Context
I approach the banking and financial crisis as an ecological economist. For me the context of the banking and financial crisis is a far more important crisis in the relationship between humanity and the natural world in which we are in severe danger of creating the conditions for our own extinction and the extinction of most other species on the planet.
Significance
The significance of the banking crisis for me is that it demonstrates that we have an economic system without a reverse gear - given the nature of the banking and finance system there no means currently exists to manage an orderly contraction and reorganisation of the economy. With the banking and finance system as we have it now the economy either grows or it is collapses - there is no other way.
Money lending in historical overview
In the middle ages and through most of the history of humanity lending of money for interest has been regarded as a sin and as socially and economically destructive. If the economy did not grow, and through most of the history of humanity the economy did not grow for long, the fact that moneylenders wanted repaying with interest inevitably meant that moneylenders ended up with a greater proportion of social production - and that could not continue for long. It was socially and economically corrosive. However, when the economy started growing, at first through long distance trade, and then at the time of the industrial revolution because of the application of fossil fuels to the productive process, the finance system could grow too. In these different circumstances it could share in the increased production and wealth. There was more for everyone - at least in the first mercantile colonial powers and then the industrial colonial powers.
Limits of fossil fuel generated production growth
However, now that we have reached the ecologically sustainable limits of a fossil fuel generated production expansion we return to the old truth. Lending involves a repayment with interest. If the economy cannot grow then the repayment of interest means that bankers will get an increasing proportion of society's product and there are limits to how much that can occur.
From a credit system using physical currencies to the dominance of debt based money
Unfortunately, the situation is a bit more complicated than that. It is not only that we have "too much debt" as some people put it - the problem is that we have a money and payment system that is founded upon debt. Once upon a time currencies were commodities like the precious metals, silver and gold. Money lending involved lending a material object and the credit and money lending was an outgrowth of the money system - now however the credit system is the money system.
Over the last two centuries we have evolved a money system which is almost entirely founded on debt. When I was a boy in the 1950s a half of the money in circulation were notes and coin and a half were bank deposits. Now, however, bank deposits make up 97% of the money in circulation. All of this money came into existence when banks lent it into existence.
Common misunderstandings of money
The common misunderstanding about money is that governments create it and when people get that money they put it in their bank accounts and the banks lend the money on. Actually that's not right. The banks create the money that they lend into existence. One way of seeing that is the banks are monetizing your agreement to repay a loan with interest.
Repayment with interest requires extra income - so stagnation and contraction which bring defaults also represent a threat to the very existence of our everyday payment system.
If the debts aren't serviced the money system starts to collapse...
Thus the money supply is backed, not by gold, but by debt and the maintenance of this entire show depends on households and companies and governments being able to service their debts - which means, obviously, repaying them with interest. And, as we have said, they can only repay with interest if the economy is growing. When incomes and profits start falling the repayment of debts and the payment of interest becomes much more difficult. That means defaults. Defaults mean losses for the banks and if large enough that can create a collapse in confidence in banks and bank runs.
Since banks deposits are effectively the monetization of the agreement to repay it means that when people cannot repay, when defaults occur, the fear takes hold that the value of the assets behind bank money is in melt down. That creates a run on the banks which creates a self fulfilling prophecy. For if banks and others are forced to sell assets to raise cash this creates a fire sale in which asset prices fall dramatically. If they survive the banks then fear to lend - and in those economic circumstances everyone else fears to borrow.
Contractions become self reinforcing
Contraction leads to a debt servicing crisis leads to a further reduction in lending leads to a further reduction in money supply in circulation - a self reinforcing downward avalanche which ultimately always puts the payment system in danger. Thus instead of merely make losses you are always confronted with the possibility of a collapse - in which governments scramble to get growth going again.
This returns me to my original point - given this type of money system the economy does not have a means for orderly retreat. There is no option of managed contraction. Retreats become routs unless a successful big effort is organised get the economy growing again - even if that is immensely ecologically destructive, even if taking out increased productivity in unpaid leisure would be preferable, even if the material resources for growth are heavily in depletion and it becomes more and more expensive to get them out of the ground as with oil, gas and other resources, even if we are in danger of driving ourselves into a climate change driven extinction.
Moral Hazard
Since 97% of our money supply is bank money that means that the bankers have us all over a barrel. The problem of moral hazard is that we all depend on the money system for everyday transactions and exchange. In that sense the money system, which has evolved over centuries, is a commons. However it is a commons that has been privatised by bankers and run in their private interest and these bankers are perfectly well aware that if it looks as if the banking system will collapse there is no alternative but to bail them out. The state must step in to prop up the banks. Unless they are propped up we have no means of conducting everyday transactions so tax payers are called upon to prop up bankers.
Creating an economy that can contract without collapsing
So how do we re-create an economy with a reverse gear - how can we create a money system that doesn't spiral into collapse during contraction? The answer is to create a money system that is not based on debt.
Taking the right to create money from the banks - two examples
The first thing that is needed is that the right to create money based on debt is taken away from the banks. How would this work? Lets take an example:
Under the current arrangements lets say that I take £10,000 new money and put it into the bank. With that new money the bank will, if it thinks it can do so safely, lend £9,000 extra to a person or a company who uses the loan to make purchases. Their payment goes into a bank and lo and behold a further £9,000 deposits have been added to my initial £10,000. 90% of that £9,000 will be lent and then there will be a further £8,100 money deposits created. That continues until £90,000 extra money exists over and above my original £10,000 deposit.
If one denies the banks the right to do this they could still lend money on but they would not be able to create money. If the bank want to lend on £9,000 of my £10,000 deposits to a third party they must convince me to make them a loan for same period as they want the third party loan to last. In this case I no longer have £10,000 in the bank as a money deposit that I can spend at any time - I will only have £1,000 on deposit and will have made a £9,000 loan to the bank for a particular period of time that matches their £9,000 loan to someone else. In that case the bank would be merely acting as intermediary between myself as a long term saver and someone else as a borrower.
They could still make money doing this and the banking and financial system would be a lot more stable. I could not demand the £9,000 back until the time is up.
Alternative ways of creating money (1) - money backed by physical assets with value
But this then leads to the question - if banks are no longer allowed to create money, how would money be created? In fact there are a number of different ways to do this - both at a local or regional level, at a national and at an international level. I will confine myself to giving two examples:
As I said, there have been moneys for centuries which, like gold or silver have some kind of intrinsic value. One could create other kinds of currency with an intrinsic value backed by real assets. For example, one could create a currency backed by wood. For example, let's say that there is mass unemployment and no money to employ people. So all over the country people are encourage to plant willow as an energy crop. They do not get a payment in sterling but in notes which say that, in 3 years time they are entitled to a portion of whatever is the value of the coppiced willow when it is harvested and sold. The notes could be held for 3 years and would gain in value as
the willow grew - or they could be exchanged here and now as currency notes whose purchasing power would be a discounted value of the estimate for the future value of the coppiced energy crop.
Alternative ways of creating money (2) - money created by state fiat
Alternatively money can be accepted because the state says it must be accepted in payment for goods and services and in settlement of debts. That is so called fiat money meaning that it is made acceptable by state fiat - because the state says it has to be accepted as legal tender for payments and in payment of debts. The amount of such money created could be determined by a public body that was responsible to create money in the interests of society as a whole. How much of the money that is created should be determined by the needs of the economy and society and ecological system.
Once that is decided the money would then be made available - either to the state to be spent into circulation or distributed to citizens on some other basis. For example new money might be given to the state who use it to spend on ecological infrastructure programmes. Or it might be given to elderly people as pensions to help them cope with rising fuel bills.
Money based on the the mobile phone system
Nor do we even need to create money by printing the stuff on pieces of paper - it would be possible to create payment between balances electronically credited to accounts that could be access and used between mobile phones for example - as unique SIM cards and PIN numbers give enough security to operate a full payment system by mobile. All that is needed is that people get the balances to start with. (This is an idea currently being considered by my colleagues in Feasta)
Money creation and inflation
The idea of giving the state the right to print money alarms people who assume, ipso facto, that this will be inflationary. In fact I am suggesting an independent trust has the right, bound by certain parameters. What's more it depends on the context in which money is created, how much is created and on what it is spent. If there is unused capacity in an economy then buying production that gets this capacity into work with newly created money is not inflationary - as long as the spending can be reversed as appropriate. Indeed state expenditure that makes it possible for the economy to avoid using resources will reduce cost pressures - an example would be if buildings are insulated using state grants. This reduces the need to spend on fuels which cheapens the cost of living in the long term. It is also important to note that creating money could absolve the state from the need to raise some taxes or from borrowing money at interest from banks. In that sense it would lighten the burden on people too. Surely one of the biggest absurdities or, alternatively, one of the biggest examples of institutionalised bare faced cheek, is the way that the state borrows from the banks at interest - when the banks create the money that they lend and the state could just as easily create money itself without having to pay any interest on it.
As debt based money crashes it is rather important that alternative sources of purchasing power are brought into existence and the problem is deflation not inflation. There is likely to be social and economic chaos - which is not at all the right circumstances in which to rebuild an ecological society.
Conclusion - a money system in which the economy can contract without chaos ensuing
With these changes we could then contract the economy, which may or may not be a painful process but is necessary to take the pressure off the eco-system, without the extreme danger of a complete collapse, with the payment system going down as well. Please note that this will not be in and of itself a sufficient way to manage energy descent and the retreat from the ecological abyss - but it is very much a necessary part of the process.
Brian Davey
Nov 3rd 2008
Tuesday 4 November 2008
Tuesday 7 October 2008
The Banking Crisis, Peak Oil and Climate Change
Yesterday at the "Urban Harvest Festival" of Transition Nottingham, one of many local groups springing up over the UK to prepare communities for peak oil and climate change, I had a conversation in which I learned that some people are saying that all this financial crisis stuff is a distraction from the climate and peak oil.
This is understandable given the threat that climate change represents and the challenges to society that peak oil will bring. It is also understandable on a very human level after activists
have spent a lot of time taking in and developing an expertise on the climate change and peak oil agendas - only to find that the message that they want to be give out and work to, the message
that they think they understand very well, doesn't interest other people so much any more - because these other people are far more interested in a set of issues on which the climate and peak oil experts do not feel particularly competent.
