP in 1980 to 71% in 2000 and 100% in 2007; and the
financial sector, whose indebtedness jumped from just 21% of GDP in 1980 to 83%
in 2000 and 116% in 2007."
The changing of the American economy from production to finance is best
represented by General Electric, the storied American company founded by Thomas
Edison and responsible for helping build America's 20th century industrial
infrastructure. In 2007, GE gained half its profits from GE Capital, its
financial arm. The same change in reliance on finance for profit could also be
seen with America's largest automobile companies General Motors and Ford.
This transformation of American economy has been accomplished for the benefit
of small segments of society, Wall Street and finance. They benefited from the
dismantling of the manufacturing base and its transference across the ocean.
They benefited from the increased indebtedness of the American citizenry and
government. Finally, they benefited outrageously from the great orgiastic last
two decades. Regulation from financial activities was removed and leverage was
brought to casino-like scales.
The greatest damage has been done to the future. For while America went on
binges of conspicuous consumption, paper wealth, and debt, we abandoned changes
necessary for the future. In essence, for three decades America lived off the
wealth created from the previous half-century and then increasingly, and even
more unfortunately, consumed the wealth of the future. The most atrocious
aspect of this debt orgy is that almost every dollar is owed to the status quo,
entrapping the future into the past.
Oil of course is both symbolic and the easiest hard example of America's
consumptive debt failure. Since the 1970s and our recognition of oil as a
finite global resource, thus neither infinite in supply or permanently cheap,
the US has increased oil consumption by 30%, cut public transit budgets, and
built ever-larger fuel-inefficient vehicles. The United States of Debt, the
most oil-dependent society on the planet, ignored the fact global oil
discoveries peaked in the 1960s and have decreased every decade since.
From 1980, the planet has consumed more oil every year than it replaces through
discoveries, though this wouldn't be alarming for a people encouraged to thrive
on debt. However, over the last five years the bill has come due. An
increasingly tight global supply of oil caused exponential rising prices, which
became instrumental bringing about the crash of America's debt culture.
America's debt economy could not run on $4 a gallon gasoline.
Nonetheless, it is not just the financial system, America's entire political
economy is broken. The one-time vibrant mixture of robust markets and
decentralized republican government has atrophied into a centralized behemoth
alliance between bureaucratic Washington DC and mega-corporations.
A detrimental alliance
Two issues, finance and energy, show this alliance to be completely
detrimental, creating a system that rewards, protects, and enhances an
unsustainable status quo that profligately profits off debt. In the financial
sector, deregulation and continuous consolidation created a massive
international Ponzi scheme with the blessings and encouragement of the
bipartisan Washington DC establishment. Simultaneously, the oil industry became
further entrenched. Oil corporations consolidated, auto-companies and their
unions actively fought change, and the DC political establishment codified the
energy status quo.
This was not the work of a couple of decades, but the culmination of over a
century. Economic activity was increasingly centralized by industrial
technologies and institutions, thus helping to politically disenfranchise the
citizenry and centralize political power, which was gradually transferred from
local government to DC.
All this coincided with the abdication of the majority of Americans from civic
life and the degradation of the political process, which became predominantly,
and in some senses exclusively controlled by moneyed interests and a small
professional political class. A centralized corporatist state was created that
is in practice neither democratic or free-market, but mouths the principles of
both.
Today, we are witnessing a crisis of the status quo. A crisis instigated by a
rise in the price of oil and the resulting pop of the massive financial bubble
that floated through and above the economy. Tragically, though not surprising,
our political and economic agents of inertia responded with the tools of the
status quo: further centralization of economic and political power; greater
debt; and bubble-headed notions that America need only drill for more oil to
solve its energy problems. The response to this crisis has done nothing more
than further lock in the status quo and, tragically, destroy opportunity for
the future.
If for no other reason than our oil problem, though certainly for not that
alone, America must change. Change will not come from centralization that
begets bureaucracy and inertia. Nor will it come by increasing our already
outrageous debt to the status quo. America must go back to some of its founding
principles to restore a more democratic-republican political economic
architecture, and dethrone the leviathan corporations that now straddle the
American economy. America must embrace a reinvigoration of small business,
vibrant markets, and distributed democratic political power.
Yet, a simple restoration, a renaissance of the principles of the republic's
founding is not sufficient. We must also evolve our political economy and
institutions with the knowledge of our times.
Five hundred years ago, the Renaissance reintroduced to Europe the ideas,
histories, and philosophies of ancient Rome and Greece, renewing interest in
democracy, and republican self-government. Subsequently, scientific thought and
method was invigorated, redefining humanity's place in the cosmos. Great forces
such as gravity were recognized and understood. The earth was removed from the
center of the universe and in so doing was helped the overthrow of the great
aristocracies of Europe. Over the course of a couple centuries, technology born
from this great scientific revolution would help break the binds of agrarian
servitude. Our modern age came ushered in on the back of science, industry, and
self-government.
The gaining of knowledge in the physical sciences was instrumental in both
upending the old order and establishing the new. Importantly, the industrial
revolution was overwhelmingly based on physics and chemistry, and both
radically re-shaped human society. Today, we are at the forefront of a new
scientific era, a biological one. Our knowledge and understanding of the
biological world creates the opportunity to impact human society to a great a
degree as physics and chemistry have over the last several centuries.
Just as electricity, the internal combustion engine, and nuclear power made
dramatic, and in many ways still little-understood changes on human society, so
too will our resulting knowledge of biology. Just as we had little
understanding of how these past technologies would impact society for better
and worse, so too we now stand in a time of change with insufficient
understanding.
For example, the contemporary environmental movement is based on the
understanding people developed on how we as a species were impacting other
species and the natural biological systems which we are part. The entirety of
environmental knowledge and its impact on how we live is still in its infancy.
The ideas and practices from our growing biological understanding will be used
to help restore and evolve our political economy in the 21st century. Two ideas
are most important; the idea of distributed network order and the essential
role that feedback plays in these systems.
Distributed networks and feedback
The idea of distributed network order is as revolutionary as Copernicus's
insight that the Earth revolves around the Sun. Hierarchy has a limited place
in biological organisms composed of thousands or trillions of cells, proteins,
and DNA, all working and creating order without centralized control. From
millions, billions, and trillions of individual parts acting simultaneously and
cooperatively, order arises in complex organisms.
In his essential new book on the organization of biological systems, Microcosm:
E Coli and the New Science of Life, author Carl Zimmer exquisitely
boils down the concept with, "Robustness [does not] come from some all-knowing
consciousness. It emerges from the network itself ... robust self-control comes
from the feedback loops built into its network."
This understanding of biological order is a blow to our millenia-old thinking
of the necessity of centralized order. In fact, we are learning from biology
that organic systems would be unable to function if they were predominately
centrally controlled. Most interesting and beneficial is that simultaneous and
coincidental to our growing knowledge of distributed order, we have already
created a rudimentary societal system that operates accordingly - the Internet
- a network of distributed order with no ultimate central hub. Order emerges
from the network.
In reforming the American system, the concept and principles of distributed
networked power would serve well in both restoring and
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