Every economy, every self-organizing system which is not
also self-limiting within the bounds set by its environment, grows until it
exceeds the ability of that environment to support and sustain it. It then collapses.
The collapse of our global economy can be expected to be
catastrophic.
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When an economy first develops, acquiring resources is
difficult and expensive. Growth is slow and uncertain, often outstripped by the
demands of increasing population. This
is despite the fact that resources are often accessible and plentiful. The methods of extracting the resources are
primitive and inefficient, and there is little surplus. The demand for and uses for new resources are
limited, and efforts at developing new resources are often desultory. This
state of affairs, essentially one of economic stagnation while surrounded by
plenty, can often last a long time.
Note that there is a maximum benefit to any resource, and
the costs of development, extraction, and conversion of that resource to useful
form must be subtracted from that maximum benefit. Ideally, the remainder is
what is available for use by the rest of the economy, though more often an
economy is incapable of extracting the maximum benefit from any resource. There
is almost always some degree of inefficiency of use of any resource by an
economy and in primitive economies, this inefficiency is very high.
However, as infrastructure is invested in and developed, the
relative cost of acquiring and developing resources decreases. More uses are found for extracted resources,
providing motive for ever greater extraction. Since it is easier and cheaper to
develop uses for resources, rather than new sources of resources, demand, in
general, outstrips supply, keeping the profit margins of producers high. For
the producers, this extra profit means more resources are available to invest
in expanding extraction and distribution, thus increasing the supply of these
extracted resources available to be put to other uses in the economy.
With the initiation of growth, the economy is able to
exploit resources at an accelerating rate. The economy grows further. At this stage, the limiting factor no longer is
the costs of extraction, but the limitations in demand, which are the final
uses for the resources, and the necessary distribution systems, which also must
be developed.
So it is necessary to develop an infrastructure, in order to
extract, distribute and employ the resources, There is a cost, in resources
consumed, to developing this infrastructure, There is also a cost to
maintaining this infrastructure, and finally there is a cost to operating this
infrastructure.
Since these costs are low, when resources are still
plentiful and cheap to extract, the infrastructure grows robustly, This has the
consequence that the early infrastructure maintenance systems will not be
designed for efficient use of resources. And this has consequence when resources later
become expensive.
For clearly, however, with finite resources, or a finite
average density of resources, or even with a finite rate of renewal of
resources, the availability of resources
limits any economy’s ability to grow. And
this first shows up as resources become more expensive to find, to extract, and
to distribute.
Indeed, as the plentiful and inexpensive resources are
consumed, the exploitation of ever more marginal resources, resources which are
more costly to extract and process, which are more distant and difficult to
transport, becomes necessary to expand and even just to sustain the
economy. And the infrastructure must be
expanded to develop these resources, and at an increasing cost. What is more, this increasing cost of
extraction must be passed on, and this increases the maintenance and operating costs
of the entire infrastructure, including that already developed and designed around
a low cost of resources in order to be efficiently maintained and operated. This
older infrastructure becomes disproportionately costly and inefficient to
operate when resources are more costly.
So less and fewer resources are available for expansion of
that infrastructure.
Eventually, as the availability of resources decreases, and
their cost of extraction increases, the cost in resources necessary to develop
new infrastructure, and more importantly, the cost in resources necessary to
maintain and operate the infrastructure
already built, exceeds the ability of the economy to extract benefits from
those resources.
Increasingly, maintenance will be sacrificed to cover the
increasing costs of operation. The system will no longer be covering its fixed
costs, but only its variable costs. The result will eventually be a stage where
the infrastructure can no longer be maintained, when the maintenance budget
passes below a critical threshold, but will be subject to increasing
catastrophic failure. This threshold is roughly when the budget is no longer
able to cover both preventative maintenance and essential repairs. With
inadequate preventative maintenance, essential repairs will increase, eating
into the budget for preventative maintenance. As the budget for preventative
maintenance decreases, the need for essential repairs will increase, in a
vicious spiral. This process is sped by increasing costs of operation as a
result of the increasing cost of acquiring resources, which the declining
quality of the infrastructure also aggravates.