That's life. People who understood the economic ramifications of peak oil deeply always expected that peak oil would bring with it a financial and banking crisis. However, the banking and financial crisis has arrived anyway and it is only very partially the consequence of supply tightness in the energy market. It is far more the result of a complex of other issues -
mainly the creation of far too much debt (leverage) which people and institutions used to buy assets, thus creating a speculative bubble in asset prices that has now burst.
The result is mass misery among ordinary people - because they are losing their houses, as well as horror and terror among bankers and high flying city types - many of them young men and women whose self esteem was based on having loads of money but who are in many cases now out of a job, with huge debts.....perhaps at home with the spouses they barely know and a family to bring up. There will be a lot of mental health problems in the City.
http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html
Whatever. This narrative still isn't the one that many climate and peak oil activists would like to be talking about and working with. But the situation is horrendous for many millions of people and they need a solution to their problems. What's more, in an unpleasant kind of way this situation of danger is also a situation of opportunity - it is an opportunity not to be missed.
Here's why...
People sometimes say that money is the root of all evil - but that's not what the biblical quote actually says. It is the *love of* money that is the root of all evil. It is when money becomes the goal of exchange that the problems arise - when money becomes the master and not the servant.
But we do need money for the service that it performs to expedite everyday transactions and exchanges in a community. Without money extensive exchange relationships are very difficult indeed and all but a very simple tribal economy would collapse.
Different kinds of money system
The problems arise because there are different kinds of money and different kinds of money relationships and systems. The money system that we have at the moment, the one that is in crisis, is a debt based money system. People often think that the government creates money and then people pay it into banks who lend it on. However, this isn't true. What actually happens when a bank gives you a loan is that they create the money that they are lending you. Most of the money in circulation was created in this way - it is backed by debt. 97% of the money in circulation is made up of bank deposits and only 3% of notes and coin. In the 1950s bank deposits made up only about 50% of the money supply. Now virtually all money is deposit money that was lent into
circulation.
Now clearly there has to be a limit on how much that can be done - if people want to take cash out of a bank, to withdraw their deposits, then a bank must have liquid assets (assets which are either cash or easily converted into a known and definite quantity of cash) available. The banks need to be careful about their lending practices too so that when deposit money is created it is
backed by loans that they expect to see paid back.
The recklessness of the banks
Over the last few years however the banks, networked internationally by global telecommunication and computers, have become increasingly reckless about lending until the crash came. This was to a large degree because they assumed that the state would always bail them out. It was also because computer telecommunications technologies allowed banking to globalise and find all sorts of ways around regulations. They also slipped up on the assumption that innovations had reduced risks. Globalising banking did spread risks - but it didn't reduce risks - it meant that when the crunch came it happened globally, but above all, initially, in the USA, whose banks used the money
loaned to them from the rest of the world in a reckless and predatory way. Globalising banking also meant that relationship banking - the possibility that lenders and borrowers might actually know each other and meet face to face now and then - was no longer possible. Assessing risks became more difficult - the province of ratings agencies who could be bought to give favourable messages.
For a year we have been listening to journalists saying that the banks do not trust each other to lend to each and now the public have got the message. If the banks don't trust each other - why should their depositors trust the banks either? After lending out recklessly the banks are pulling back their lending as quickly as they can - thus plunging those individuals, families and companies who they earlier encouraged to get into debt into turmoil. But they are still left with those debts that have gone sour - the money that they should never have lent at all.
That means that the payment system on which we all depend is in crisis.
So we need a money system. But is this the way to run one? The money system which should managed to be a service to society has been run like a casino and the result has been chaos. What should be run for the public good, is run for private gain and now the result is chaos. And guess who is having to pick up the bill? The taxpayer is.
As they say - no taxation without representation. If the public is going to pay for the system then the public (i.e. some collective arrangement) should be controlling the system in the public interest.
Bankers regulating bankers
That sounds fine but what would that mean in practice? In practice it means that bankers who had changed (or lost) their jobs would be re-employed by the state to run the show in the difficult period, when things are going badly. They will be paid for by the taxpayers - until the banking system had been cleaned up and put back together again - and then the banks would be passed
back to the private sector. In the jargon the banks that are insolvent would be allowed to fail, the bits of them that could still make money would be merged with a smaller number of stronger banks who would be further strengthened by taxpayer funded money to "re-capitalise" them and then they would be floated off back into the private sector. Given the losses that the banks might make this would be very expensive for the taxpayer and may mean cuts in other government spending.
Will these banks then be regulated so that it doesn't happen again? Well, for a time they will be "well regulated". They always have been after a crash - when they barely need regulating anyway because the whole market is ultra cautious about lending in any case.
Then what happens? Well, look at the history:
Holy Roman Empire currency 1622; Tulips 1636; South Sea Scheme 1720; Northern Europe 1763; East India Company 1772; Emerging markets 1809-1838; Railways 1847-1873; Commodities 1890-1920; Great Crash of 1929; Bretton Woods collapse of 1973; Savings and Loan Collapse 1980; Third World Debt 1982; Black Monday 1987; Junk Bonds 1988; Japanese bubble 1990s; US Bond Crash 1994; Mexican
Debt Crisis 1995; Asian Crisis 1997; Russian Crisis 1998; Long Term Capital Management Crisis 1998; Dotcom crash 2000; Sept 11 2001 Disruption; Argentine Crisis 2002 and now the credit crunch beginning from August 2007....
Would it surprise you to know that after each of these crisis there was a tightening up of regulation so that it didn't happen again? In any case, who are the bankers doing the regulation. Nick Leeson, the man who broke the Barings Bank by his reckless trading has some insider knowledge on that.
According to Leeson alongside the "best brains" in the trading rooms, competing fiercely and taking risks, there are also " the grey men of the back office.... They do the paperwork behind the traders' deals and run the regulatory systems. It is their job to monitor the markets and ensure checks and balances are properly applied. These bankers are invariably not up to it. The front end of the business is far more profitable. The brightest and best are seduced by the lure of big bonuses, leaving the third-raters and burn-outs to take safe desk jobs in staid institutions such as the Bank of England."
http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=482060&in_page_id=1770
It is these "third raters" who protect us from emotionally and ethically immature youngsters, straight out of university whose self esteem is based on how much money they spend. They have been investigated by a professor of organisational ethics at the Cass Business School, Roger Steare. When he undertook integrity tests on more than 700 financial services executives in several major firms and he came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry,".
The results of his tests indicated that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm
Put Humpty Dumpty back on the Wall and Peak Oil will knock him off again
So putting humpty dumpty back together again, which is the current agenda, is not going to get us very far. Indeed, if we remember peak oil has not gone away, then it is difficult to see how humpty dumpty can be put together again for very long. Let's say, "optimistically" that the banking system were mended and put back into operation for say sometime between 2010 and 2012.
This will be just in time for when the International Energy Agency expects to be an even more serious oil supply crunch - as if we didn't have one already.
Now the point about energy descent and a debt based money system is that they don't mix. A debt based money system requires growth to survive or it gets into serious problems. This is because it is only practical to lend money into existence, which is what the banks do, if the loans can be repaid with interest but if the economy cannot expand then there is no additional output that the banking system can share in when it claims its interest payments.
Thus energy descent, which involves a fall in material production (though not necessarily a fall in the quality of life if we can develop other dimensions of our existence through the Transition Movement) is a no no for the banking system. It follows that an energy crunch will create another credit crunch.
Relocalised production arrangements need local currencies
Nevertheless we will need a money system that is able to function when the material production system is in retreat and that will have to be one that is not backed by debt. What's more we will need a money system that is in tune with the energy descent process which is in large part a process of re-localisation.
Ecnomic activity will more and more be about sustainable arrangements to provide the essential needs of particular communities in particular places. This re-localisation ideally means local or perhaps regional currencies which can run alongside and complement national currencies. Because such local currencies can only be spent in the locality they represent a commitment to, and encouragement of, local exchange relationships. This means that you are not using bucket loads of carbon energy transporting goods from the other end of the globe. It means that you can cut out the financial and energy expense of all those long logistical supply chains that the supermarket economy runs upon. It means that things are on a smaller scale - and power relationships are more equal.
Democracizing money creation at the local level
The other reason for local currencies is that they are created, managed and run by people that you can know personally, people that you meet in the street, people who live close to you, that you can really hold account-able. Developing local currencies also gives people experience in money matters and makes them less beholden to and in awe of the national and international money markets. It means that when the national and international money system goes into crisis there will be a movement of ordinary people out there who will not be overawed by the bankers who have been re-employed in different roles in the national state to put humpty dumpty back together again. There will be a movement that will be able to speak with experience and knowledge about how non debt based money can run because they have been running such systems at local level. People who have developed money with public and community well being as its core value.
Developing these currencies is currently a major task in hand. It is not at all a distraction from the problems of peak oil and climate change. It is totally consistent with dealing with these problems.
Brian Davey
6/7th October 2008
This is understandable given the threat that climate change represents and the challenges to society that peak oil will bring. It is also understandable on a very human level after activists
have spent a lot of time taking in and developing an expertise on the climate change and peak oil agendas - only to find that the message that they want to be give out and work to, the message
that they think they understand very well, doesn't interest other people so much any more - because these other people are far more interested in a set of issues on which the climate and peak oil experts do not feel particularly competent.
That's life. People who understood the economic ramifications of peak oil deeply always expected that peak oil would bring with it a financial and banking crisis. However, the banking and financial crisis has arrived anyway and it is only very partially the consequence of supply tightness in the energy market. It is far more the result of a complex of other issues -
mainly the creation of far too much debt (leverage) which people and institutions used to buy assets, thus creating a speculative bubble in asset prices that has now burst.
The result is mass misery among ordinary people - because they are losing their houses, as well as horror and terror among bankers and high flying city types - many of them young men and women whose self esteem was based on having loads of money but who are in many cases now out of a job, with huge debts.....perhaps at home with the spouses they barely know and a family to bring up. There will be a lot of mental health problems in the City.
http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html
Whatever. This narrative still isn't the one that many climate and peak oil activists would like to be talking about and working with. But the situation is horrendous for many millions of people and they need a solution to their problems. What's more, in an unpleasant kind of way this situation of danger is also a situation of opportunity - it is an opportunity not to be missed.
Here's why...
People sometimes say that money is the root of all evil - but that's not what the biblical quote actually says. It is the *love of* money that is the root of all evil. It is when money becomes the goal of exchange that the problems arise - when money becomes the master and not the servant.
But we do need money for the service that it performs to expedite everyday transactions and exchanges in a community. Without money extensive exchange relationships are very difficult indeed and all but a very simple tribal economy would collapse.
Different kinds of money system
The problems arise because there are different kinds of money and different kinds of money relationships and systems. The money system that we have at the moment, the one that is in crisis, is a debt based money system. People often think that the government creates money and then people pay it into banks who lend it on. However, this isn't true. What actually happens when a bank gives you a loan is that they create the money that they are lending you. Most of the money in circulation was created in this way - it is backed by debt. 97% of the money in circulation is made up of bank deposits and only 3% of notes and coin. In the 1950s bank deposits made up only about 50% of the money supply. Now virtually all money is deposit money that was lent into
circulation.
Now clearly there has to be a limit on how much that can be done - if people want to take cash out of a bank, to withdraw their deposits, then a bank must have liquid assets (assets which are either cash or easily converted into a known and definite quantity of cash) available. The banks need to be careful about their lending practices too so that when deposit money is created it is
backed by loans that they expect to see paid back.
The recklessness of the banks
Over the last few years however the banks, networked internationally by global telecommunication and computers, have become increasingly reckless about lending until the crash came. This was to a large degree because they assumed that the state would always bail them out. It was also because computer telecommunications technologies allowed banking to globalise and find all sorts of ways around regulations. They also slipped up on the assumption that innovations had reduced risks. Globalising banking did spread risks - but it didn't reduce risks - it meant that when the crunch came it happened globally, but above all, initially, in the USA, whose banks used the money
loaned to them from the rest of the world in a reckless and predatory way. Globalising banking also meant that relationship banking - the possibility that lenders and borrowers might actually know each other and meet face to face now and then - was no longer possible. Assessing risks became more difficult - the province of ratings agencies who could be bought to give favourable messages.
For a year we have been listening to journalists saying that the banks do not trust each other to lend to each and now the public have got the message. If the banks don't trust each other - why should their depositors trust the banks either? After lending out recklessly the banks are pulling back their lending as quickly as they can - thus plunging those individuals, families and companies who they earlier encouraged to get into debt into turmoil. But they are still left with those debts that have gone sour - the money that they should never have lent at all.
That means that the payment system on which we all depend is in crisis.
So we need a money system. But is this the way to run one? The money system which should managed to be a service to society has been run like a casino and the result has been chaos. What should be run for the public good, is run for private gain and now the result is chaos. And guess who is having to pick up the bill? The taxpayer is.
As they say - no taxation without representation. If the public is going to pay for the system then the public (i.e. some collective arrangement) should be controlling the system in the public interest.
Bankers regulating bankers
That sounds fine but what would that mean in practice? In practice it means that bankers who had changed (or lost) their jobs would be re-employed by the state to run the show in the difficult period, when things are going badly. They will be paid for by the taxpayers - until the banking system had been cleaned up and put back together again - and then the banks would be passed
back to the private sector. In the jargon the banks that are insolvent would be allowed to fail, the bits of them that could still make money would be merged with a smaller number of stronger banks who would be further strengthened by taxpayer funded money to "re-capitalise" them and then they would be floated off back into the private sector. Given the losses that the banks might make this would be very expensive for the taxpayer and may mean cuts in other government spending.
Will these banks then be regulated so that it doesn't happen again? Well, for a time they will be "well regulated". They always have been after a crash - when they barely need regulating anyway because the whole market is ultra cautious about lending in any case.
Then what happens? Well, look at the history:
Holy Roman Empire currency 1622; Tulips 1636; South Sea Scheme 1720; Northern Europe 1763; East India Company 1772; Emerging markets 1809-1838; Railways 1847-1873; Commodities 1890-1920; Great Crash of 1929; Bretton Woods collapse of 1973; Savings and Loan Collapse 1980; Third World Debt 1982; Black Monday 1987; Junk Bonds 1988; Japanese bubble 1990s; US Bond Crash 1994; Mexican
Debt Crisis 1995; Asian Crisis 1997; Russian Crisis 1998; Long Term Capital Management Crisis 1998; Dotcom crash 2000; Sept 11 2001 Disruption; Argentine Crisis 2002 and now the credit crunch beginning from August 2007....
Would it surprise you to know that after each of these crisis there was a tightening up of regulation so that it didn't happen again? In any case, who are the bankers doing the regulation. Nick Leeson, the man who broke the Barings Bank by his reckless trading has some insider knowledge on that.
According to Leeson alongside the "best brains" in the trading rooms, competing fiercely and taking risks, there are also " the grey men of the back office.... They do the paperwork behind the traders' deals and run the regulatory systems. It is their job to monitor the markets and ensure checks and balances are properly applied. These bankers are invariably not up to it. The front end of the business is far more profitable. The brightest and best are seduced by the lure of big bonuses, leaving the third-raters and burn-outs to take safe desk jobs in staid institutions such as the Bank of England."
http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=482060&in_page_id=1770
It is these "third raters" who protect us from emotionally and ethically immature youngsters, straight out of university whose self esteem is based on how much money they spend. They have been investigated by a professor of organisational ethics at the Cass Business School, Roger Steare. When he undertook integrity tests on more than 700 financial services executives in several major firms and he came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry,".
The results of his tests indicated that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm
Put Humpty Dumpty back on the Wall and Peak Oil will knock him off again
So putting humpty dumpty back together again, which is the current agenda, is not going to get us very far. Indeed, if we remember peak oil has not gone away, then it is difficult to see how humpty dumpty can be put together again for very long. Let's say, "optimistically" that the banking system were mended and put back into operation for say sometime between 2010 and 2012.
This will be just in time for when the International Energy Agency expects to be an even more serious oil supply crunch - as if we didn't have one already.
Now the point about energy descent and a debt based money system is that they don't mix. A debt based money system requires growth to survive or it gets into serious problems. This is because it is only practical to lend money into existence, which is what the banks do, if the loans can be repaid with interest but if the economy cannot expand then there is no additional output that the banking system can share in when it claims its interest payments.
Thus energy descent, which involves a fall in material production (though not necessarily a fall in the quality of life if we can develop other dimensions of our existence through the Transition Movement) is a no no for the banking system. It follows that an energy crunch will create another credit crunch.
Relocalised production arrangements need local currencies
Nevertheless we will need a money system that is able to function when the material production system is in retreat and that will have to be one that is not backed by debt. What's more we will need a money system that is in tune with the energy descent process which is in large part a process of re-localisation.
Ecnomic activity will more and more be about sustainable arrangements to provide the essential needs of particular communities in particular places. This re-localisation ideally means local or perhaps regional currencies which can run alongside and complement national currencies. Because such local currencies can only be spent in the locality they represent a commitment to, and encouragement of, local exchange relationships. This means that you are not using bucket loads of carbon energy transporting goods from the other end of the globe. It means that you can cut out the financial and energy expense of all those long logistical supply chains that the supermarket economy runs upon. It means that things are on a smaller scale - and power relationships are more equal.
Democracizing money creation at the local level
The other reason for local currencies is that they are created, managed and run by people that you can know personally, people that you meet in the street, people who live close to you, that you can really hold account-able. Developing local currencies also gives people experience in money matters and makes them less beholden to and in awe of the national and international money markets. It means that when the national and international money system goes into crisis there will be a movement of ordinary people out there who will not be overawed by the bankers who have been re-employed in different roles in the national state to put humpty dumpty back together again. There will be a movement that will be able to speak with experience and knowledge about how non debt based money can run because they have been running such systems at local level. People who have developed money with public and community well being as its core value.
Developing these currencies is currently a major task in hand. It is not at all a distraction from the problems of peak oil and climate change. It is totally consistent with dealing with these problems.
Brian Davey
6/7th October 2008
Saturday 7 June 2008
Energy Descent and the care and Support of Vulnerable People - Some preliminary thoughts
Health and Social Care
The aging population in industrial countries will be put under the hardest pressure of this change - and self care and care of the elderly will become a major political economic issue as arrangements for pensions collapse in a savings wipe out at the same time that state funding is drying up. While the older population has personal knowledge of wartime and post-war austerity measures this group is now the old elderly and often far too frail to bring their experience to bear in practical engagement. Nevertheless to a degree this group can be given a respected social role sharing their experience of living in a make do and mend world - as suggested in the Honour the Elders notion in the Transition Initiatives. Some of the 'young elderly' may be able, in the early stages of this process, through downshifting and early retirement, to contribute to the organisation of new local economic arrangements and may even embrace and pioneer alternative lifestyles and subsistence arrangements.
For the ‘older elderly’ the situation is more challenging. A major portion of health and care costs are in the last year of life - in Germany it is one third - current moves towards easier euthanasia in several countries should be judged in that light and will be a serious challenge to health and social services when budgets are tight.
Single vulnerable people
The ability of any individual to survive in times of difficulty is powerfully determined by the amount of social capital they possess. Major life style changes to meet more needs close to home, with less energy and within the local economy, will not be possible for individuals to achieve alone. While some individuals are well connected into supportive social networks there are many who are not. In recent years there have been major increases in the number of single person households; in the 2001 census of 21.7 million households in the UK 30% were single persons - 6.5 million. 3.1million of these were one pensioner - 75% being women. 3.4 million are under pension age - 60% are men and 40% women. Single parent households will also need considerable support - there being 2.3 million single mother households in the UK - not to mention all those other households where one person is a full time carer for another chronically sick or disabled person who may not have the time to grow their own vegetables or insulating their house.
Socio-ecological self help and support arrangements for single individuals extending to those who are more vulnerable will become vital initiatives if society is to retain any traces of 'civility'.
More generally the trend to single people living alone will need to be reversed. Anyone trying to do a personal carbon calculation will notice that if they live on their own their energy and carbon usage is much higher - for example, they are not sharing the heat in a room - and a bed!
Public health difficulties
For the public authorities at the most local level the evolving difficulties, peaking periodically in specific emergencies, could take the form of a succession of public health crises - encompassing both physical and mental health. Large numbers of people will continue to require health and social care - at the same time as local health services are finding it difficult to get the money to pay the salaries and wages of their workers and the big centralised hospital complexes, that use masses of energy and energy intensive technologies, will be in difficulties.
Depending on the speed and manner in which the crisis develops large numbers of people may be suffering under chronically worrying debt burdens and a sort of culture shock when they find that their anticipated secure futures, with all their plans, have become ever more unrealisable so that anxiety, depression and breakdown will be widespread.