The real increasing costs of maintaining the real economy,
(and in particular its infrastructure,) and the increasing real costs of its
extraction of real resources from the natural environment, are hidden by the
mechanisms of externalization of costs.
In an economy there are many mechanisms for externalizing
costs, but they fall into the two broad classes of externalizing real costs,
and of externalizing financial costs.
Externalizing financial costs does not alter the real costs of
extraction and distribution. By
financial manipulation, these real costs are not reduced, but merely
redistributed throughout the rest of the economy, the point being that the
extractive industry will appear to be making more of a monetary profit than it
really is. The industry may actually be
losing money. But the appearance of profit
leads to the real economy appearing to be gaining greater benefit from the
extractive process than it really is.
Real costs appear lower,
because financial costs appear lower.
But the financial costs to some of the other
sectors of the economy become higher,
though, because they must absorb some of the real costs of extraction. Somebody must pay, and if not the extractive
industries themselves, then it must be somebody else. And all together, the real cost is greater,
because resources are consumed in the economically empty endeavor of
externalizing costs.
On the other hand, the externalization of real costs does permit
the current extraction of resources at a present day lower real cost.
So two ways of externalizing real costs are pollution and the
over exploitation of a renewable resources.
Deferred maintenance is another. So
where externalizing financial costs distributes real costs throughout a present
economy, we see that the direct externalization of real costs distributes those
costs into the future economy. Externalized
costs distributed over the future also tend to be greater than costs which are internalized
in the present. For one example: The Newfoundland cod
fishery: It collapsed in 1992 due to
overfishing, and has yet (2017) to recover.
These manipulations
of the real economy, as well as the financial manipulations which enable them,
enrich the financial and consuming sectors, and impoverish the actual producers
of real goods and services. At this late
stage, many productive sectors are deprived of the real resources necessary for
them to grow, and ultimately to maintain themselves.
For in the case of the modern economy, there are two
relevant systems: The real economy
itself, and the financial economy which feeds off the real economy. The financial economy produces nothing of
substance itself. When useful it serves as a multiplier of production, by
increasing the efficiency of allocation of resources. If feeds itself, first,
however, before the real economy, and when overgrown it diverts more resources
to itself than it saves the real economy by that allocation of resources. The result is a decline in the efficiency of
the real economy, and its ability to grow.
In any case, this happens at a late stage in the development
of the real economy, when the resources available to the real economy to mount
opposition to the growth of the financial economy are diverted away. Part of
this is the result of increasing real costs in the rest of the economy outlined
above. Part is by the increasing diversion
of resources by and to the financial sector itself. (Inter-sectoral competition for resources is
seldom considered by business leaders.) A
point is reached when effective regulation of the financial sector fails. (One part of this process is that one of the
consequences of the increasing concentration of wealth is that the value of
non-financial rewards offered by the society declines, and become devalued,
reducing the cost of corrupting other institutions.)
Once the financial economy evades the controls set on it by
the real economy, it grows without effective bounds. The financial sector then out-competes
the real economy for money. The
financial sector is designed around the acquiring of money, and, unregulated,
is simply more efficient at this than any sector of the real economy.
Feeding off the real economy, finance is also a
non-self-limiting, self-organizing system.. It too is subject to overgrowth and
collapse. This happens when it exceeds
the ability of the real economy to support it. When this occurs, if and only if
it occurs before a critical point in the growth of the real economy, the real
economy may yet be saved. This is not
because the real economy is self-limiting.
It is only because it has been increasingly organized to service the
financial economy, and with the collapse of the financial economy, the real
economy may be reorganized into a self-limiting form. This is not guaranteed. This may not even be likely. In 2008, the opportunity for such
reorganization arose, and was missed. And whether or not the real economy can still
be saved still depends on whether or not it is already too big to be
reorganized into a sustainable form. (It
should be mentioned that capitalism, per se, is organized around efficiency,
not sustainability.)
With the financial economy in ascendant, money is pumped out
of the real economy almost as fast as government spending can pump it in. This severely reduces the profit margins of
productive industries. Producers in the
real economy would be hurt two ways.
Because of lags in production, prices of final goods are reduced vis a
vis the prices of the factors which went into them. And because of the money diverted into
finance, prices for those final goods are also diminished.