On the practical day to day level, an occasional and then more frequent breakdown of grid electricity and gas supply could undermine the ability of populations to maintain basic hygiene and keep warm, fed and watered. Bed bugs, fleas and lice could become a more serious issue bringing with them typhoid and other diseases. Unemployment and disorientation would have stress consequences that weaken resistance to the new diseases that are now emerging ('ecodemics' like avian influenza, lymes disease, SARS, West Nile Fever etc) plus the geographical spread of diseases as a result of climate change. It can therefore be expected that community health services will be forced to try to play a major role in organising local level community support networks and basic shared facilities for basic needs.
Education and Children's needs
Schools and other educational establishments, plus child care will also have a major role in community organisation at a local level - for training children and older people in skills appropriate to the 'new domestication' - gardening, cooking, manual skills, metal work, woodworking, energy numeracy and literacy etc. They also have resources in their buildings and grounds to be used - e.g. Land for growing, kitchens, workrooms, meeting halls, showers and changing rooms (important for the hygiene of children in a society under stress) etc. The schools will have a lot to do - a recent article in the Observer pointed out that in the UK only 8% of households cook from basic ingredients every day... but teachers would be facing these tasks while, like health workers, finding if increasingly difficult to make ends meet themselves.
Community leaders
As the central institutions of the state prove more and more unable to help, people at a local level will be thrown back on their own resources. What then happens within an individual community will depend on the community leaders who emerge. This is why it is so important that local authorities and health agencies work together with the Transition Towns movement. These will need to be clear about what is happening and have the connections and networks to draw together initiatives to recycle and rebuild local community arrangements around basic needs, food production, health and hygiene and energy. Existing councils may be able to facilitate this, with the right guidance and vision. Some new community leaders may be workers from health, education, community and voluntary sectors - who may pioneer the new economy partly out of self interest as they find the state unable to guarantee their jobs and pay.
In this regard, socially cohesive responses to major collective shocks can also be a positive as people work together and develop mutual support and solidarity which may draws in and support isolated people. However there has to be a common orientation to what is happening for this to occur and a common purpose in regard to what must be done which gives some sense of hope and direction towards a liveable future. This collective purpose will need to be organised in and through local institutions where people gather together and which they trust.
Crime and Policing
However, there is no guarantee that people will come together around considered and rational community spirited responses to the ecological/energy crisis in a co-operative relationship. While people must band together if they are to survive, the new associations may take the form of criminal gangs, sects with odd and extreme religious and/or political views - or vigilante self defence organisations. Gangs and vigilante groups are most likely to arise where the public authorities and governing elites appear powerless, or even act in a way that exploits people's vulnerability for their own ends as the crisis evolves.
The greater intensity of dependency of people on each other at a local level could easily evolve into a loss of privacy and personal space as well as a pressure for loyalty and conformity characteristic of extended families, clans and sects – which might easily develop collective secrets as attempts to protect themselves against the authorities, compete against one another and/or exploited by groups seeking to channel mass frustration at scapegoats whose expropriation or expulsion/ethnic cleansing will be held up as a solution for all ills. Criminality may be a serious problem getting a new economy up and running - e.g. crop thefts from community gardens....
This is a description of a transition to a sort of feudalism – communities in thrall to strong men or mafias who thrive in the crisis – with other finding protection in enclosed communities held together by faith ideas.
On the other hand one should be aware that many of the current trends towards increased criminality will be thrown into reverse. There will be an increased need for skilled manual labour and therefore more respected and paying social roles for the currently disaffected young people who currently cannot find a place in an office and professional focused culture. The progressive erosion of globalisations long distance communications systems may also erode some of the channels through which illegal drugs travel.
Culture, the arts and Leisure services
As has been argued by David Fleming the future must also have some culture to it - some celebration, fun and something for which life would be worth living. This will be a task that local authority leisure services departments will need to look at. This has been a very doom and gloom scenario but if that is all that is on offer then there is little hope of any new sustainable social and economic arrangements emerging without crisis occurring first. In fact, the social and economic arrangements to replace the high energy economy are likely to have many positive features which the current society is lacking. Much of the current tension in some urban areas is the result of the loss of manual employment and the devalued status of what manual employment remains. That can be expected to change as skilled manual workers will be important to rebuilding the future. There will be plenty of reason to bring currently isolated and lonely people together and no lack of practical common purposes in the simple things of life - cooking, eating, growing, repairing and building together. While the transition will be painful the simpler arrangements that eventually replace our existing economic and social arrangements may at least lack some of the horrendous complication, the stresses and performance pressures of an accelerating 24 hour society.....As I've found myself, gardening with friends is much preferable to sitting in front of a computer screen and chasing targets.
Also on a positive note it is worth pointing out that irrespective of people’s belief systems they will have to eat, drink, keep warm and clean – so those people who provide a practical leadership at a local level, providing genuine practical solutions to these problems will exert an attractive force. If they prove able to construct coherent networks of project activities that genuinely support people they will find themselves very influential. That means sticking to the fundamentals at a local level. In this regard I think that recent authors in Permaculture Magazine, reviewing the various videos and literature about ‘Peak Oil’ have it right when they say:
“One of the things that struck me (on watching a video about peak oil) was that for all those people campaigning against globalisation, their time would be better spent beginning to put in place what will be needed after globalisation’s inevitable demise. Why campaign against something that will inevitably collapse, and soon? Building the sustainable, low energy yet abundant future offered by permaculture is imperative, and the alternatives too grim to contemplate.”(Rob Hopkins)
“Forget about saving the world. The world is bent on self destruction and we can’t stop it. Trying is a waste of time. What we can and must save is the knowledge that will be so essential afterwards. We must keep alive traditional skills which are now despised and being rapidly forgotten. We must also develop new skills, using the best of modern technology and design science. We must preserve as much of the vanishing biodiversity of the planet as we can, in order to rebuild as healthy a future as possible after the crash.” ((Patrick Whitefield)
The aging population in industrial countries will be put under the hardest pressure of this change - and self care and care of the elderly will become a major political economic issue as arrangements for pensions collapse in a savings wipe out at the same time that state funding is drying up. While the older population has personal knowledge of wartime and post-war austerity measures this group is now the old elderly and often far too frail to bring their experience to bear in practical engagement. Nevertheless to a degree this group can be given a respected social role sharing their experience of living in a make do and mend world - as suggested in the Honour the Elders notion in the Transition Initiatives. Some of the 'young elderly' may be able, in the early stages of this process, through downshifting and early retirement, to contribute to the organisation of new local economic arrangements and may even embrace and pioneer alternative lifestyles and subsistence arrangements.
For the ‘older elderly’ the situation is more challenging. A major portion of health and care costs are in the last year of life - in Germany it is one third - current moves towards easier euthanasia in several countries should be judged in that light and will be a serious challenge to health and social services when budgets are tight.
Single vulnerable people
The ability of any individual to survive in times of difficulty is powerfully determined by the amount of social capital they possess. Major life style changes to meet more needs close to home, with less energy and within the local economy, will not be possible for individuals to achieve alone. While some individuals are well connected into supportive social networks there are many who are not. In recent years there have been major increases in the number of single person households; in the 2001 census of 21.7 million households in the UK 30% were single persons - 6.5 million. 3.1million of these were one pensioner - 75% being women. 3.4 million are under pension age - 60% are men and 40% women. Single parent households will also need considerable support - there being 2.3 million single mother households in the UK - not to mention all those other households where one person is a full time carer for another chronically sick or disabled person who may not have the time to grow their own vegetables or insulating their house.
Socio-ecological self help and support arrangements for single individuals extending to those who are more vulnerable will become vital initiatives if society is to retain any traces of 'civility'.
More generally the trend to single people living alone will need to be reversed. Anyone trying to do a personal carbon calculation will notice that if they live on their own their energy and carbon usage is much higher - for example, they are not sharing the heat in a room - and a bed!
Public health difficulties
For the public authorities at the most local level the evolving difficulties, peaking periodically in specific emergencies, could take the form of a succession of public health crises - encompassing both physical and mental health. Large numbers of people will continue to require health and social care - at the same time as local health services are finding it difficult to get the money to pay the salaries and wages of their workers and the big centralised hospital complexes, that use masses of energy and energy intensive technologies, will be in difficulties.
Depending on the speed and manner in which the crisis develops large numbers of people may be suffering under chronically worrying debt burdens and a sort of culture shock when they find that their anticipated secure futures, with all their plans, have become ever more unrealisable so that anxiety, depression and breakdown will be widespread.
On the practical day to day level, an occasional and then more frequent breakdown of grid electricity and gas supply could undermine the ability of populations to maintain basic hygiene and keep warm, fed and watered. Bed bugs, fleas and lice could become a more serious issue bringing with them typhoid and other diseases. Unemployment and disorientation would have stress consequences that weaken resistance to the new diseases that are now emerging ('ecodemics' like avian influenza, lymes disease, SARS, West Nile Fever etc) plus the geographical spread of diseases as a result of climate change. It can therefore be expected that community health services will be forced to try to play a major role in organising local level community support networks and basic shared facilities for basic needs.
Education and Children's needs
Schools and other educational establishments, plus child care will also have a major role in community organisation at a local level - for training children and older people in skills appropriate to the 'new domestication' - gardening, cooking, manual skills, metal work, woodworking, energy numeracy and literacy etc. They also have resources in their buildings and grounds to be used - e.g. Land for growing, kitchens, workrooms, meeting halls, showers and changing rooms (important for the hygiene of children in a society under stress) etc. The schools will have a lot to do - a recent article in the Observer pointed out that in the UK only 8% of households cook from basic ingredients every day... but teachers would be facing these tasks while, like health workers, finding if increasingly difficult to make ends meet themselves.
Community leaders
As the central institutions of the state prove more and more unable to help, people at a local level will be thrown back on their own resources. What then happens within an individual community will depend on the community leaders who emerge. This is why it is so important that local authorities and health agencies work together with the Transition Towns movement. These will need to be clear about what is happening and have the connections and networks to draw together initiatives to recycle and rebuild local community arrangements around basic needs, food production, health and hygiene and energy. Existing councils may be able to facilitate this, with the right guidance and vision. Some new community leaders may be workers from health, education, community and voluntary sectors - who may pioneer the new economy partly out of self interest as they find the state unable to guarantee their jobs and pay.
In this regard, socially cohesive responses to major collective shocks can also be a positive as people work together and develop mutual support and solidarity which may draws in and support isolated people. However there has to be a common orientation to what is happening for this to occur and a common purpose in regard to what must be done which gives some sense of hope and direction towards a liveable future. This collective purpose will need to be organised in and through local institutions where people gather together and which they trust.
Crime and Policing
However, there is no guarantee that people will come together around considered and rational community spirited responses to the ecological/energy crisis in a co-operative relationship. While people must band together if they are to survive, the new associations may take the form of criminal gangs, sects with odd and extreme religious and/or political views - or vigilante self defence organisations. Gangs and vigilante groups are most likely to arise where the public authorities and governing elites appear powerless, or even act in a way that exploits people's vulnerability for their own ends as the crisis evolves.
The greater intensity of dependency of people on each other at a local level could easily evolve into a loss of privacy and personal space as well as a pressure for loyalty and conformity characteristic of extended families, clans and sects – which might easily develop collective secrets as attempts to protect themselves against the authorities, compete against one another and/or exploited by groups seeking to channel mass frustration at scapegoats whose expropriation or expulsion/ethnic cleansing will be held up as a solution for all ills. Criminality may be a serious problem getting a new economy up and running - e.g. crop thefts from community gardens....
This is a description of a transition to a sort of feudalism – communities in thrall to strong men or mafias who thrive in the crisis – with other finding protection in enclosed communities held together by faith ideas.
On the other hand one should be aware that many of the current trends towards increased criminality will be thrown into reverse. There will be an increased need for skilled manual labour and therefore more respected and paying social roles for the currently disaffected young people who currently cannot find a place in an office and professional focused culture. The progressive erosion of globalisations long distance communications systems may also erode some of the channels through which illegal drugs travel.
Culture, the arts and Leisure services
As has been argued by David Fleming the future must also have some culture to it - some celebration, fun and something for which life would be worth living. This will be a task that local authority leisure services departments will need to look at. This has been a very doom and gloom scenario but if that is all that is on offer then there is little hope of any new sustainable social and economic arrangements emerging without crisis occurring first. In fact, the social and economic arrangements to replace the high energy economy are likely to have many positive features which the current society is lacking. Much of the current tension in some urban areas is the result of the loss of manual employment and the devalued status of what manual employment remains. That can be expected to change as skilled manual workers will be important to rebuilding the future. There will be plenty of reason to bring currently isolated and lonely people together and no lack of practical common purposes in the simple things of life - cooking, eating, growing, repairing and building together. While the transition will be painful the simpler arrangements that eventually replace our existing economic and social arrangements may at least lack some of the horrendous complication, the stresses and performance pressures of an accelerating 24 hour society.....As I've found myself, gardening with friends is much preferable to sitting in front of a computer screen and chasing targets.
Also on a positive note it is worth pointing out that irrespective of people’s belief systems they will have to eat, drink, keep warm and clean – so those people who provide a practical leadership at a local level, providing genuine practical solutions to these problems will exert an attractive force. If they prove able to construct coherent networks of project activities that genuinely support people they will find themselves very influential. That means sticking to the fundamentals at a local level. In this regard I think that recent authors in Permaculture Magazine, reviewing the various videos and literature about ‘Peak Oil’ have it right when they say:
“One of the things that struck me (on watching a video about peak oil) was that for all those people campaigning against globalisation, their time would be better spent beginning to put in place what will be needed after globalisation’s inevitable demise. Why campaign against something that will inevitably collapse, and soon? Building the sustainable, low energy yet abundant future offered by permaculture is imperative, and the alternatives too grim to contemplate.”(Rob Hopkins)
“Forget about saving the world. The world is bent on self destruction and we can’t stop it. Trying is a waste of time. What we can and must save is the knowledge that will be so essential afterwards. We must keep alive traditional skills which are now despised and being rapidly forgotten. We must also develop new skills, using the best of modern technology and design science. We must preserve as much of the vanishing biodiversity of the planet as we can, in order to rebuild as healthy a future as possible after the crash.” ((Patrick Whitefield)
Monday 2 June 2008
Review Article of "The New Paradigm for Financial Markets - The Credit Crunch of 2008 and What it Means " by George Soros
This small book is full of insights - but from an ecological economics perspective frustratingly limited to the analysis of the financial markets.
Soros sees himself first and foremost as writing a book of philosophy and draws upon his experience as one of the very first hedge fund managers. In his own words he has worked "as a successful speculator" in the financial markets since the 1960s. Before that the formative influences on his thinking were having to survive as Jew in Nazi occupied Hungary with a false identity. Then he lived through the early years of the Communist period in Hungary. After that he came to the UK - where he was deeply influenced by the ideas of philosopher of science Karl Popper.
Popper had a philosophy about 'Open Societies' that, given his earlier experience, was deeply appealing to Soros. "Popper argued that the Nazi and Communist ideologies have something in common - they both claim to be in possession of the ultimate truth. Since the ultimate truth is beyond human reach, both ideologies had to be based on a distorted and biased interpretation of reality; consequently the could be imposed on society only by the use of repressive methods." (p15).
To Popper, and to Soros, there is no such thing as being in possession of the ultimate truth. One can work towards it, and have provisional hypotheses, but theories and interpretations must always be open to questioning.
Hence, at the core of the thinking of George Soros, is a radical notion of the fallibility of human thinking. That does not mean that "any narrative goes". He especially dislikes the notion that powerful individuals and institutions can impose their own version of reality. On the contrary, it is important to Soros that one strives towards the truth, even if one only ever has a provisional and tentative version of it.
This means that a healthy democracy depends on an electorate being actively engaged in a search for what is true. They must be actively be engaged in holding people with power to account in regard to truth, otherwise the result is disaster. Soros gives Iraq as an example of how things go awry when this does not occur - citing the spokesperson for Bush, probably Karl Rove, as saying that, given its power, America's political elite could create their own reality. People like Rove manipulated the truth as if this was the superior way to do things. Naturally things went wrong after this.
Prevailing biases - illusions creating realities
For Soros the central notion of fallibility also applies in economics and the analysis of the financial markets. He recounts how, as a student of economics, he noticed that the claim that competitive markets delivered an optimal allocation of resources, when there is assumed to be perfect knowledge in those markets, was at odds with Popper's notion of the inevitability of imperfect understanding. Since that time he worked from the opposite idea - that markets are always wrong.
Indeed, he goes further. In his thinking, markets share a view which he calls a 'prevailing bias' and the prevailing bias may be self reinforcing, thus driving them away from equilibrium rather than towards it. Eventually they reverse, the bias is inverted, and a self reinforcing process drives in the other direction.
Looked at in this way the very notion of "equilibrium" is paradoxical. Indeed, Soros holds equilibrium theory to be invalid. "The behaviour of markets needs to be interpreted as a somewhat unpredictable historical process rather than as one determined by timelessly valid laws" (p 52)
In real life supply and demand curves incorporate participants' expectations about events that are shaped by those very same expectations. For example, in financial markets buy and sell decisions are based on expectations about future prices - and future prices, in turn, are contingent on present buy and sell decisions.
Thus, expectations of future price rises may encourage decisions to buy and, in turn, current decisions to buy may condition expectations of future price rises. From this it follows that, instead of, as one would expect, rising prices leading to a reduction in demand, rising prices may lead to more demand. There may be a self reinforcing process whereby market sentiment creates the conditions for its own justification.
Such a self reinforcing process is given an even more powerful forward push if there is a market reversal but this reversal proves only temporary. When the upward movement is resumed a shared interpretation can take hold that the market has "withstood a test" on its way up and has now resumed the upward path. This is, in turn, interpreted to mean that "fundamentals" really are pointing upwards. It is in conditions like these that a collective sentiment takes hold that inflates the market even more powerfully, pushing it towards a "far from equlibrium" state. "Leverage" acts as a powerful force to shove markets even more into such "far from equilibirium" states. (Leverage is where speculators are enhancing their earnings using borrowed money. This magnifies the gains on the way up - but is very painful on the way down)
Reflexivity
Processes whereby economic agents are influencing the outcomes that they forecast and expect through those very same forecasts and expectations Soros calls reflexivity. He relates reflexivity to his differences with Popper and argues that the notion has political as well as economic consequences.
Popper had insisted that the same methods and criteria apply to the study of social affairs as to the study of natural phenomena but here Soros disagrees. For Soros natural science can operate through disinterested observation and experiment but in the study of human affairs people need to be understood not only as observers but also as participants. They are not just detached searchers for the truth, using reason as their guide, they are also engaged in active manipulation of the world. This introduces elements of indeterminacy into events because participants in human affairs act on the basis of fallible understandings.
The pursuit of (an unattainable) truth
In regard to politics the pursuit of truth is still a requirement for an open society. The case for critical thinking remains unimpaired - to gain a better understanding of reality. It is only on this ground that there is a reasonably safe basis for making policy. However politics is a pursuit of power not of truth. There is a danger that politicians attempt to manipulate the perception of reality in the pursuit of their own agendas. This happened in the War on Terror and the invasion of Iraq on false pretences. Such manipulations end up badly and the results are liable to be radically different from the expectations of the manipulators. Thus "the only way in which politicians can be persuaded to pay more respect for reality is by the electorate insisting on it, rewarding those it considers truthful and insightful and punishing those engaged in deliberate decption." (p 39)
Soros is aware that this way of seeing reality is deeply paradoxical and contradictory. Precisely because humans are active in the world, they cannot possibly understand or know the larger whole of which they are a part. Their fallibility is thus inevitable, at least to some degree.
It is also the case that because people may interpret things in different ways, or they may attempt to deceive, there is an inevitable indeterminacy in human affairs. Soros compares this to the uncertainty principle in Quantum Mechanics. Despite this we must strive for the best understandings to get the best outcomes. Taking on board that we are all fallible gives rise to a critical attitude. The starting point is that all understandings are provisional. One needs to be on the look out for prevailing biases on the assumption that oneself and others can be wrong. There is a realisation that individual and collective illusions are shaping observed events too.
There is a terrible paradox in all of this. It is when markets feel that they are dealing with a certainty that they overreact and destroy the basis for that uncertainty. Soros describes this as being a bit like the Peter principle - just as people are promoted to that the point beyond which they no longer have an adequate competency to manage, so prevailing analyses and ideas become overused as the basis for actions to beyond the points where they are still valid.