Because of the diversion of money to the financial economy,
the quantity of various forms of money in the financial economy increases. This is accompanied by ever greater
concentration of wealth. While all
assets become overvalued, consuming assets, in particular the assets of producers
of toys for the wealthy, gain the highest profit margins, and so gain the
highest valuation. At the same time, the assets of more basic industries,
caught between rising costs and more limited demand, have lower profits, and
thus a lower increase in value.
This growth is in the demand, or consuming side of the
economy, which conceals a relative decline in the extracting and manufacturing
sectors. GDP, for instance, does not
distinguish between growth in basic industries, whose value added is underpriced,
and growth in consuming sectors such as retail (High and low end retail. Retail oriented toward the middle and working classes,
as these are the classes from which the wealthy can most efficiently extract
money, does not do as well.) and, increasingly, finance. The economy becomes increasingly skewed, away
from production and towards consumption.
.
This financial extraction becomes ever more difficult and
costly, as the real economy becomes progressively impoverished and less
productive. The concentration and
availability of extractable community assets also declines. These assets, historically, because of their
low potential for profits, were unattractive to private enterprise, and government
was virtually compelled to assume these responsibilities. Public services become attractive to private
monies only due to the combination of being cheaply acquirable capital, the
dearth of alternative investment opportunities, and, because of the increasing
inability of the undercapitalized public sector to defend itself, opportunities
for graft.
This decline in efficiency of financial extraction, means
more labor is required for the financial sector to extract wealth from the real
economy. Thus, even though most labor is no longer involved in real extraction
and production, there results the paradox of an increasing burden on labor in
non-productive jobs. This is obscured by the fact that these financial costs
are increasingly externalized onto the real economy, ie absorbed by
non-financial industries and labor . However, because of the decreasing
efficiency, the profit to be made off these jobs is very low, and decreasing,
and the pay must be commensurate.
Meanwhile, since the cost of all maintenance increases, the
cost of maintaining the burden of the financial and consuming sectors is also
increasing; the costs required for
extraction increase, the actual financial profits decline to zero and even go
negative.
The degree of financial exploitation is not reduced, but more
resources are devoted to the process.
Even as this happens, fewer resources are available to the real economy.
This is both because the financial sector externalizes its costs onto it onto
the real economy, (and thus appearing artificially profitable,) and because
greater real resources must be expended in acquiring resources from an
increasingly impoverished natural environment.
Combined, these processes render the usual indicators of
economic health and prosperity at least useless and even more likely
misleading. Much growth occurs in the wrong sectors, and is indicative of
impending failure, rather than success. Further, with increasing deregulation,
more fraud may be expected, both in production, and in reporting on that
production, further corrupting indicators.
______________________________
Mankind has yet to develop a modern, self-limiting economy.
Hunter-gatherer societies existed in ecological equilibrium with their
environment, fitting into the limits set by the rate of replenishment of
renewable resources. For pre-industrial
economies, the growth trap must be considered as a possible factor in their
ultimate decline. Since economies ultimately serve a population, clearly, with
unrestricted population growth, no self-limiting economy is possible. And any non-self-limiting economy will be
subject to the growth trap.
More to the present, however, there is no evidence that
capitalism is self-limiting. Indeed, the
virtue of Capitalism is efficiency, not sustainability. Because of its inherent drive for efficiency,
it is able to out-compete any sustainable system, and destroy it. It even out-competes those sustainable
systems it depends on, and destroys those.
Only a self-limiting economy can survive the growth
trap. Only an economy which can limit
its consumption of renewable resources to some rate less than the rate those
resources are renewed, and its consumption of non-renewable resources to some
rate less than those resources can be recycled, can be indefinitely
sustained. All other economies will
fail. And a failing economy will be incapable of providing sufficient resources
for the survival of most of its members.
Indeed, because of the enormous efficiencies brought about by a modern
economy, if that economy fails, such a failure will be catastrophic, and only
small percentage of the people who depend on that economy can be expected to
survive.
There still seems a choice, however, although, judging from
their antics, our political class seems either incapable of or uninterested in
confronting the issue.
Revised and expanded Sep 7,2016, Nov7, 2016, Feb 17, 2017,
May15, 2017
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