Black Swan Events
The recent fall in US house prices described by the Investment Editor of the Financial Times, John Authers gives an example. The boom was overegged by the belief that a house price fall would not happen - which created the conditions for a fall after all!
"Much of the house price boom was based on buyers' belief that such a fall was impossible. Ben Bernanke, Fed chairman, said in 2005 that the US had "never had a decline in housing prices on a nationwide basis". Such a fall is under way.
Hence a national fall in nominal house prices is a perfect example of a "black swan" - an exceptional event that has not been covered in historically based models. Such events, widely discussed in recent months, can lead to extreme and unpredictable responses in financial markets. "
http://news.yahoo.com/s/ft/20080523/bs_ft/fto052320081602191319
Popper would have loved the idea of a Black Swan event since the generalisation that all swans are white would be held by Popper to be true only provisionally.
This radically destabilises the economic theory assumption that markets must tend towards equilibrium. On the contrary markets are historical processes characterised by fluctuating degrees of understanding and illusion. Even worse for economic theory - the illusion is not just an abberation it is an inevitable and integral part of the cycle - created by a herd reaction to an apparent certainty which creates its opposite, uncertainty.
Market sentiment and market mental health
The idea that individual and collective illusions are also shapers of events is a very deep insight. Although Soros does not go as far as to say so, although he perhaps does not realise it, it means that economic reality can be approached with the same type of conceptual tools that one uses to understand individual and collective mental health. The dispassionate observer who is engaged solely in the pursuit of truth is, as Soros is well aware, a long way from the engaged participant who is anything but dis-passionate. Market sentiment or the "animal spirits" which Keynes wrote about, is clearly an emotional engagement with the market. When the market is "far from equilibrium" it is euphoric or in a panic - the emotions that dominate, energetic greed or blind fear, are influencing the thinking of market participants to the point of them ignoring what, to the "dispassionate" observer, might appear to be obvious. Another way of putting this is that, just before a crash, the markets are more than just wrong, they are likely to be actively delusionary. What's more the delusion is not an abberation it is an integral part of the cycle.
Soros does not draw these parallels with mental health but why should he? Medically dominated psychiatry gives a misleading account of many mental health problems by a reductionist methodology that locates the causation of mental health issues in faulty brain chemistry. If one understands mental health problems in the medical way one will find no parallels or similarities to the account of Soros. Also, mental health issues are common assumed to be about the problems of individuals - so that collective processes, like the evolving interplay between market emotions and market cognitions, are not looked at as having any obvious similarities with the mental health problems of people. However, psychotherapeutic accounts of mental health problems contain many useful parallels which help us understand market processes. (see my Mental Health and Financial Market Cycles at http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html )
The notion that market expectations can create the conditions for their own justification is a situation that will surprise no therapist. It is a very typical topic coming up in therapy. A paranoid person, expecting the worse in regard to the motivations and actions of others, will interpret quite innocent situations as hostile and act to defend themselves, thereby provoking the very aggressive counter actions that they feared.
Self fulfilling prophecies - the profitable economics of paranoia
In that sense it is not just that the War on Terror was promoted by a misleading and untruthful practices. It is also that the War on Terror helps create the very events that could then be used to motivate and justify its further prosecution - because it is one pole of a process winding up tension in the world.
Nor is this just a matter of politics. The War on Terror is associated with a powerful economic sector - that of the military establishment, of private armies, security companies and mercenaries, of armaments and military logistics. The operations of this sector, if unchecked, make huge profits out of a self reinforcing process of economic, social and political destruction. There is a danger that an ever larger volume of economic resources get sucked into a paranoid vortex - particularly in those circumstances where the economy turns down - for example when distributional conflicts occur due to periods of greater scarcity, when serious imbalances occur that cannot be bridged or when defaults on agreed arrangements take place.
When markets and politicians are more than wrong - when they are ignor - ant
Making use from ideas from clinical psychology we can go further and claim that the market is not only wrong - it might be more accurate to claim that it is ignor - ant. By separating the word, to highlight the "ignore" in ignorant, the intention here is to emphasise that "being wrong" may take place in different ways.
One can be wrong because, although dimly aware of other possible ways of interpreting reality, one prefers not to explore those possibilities in any depth - holding certain interpretations and realities at arms length because they are too unpleasant to contemplate. One may ignore other interpretations that one is dimly aware of because these interpretations are views which are widely disparaged in the media and one does not want to risk finding out more. To ignore some viewpoints is to avoid the risk that one will end up with the inconvenience of finding oneself supporting people who are ostracised for their views and who are, in the conventional wisdom, "obviously wrong". One may ignore an idea because it is held by people who are younger, of lower status, people who one assumes must be wrong because their lack of status or different mind-set or profession denotes a lack of experience, connections and information of the sort that the powerful group, that one is oneself a member of, are party to. Or one may ignore an idea because, even without going into that idea in depth, one senses that its implications would be too far reaching to take on board superficially, when one is already overcommitted. One does not want the added stress of taking on big changes and challenges. In these cases markets (or politicians) can be wrong because they are actually avoiding looking at things for what they are - they are ignor -ant.
The world is always more complex and there is always more to learn than one knows - but frequently one has only limited time before one must act. It is therefore often most convenient to believe what one's peers believe - because not to do so is a source of immense frustration and conflict. From this point of view fundamentalism, of any kind, simplifies. (See my "Fundamentalism in Communities of Belief. Closed mindedness and the human condition" at http://www.bgmi.us/web/bdavey/Fundamentalism.htm )
In all of this one can say that one definition of socio-economic and political power is that one can ignore others and get away with it because one's own judgements and interpretations are given special and predominant weight in the society in which one lives. In our society that means that one's views are predominant in the discourse conducted in the mass media - and therefore in the collective decision making about resource allocation in business and government.
More specifically, the judgements that are made in this world are overwhelmingly judgements made in the language and concept system of orthodox economics which Soros, with justice, disparages.
In the economic mind set there are certain assumptions which, if one tries to articulate another view, one is not considered worthy of being listened to. Above all one is not considered worthy of being listened to if one questions the idea of economic growth and asserts the notion that there are ecological capacity limits to the growth economy. Growth is an article of faith for the economists - where by "faith" I mean a collection of beliefs and taken for granted truths which, to contradict, marks one out as particularly worthy of being ignored because "one has already been proved wrong".
Ignor - ance and growth fetishism
Soros is quite right to attack the misleading simplifications of market fundamentalism. There are other simplifications around too. Another one is growth fundamentalism - the growth fetish.
To Soros the natural sciences are unlike the human sciences because it is possible for their to be processes of disinterested inquiry in the natural sciences. Yet this is a simplification if ever there was one. The natural sciences explore in directions where scientists and scientific research establishments can get the money and resources to explore and research. Getting the money is not uncontaminated by human interests. And climate science, in particular, is anything but uncontaminated by political and economic interest groups. Thus, for example, David Wasdell has analysed the way in which drafts of the Climate Science Reports described as "Summaries for Policy Makers" drawn up by the Inter-governmental Panel of Climate Change have been edited before the final version of that report appeared. As he shows the editing took out the ideas which suggested that climate change was accelerating and the reasons why this was so because of positive re-inforcing feedbacks in the climate system.
(See http://www.meridian.org.uk/Resources/Global%20Dynamics/IPCC/contents.htm )
In fact, in the interplay between the economic system and the ecological system the boundaries between natural science and social science and human affairs cannot be understood as clear cut. Thus climate science is attempting to understand the impact of human economic activity on the climate system and, just as markets always get it wrong, so there are good reasons to believe that there are prevailing biases, dangerously erroneous ones, in the climate policy field too. Just as there are prevailing biases in the financial markets so there are prevailing biases in climate policy - which are based on wishful thinking and what is convenient for economic interests. These prevailing biases are in turn buttressed by the very dangerous illusion that the climate system operates in way that similar to the way the economy is supposed to operate (and doesn't) - moving from one supposed equilibrium system to another.
Climate science and economics - complacent illusions for equilibrium theorists
One can see this in the Stern Review. Its methodology is based on an assumption that for each "stabilised" level of greenhouse gases in the atmosphere at some point in the future (measured as CO2 equivalents) there will be a certain temperature rise above the pre-industrial. To be sure it is only possible to give a probability distribution of what the temperature rises might be for each stabilised level of CO2eq but, in principle, it seems possible to estimate the temperature rise from the level of greenhouse gases in the atmosphere. From these concentrations and temperature rises, in turn, further estimates are then made of the climate impacts (on sea levels, food supply, weather patterns including extreme events etc). From these, impacts, in turn, further estimates are made for the economic costs. Thus, for each stabilised level of greenhouse gas there are estimates of economic costs of the climate change that occurs at that level. So the theory.
This makes it possible for Stern to apply a (low) discount rate to compare the costs of different levels of greenhouse house gases and temperature rises with the costs of different strategies for mitigating emissions - all in net present values. From this he arrives at his famous conclusion that is worth spending 1% of global production to prevent a loss of between 5 and 20% of global production every year.
Leaving aside the huge difference between 5 and 20% the real flaw in this whole chain of reasoning is the idea of stabilisation levels of greenhouse gases corresponding to specific increases in global temperatures. Here the economists are conceptualising the climate as another system that tends to stable equlibriums. In reality climate scientists are looking at the climate in a quite different way - they are now saying that the global climate is stable only within relatively narrow temperature bands - and that it tends to whipsaw between different states and is highly volatile to small initial changes. This is because over substantial ranges the climate is subject to a great deal more positive, re-inforcing feedbacks than negative, stabilising, feedbacks.
Now that humanity has started the climate changing through CO2 emissions there are real dangers of an avalanche effect. Factors such as changing albedo (declining reflectivity as ice and snow melts) and methane releases accelerating the climate change process appear to predominate.
So, while economists fantasise that we have a choice of options between different levels of temperature increase and associated costs, compared to climate change mitigation costs, it is more accurate to say that we are in the opening phase of a global emergency and we only have only a few years to cool the planet by taking CO2 out of the atmosphere if we can find the ways to do so. This is more akin to a war emergency where we have to throw everything we have at the problem otherwise humanity is unlikely to survive.
The complacency and ignor - ance of the economists is blocking the way to this realisation - their illusions are very damaging, and not just in the financial markets.
Brian Davey
June 2008
Soros sees himself first and foremost as writing a book of philosophy and draws upon his experience as one of the very first hedge fund managers. In his own words he has worked "as a successful speculator" in the financial markets since the 1960s. Before that the formative influences on his thinking were having to survive as Jew in Nazi occupied Hungary with a false identity. Then he lived through the early years of the Communist period in Hungary. After that he came to the UK - where he was deeply influenced by the ideas of philosopher of science Karl Popper.
Popper had a philosophy about 'Open Societies' that, given his earlier experience, was deeply appealing to Soros. "Popper argued that the Nazi and Communist ideologies have something in common - they both claim to be in possession of the ultimate truth. Since the ultimate truth is beyond human reach, both ideologies had to be based on a distorted and biased interpretation of reality; consequently the could be imposed on society only by the use of repressive methods." (p15).
To Popper, and to Soros, there is no such thing as being in possession of the ultimate truth. One can work towards it, and have provisional hypotheses, but theories and interpretations must always be open to questioning.
Hence, at the core of the thinking of George Soros, is a radical notion of the fallibility of human thinking. That does not mean that "any narrative goes". He especially dislikes the notion that powerful individuals and institutions can impose their own version of reality. On the contrary, it is important to Soros that one strives towards the truth, even if one only ever has a provisional and tentative version of it.
This means that a healthy democracy depends on an electorate being actively engaged in a search for what is true. They must be actively be engaged in holding people with power to account in regard to truth, otherwise the result is disaster. Soros gives Iraq as an example of how things go awry when this does not occur - citing the spokesperson for Bush, probably Karl Rove, as saying that, given its power, America's political elite could create their own reality. People like Rove manipulated the truth as if this was the superior way to do things. Naturally things went wrong after this.
Prevailing biases - illusions creating realities
For Soros the central notion of fallibility also applies in economics and the analysis of the financial markets. He recounts how, as a student of economics, he noticed that the claim that competitive markets delivered an optimal allocation of resources, when there is assumed to be perfect knowledge in those markets, was at odds with Popper's notion of the inevitability of imperfect understanding. Since that time he worked from the opposite idea - that markets are always wrong.
Indeed, he goes further. In his thinking, markets share a view which he calls a 'prevailing bias' and the prevailing bias may be self reinforcing, thus driving them away from equilibrium rather than towards it. Eventually they reverse, the bias is inverted, and a self reinforcing process drives in the other direction.
Looked at in this way the very notion of "equilibrium" is paradoxical. Indeed, Soros holds equilibrium theory to be invalid. "The behaviour of markets needs to be interpreted as a somewhat unpredictable historical process rather than as one determined by timelessly valid laws" (p 52)
In real life supply and demand curves incorporate participants' expectations about events that are shaped by those very same expectations. For example, in financial markets buy and sell decisions are based on expectations about future prices - and future prices, in turn, are contingent on present buy and sell decisions.
Thus, expectations of future price rises may encourage decisions to buy and, in turn, current decisions to buy may condition expectations of future price rises. From this it follows that, instead of, as one would expect, rising prices leading to a reduction in demand, rising prices may lead to more demand. There may be a self reinforcing process whereby market sentiment creates the conditions for its own justification.
Such a self reinforcing process is given an even more powerful forward push if there is a market reversal but this reversal proves only temporary. When the upward movement is resumed a shared interpretation can take hold that the market has "withstood a test" on its way up and has now resumed the upward path. This is, in turn, interpreted to mean that "fundamentals" really are pointing upwards. It is in conditions like these that a collective sentiment takes hold that inflates the market even more powerfully, pushing it towards a "far from equlibrium" state. "Leverage" acts as a powerful force to shove markets even more into such "far from equilibirium" states. (Leverage is where speculators are enhancing their earnings using borrowed money. This magnifies the gains on the way up - but is very painful on the way down)
Reflexivity
Processes whereby economic agents are influencing the outcomes that they forecast and expect through those very same forecasts and expectations Soros calls reflexivity. He relates reflexivity to his differences with Popper and argues that the notion has political as well as economic consequences.
Popper had insisted that the same methods and criteria apply to the study of social affairs as to the study of natural phenomena but here Soros disagrees. For Soros natural science can operate through disinterested observation and experiment but in the study of human affairs people need to be understood not only as observers but also as participants. They are not just detached searchers for the truth, using reason as their guide, they are also engaged in active manipulation of the world. This introduces elements of indeterminacy into events because participants in human affairs act on the basis of fallible understandings.
The pursuit of (an unattainable) truth
In regard to politics the pursuit of truth is still a requirement for an open society. The case for critical thinking remains unimpaired - to gain a better understanding of reality. It is only on this ground that there is a reasonably safe basis for making policy. However politics is a pursuit of power not of truth. There is a danger that politicians attempt to manipulate the perception of reality in the pursuit of their own agendas. This happened in the War on Terror and the invasion of Iraq on false pretences. Such manipulations end up badly and the results are liable to be radically different from the expectations of the manipulators. Thus "the only way in which politicians can be persuaded to pay more respect for reality is by the electorate insisting on it, rewarding those it considers truthful and insightful and punishing those engaged in deliberate decption." (p 39)
Soros is aware that this way of seeing reality is deeply paradoxical and contradictory. Precisely because humans are active in the world, they cannot possibly understand or know the larger whole of which they are a part. Their fallibility is thus inevitable, at least to some degree.
It is also the case that because people may interpret things in different ways, or they may attempt to deceive, there is an inevitable indeterminacy in human affairs. Soros compares this to the uncertainty principle in Quantum Mechanics. Despite this we must strive for the best understandings to get the best outcomes. Taking on board that we are all fallible gives rise to a critical attitude. The starting point is that all understandings are provisional. One needs to be on the look out for prevailing biases on the assumption that oneself and others can be wrong. There is a realisation that individual and collective illusions are shaping observed events too.
There is a terrible paradox in all of this. It is when markets feel that they are dealing with a certainty that they overreact and destroy the basis for that uncertainty. Soros describes this as being a bit like the Peter principle - just as people are promoted to that the point beyond which they no longer have an adequate competency to manage, so prevailing analyses and ideas become overused as the basis for actions to beyond the points where they are still valid.
Black Swan Events
The recent fall in US house prices described by the Investment Editor of the Financial Times, John Authers gives an example. The boom was overegged by the belief that a house price fall would not happen - which created the conditions for a fall after all!
"Much of the house price boom was based on buyers' belief that such a fall was impossible. Ben Bernanke, Fed chairman, said in 2005 that the US had "never had a decline in housing prices on a nationwide basis". Such a fall is under way.
Hence a national fall in nominal house prices is a perfect example of a "black swan" - an exceptional event that has not been covered in historically based models. Such events, widely discussed in recent months, can lead to extreme and unpredictable responses in financial markets. "
http://news.yahoo.com/s/ft/20080523/bs_ft/fto052320081602191319
Popper would have loved the idea of a Black Swan event since the generalisation that all swans are white would be held by Popper to be true only provisionally.
This radically destabilises the economic theory assumption that markets must tend towards equilibrium. On the contrary markets are historical processes characterised by fluctuating degrees of understanding and illusion. Even worse for economic theory - the illusion is not just an abberation it is an inevitable and integral part of the cycle - created by a herd reaction to an apparent certainty which creates its opposite, uncertainty.
Market sentiment and market mental health
The idea that individual and collective illusions are also shapers of events is a very deep insight. Although Soros does not go as far as to say so, although he perhaps does not realise it, it means that economic reality can be approached with the same type of conceptual tools that one uses to understand individual and collective mental health. The dispassionate observer who is engaged solely in the pursuit of truth is, as Soros is well aware, a long way from the engaged participant who is anything but dis-passionate. Market sentiment or the "animal spirits" which Keynes wrote about, is clearly an emotional engagement with the market. When the market is "far from equilibrium" it is euphoric or in a panic - the emotions that dominate, energetic greed or blind fear, are influencing the thinking of market participants to the point of them ignoring what, to the "dispassionate" observer, might appear to be obvious. Another way of putting this is that, just before a crash, the markets are more than just wrong, they are likely to be actively delusionary. What's more the delusion is not an abberation it is an integral part of the cycle.
Soros does not draw these parallels with mental health but why should he? Medically dominated psychiatry gives a misleading account of many mental health problems by a reductionist methodology that locates the causation of mental health issues in faulty brain chemistry. If one understands mental health problems in the medical way one will find no parallels or similarities to the account of Soros. Also, mental health issues are common assumed to be about the problems of individuals - so that collective processes, like the evolving interplay between market emotions and market cognitions, are not looked at as having any obvious similarities with the mental health problems of people. However, psychotherapeutic accounts of mental health problems contain many useful parallels which help us understand market processes. (see my Mental Health and Financial Market Cycles at http://strategyforlosers.blogspot.com/2008/04/mental-health-and-financial-market.html )
The notion that market expectations can create the conditions for their own justification is a situation that will surprise no therapist. It is a very typical topic coming up in therapy. A paranoid person, expecting the worse in regard to the motivations and actions of others, will interpret quite innocent situations as hostile and act to defend themselves, thereby provoking the very aggressive counter actions that they feared.
Self fulfilling prophecies - the profitable economics of paranoia
In that sense it is not just that the War on Terror was promoted by a misleading and untruthful practices. It is also that the War on Terror helps create the very events that could then be used to motivate and justify its further prosecution - because it is one pole of a process winding up tension in the world.
Nor is this just a matter of politics. The War on Terror is associated with a powerful economic sector - that of the military establishment, of private armies, security companies and mercenaries, of armaments and military logistics. The operations of this sector, if unchecked, make huge profits out of a self reinforcing process of economic, social and political destruction. There is a danger that an ever larger volume of economic resources get sucked into a paranoid vortex - particularly in those circumstances where the economy turns down - for example when distributional conflicts occur due to periods of greater scarcity, when serious imbalances occur that cannot be bridged or when defaults on agreed arrangements take place.
When markets and politicians are more than wrong - when they are ignor - ant
Making use from ideas from clinical psychology we can go further and claim that the market is not only wrong - it might be more accurate to claim that it is ignor - ant. By separating the word, to highlight the "ignore" in ignorant, the intention here is to emphasise that "being wrong" may take place in different ways.
One can be wrong because, although dimly aware of other possible ways of interpreting reality, one prefers not to explore those possibilities in any depth - holding certain interpretations and realities at arms length because they are too unpleasant to contemplate. One may ignore other interpretations that one is dimly aware of because these interpretations are views which are widely disparaged in the media and one does not want to risk finding out more. To ignore some viewpoints is to avoid the risk that one will end up with the inconvenience of finding oneself supporting people who are ostracised for their views and who are, in the conventional wisdom, "obviously wrong". One may ignore an idea because it is held by people who are younger, of lower status, people who one assumes must be wrong because their lack of status or different mind-set or profession denotes a lack of experience, connections and information of the sort that the powerful group, that one is oneself a member of, are party to. Or one may ignore an idea because, even without going into that idea in depth, one senses that its implications would be too far reaching to take on board superficially, when one is already overcommitted. One does not want the added stress of taking on big changes and challenges. In these cases markets (or politicians) can be wrong because they are actually avoiding looking at things for what they are - they are ignor -ant.
The world is always more complex and there is always more to learn than one knows - but frequently one has only limited time before one must act. It is therefore often most convenient to believe what one's peers believe - because not to do so is a source of immense frustration and conflict. From this point of view fundamentalism, of any kind, simplifies. (See my "Fundamentalism in Communities of Belief. Closed mindedness and the human condition" at http://www.bgmi.us/web/bdavey/Fundamentalism.htm )
In all of this one can say that one definition of socio-economic and political power is that one can ignore others and get away with it because one's own judgements and interpretations are given special and predominant weight in the society in which one lives. In our society that means that one's views are predominant in the discourse conducted in the mass media - and therefore in the collective decision making about resource allocation in business and government.
More specifically, the judgements that are made in this world are overwhelmingly judgements made in the language and concept system of orthodox economics which Soros, with justice, disparages.
In the economic mind set there are certain assumptions which, if one tries to articulate another view, one is not considered worthy of being listened to. Above all one is not considered worthy of being listened to if one questions the idea of economic growth and asserts the notion that there are ecological capacity limits to the growth economy. Growth is an article of faith for the economists - where by "faith" I mean a collection of beliefs and taken for granted truths which, to contradict, marks one out as particularly worthy of being ignored because "one has already been proved wrong".
Ignor - ance and growth fetishism
Soros is quite right to attack the misleading simplifications of market fundamentalism. There are other simplifications around too. Another one is growth fundamentalism - the growth fetish.
To Soros the natural sciences are unlike the human sciences because it is possible for their to be processes of disinterested inquiry in the natural sciences. Yet this is a simplification if ever there was one. The natural sciences explore in directions where scientists and scientific research establishments can get the money and resources to explore and research. Getting the money is not uncontaminated by human interests. And climate science, in particular, is anything but uncontaminated by political and economic interest groups. Thus, for example, David Wasdell has analysed the way in which drafts of the Climate Science Reports described as "Summaries for Policy Makers" drawn up by the Inter-governmental Panel of Climate Change have been edited before the final version of that report appeared. As he shows the editing took out the ideas which suggested that climate change was accelerating and the reasons why this was so because of positive re-inforcing feedbacks in the climate system.
(See http://www.meridian.org.uk/Resources/Global%20Dynamics/IPCC/contents.htm )
In fact, in the interplay between the economic system and the ecological system the boundaries between natural science and social science and human affairs cannot be understood as clear cut. Thus climate science is attempting to understand the impact of human economic activity on the climate system and, just as markets always get it wrong, so there are good reasons to believe that there are prevailing biases, dangerously erroneous ones, in the climate policy field too. Just as there are prevailing biases in the financial markets so there are prevailing biases in climate policy - which are based on wishful thinking and what is convenient for economic interests. These prevailing biases are in turn buttressed by the very dangerous illusion that the climate system operates in way that similar to the way the economy is supposed to operate (and doesn't) - moving from one supposed equilibrium system to another.
Climate science and economics - complacent illusions for equilibrium theorists
One can see this in the Stern Review. Its methodology is based on an assumption that for each "stabilised" level of greenhouse gases in the atmosphere at some point in the future (measured as CO2 equivalents) there will be a certain temperature rise above the pre-industrial. To be sure it is only possible to give a probability distribution of what the temperature rises might be for each stabilised level of CO2eq but, in principle, it seems possible to estimate the temperature rise from the level of greenhouse gases in the atmosphere. From these concentrations and temperature rises, in turn, further estimates are then made of the climate impacts (on sea levels, food supply, weather patterns including extreme events etc). From these, impacts, in turn, further estimates are made for the economic costs. Thus, for each stabilised level of greenhouse gas there are estimates of economic costs of the climate change that occurs at that level. So the theory.
This makes it possible for Stern to apply a (low) discount rate to compare the costs of different levels of greenhouse house gases and temperature rises with the costs of different strategies for mitigating emissions - all in net present values. From this he arrives at his famous conclusion that is worth spending 1% of global production to prevent a loss of between 5 and 20% of global production every year.
Leaving aside the huge difference between 5 and 20% the real flaw in this whole chain of reasoning is the idea of stabilisation levels of greenhouse gases corresponding to specific increases in global temperatures. Here the economists are conceptualising the climate as another system that tends to stable equlibriums. In reality climate scientists are looking at the climate in a quite different way - they are now saying that the global climate is stable only within relatively narrow temperature bands - and that it tends to whipsaw between different states and is highly volatile to small initial changes. This is because over substantial ranges the climate is subject to a great deal more positive, re-inforcing feedbacks than negative, stabilising, feedbacks.
Now that humanity has started the climate changing through CO2 emissions there are real dangers of an avalanche effect. Factors such as changing albedo (declining reflectivity as ice and snow melts) and methane releases accelerating the climate change process appear to predominate.
So, while economists fantasise that we have a choice of options between different levels of temperature increase and associated costs, compared to climate change mitigation costs, it is more accurate to say that we are in the opening phase of a global emergency and we only have only a few years to cool the planet by taking CO2 out of the atmosphere if we can find the ways to do so. This is more akin to a war emergency where we have to throw everything we have at the problem otherwise humanity is unlikely to survive.
The complacency and ignor - ance of the economists is blocking the way to this realisation - their illusions are very damaging, and not just in the financial markets.
Brian Davey
June 2008
Monday 12 May 2008
Second Generation Climate Change Economics
Thank you for inviting me to talk on the economics of climate change. It will not surprise you that I would like to start with the Stern Review. More specifically I would like to start with this diagram which gives a clear sense of the underlying method by which Stern approaches the economics of climate change.
The approach of mainstream economics as exemplified in the Stern Review
We can follow the argument by working our way down this diagram from page 330 of the Stern Review
Starting at the top the diagram shows a range of probabilities of temperature rises is associated with successive rises of concentration of CO2eq in the atmosphere.
For each increase in temperatures there is a range of impacts - for example on food supply, on water, on ecosystems, extreme weather events etc.
What Stern then does is to argue that for each of these impacts there is a level of costs expressed as a loss of gross world production. His review then compares the cost of mitigation to stabilise at each of the levels of greenhouse gas concentration compared to the (discounted) costs of impacts at that concentration level.
Using this methodology (and a low discount rate) Stern concludes that a 1% mitigation cost of gross world production is worth investing to prevent the loss of 5-20% of gross world production for ever.
In more recent statements Stern has said “We underestimated the risk, we underestimated some of the effects” May 2008. However he defends his costing of mitigation.
Flaws in the Stern Review Approach - non linearities and feedbacks in the climate system
The Stern Review is a massive piece of research and scholarship. However it is flawed in the implicit assumption of “stabilisation levels” - the idea that a stabilised concentration of Greenhouse Gases means a stabilised level of global temperatures. This is outdated climate science.
The current climate science uses system dynamics approaches which are non linear. Climate change appears to be accelerating because positive feedbacks (which amplify or reinforce the process) appears to predominate over negative ones (which would brake or dampen the process). This leads to the conclusion that the climate system can "runaway" with declining possibilities for human intervention and rising costs of mitigation to stop it happening the longer mitigation is delayed.
Positive or self reinforcing Feedbacks
An example of a positive feedback effect is that global warming melts ice, reducing the amount of energy and light reflected back into space so the earth gets warmer. This in turn means that yet more ice melts.
Note that, once started, this continues, feeding on itself, even if CO2 emissions have stopped increasing.
This is why leading climate scientists, like for example, James Hansen, are saying that "The Earth's climate is remarkably sensitive to global forcings. Positive feedbacks predominate. This allows the entire planet to be whipsawed between climate states. Recent greenhouse gas emissions place the Earth perilously close to dramatic climate change that could run out of our control with great dangers for humans and other creatures." James Hansen, Director, NASA Goddard Institute for Space Studies. 18th February 2007
It should be said that there are quite a few positive feedbacks. Another is that of methane, which is a far more powerful greenhouse gas than CO2. Global warming leads to the release of more methane from under the permafrost and from ocean beds but methane is a greenhouse gas so this leads to more global warming. Again, once started this would go on even if CO2 emissions have stopped.
The political suppression of the acceleration feedback message
It should be said that these dangers are not generally recognised and they are not getting the recognition that they deserve. According to an article by Fred Pearce in the New Scientist on 8th March 2007 the latest Intergovernmental Panel on Climate Change Assessment Report's Summary for Policy Makers Report was watered down when governments became involved in writing it.
The preliminary version produced by scientists in April 2006 contained many references to the potential for climate to change faster than expected because of "positive feedbacks" in the climate system. Most of these references were absent from the final version.
Safe greenhouse gas concentration limits dramatically revised
However a PR manipulation doesn't change the facts which is why many climate scientists are saying that we may be already over the safe limit for CO2 in the atmosphere.
For example James Hansen was recently quoted in the Guardian as saying that a safe limit for CO2 in the atmosphere may be 350ppm when we are already at 385ppm and the target of the EU and Stern is effectively 550 ppm. (The Guardian 7th April 2008)
As if this was not bad enough oil and gas depletion makes the situation even worse. Here again governments are in denial about peak oil and gas - although, following the International Energy Agency they do acknowledge problems. However, the evidence of rising energy prices is something everyone is aware of
Peak Oil and Gas makes the situation worse
India, China and other countries are joining Europe, the US and Japan on a fossil fuel powered development path at that point in history when global fossil oil and gas reserves are about one half exhausted – these were the cheap and easy to recover oil and gas reserves. What is left are the expensive to recover oil and gas reserves.
The fact that oil and gas are running out might seem to be a good thing but the currently available substitutes for oil and gas damage the climate.
The unmet demand for oil and gas is spilling over into increased demand for coal, biomass and bio-fuels.
But coal is a much more climate damaging fuel and although there are possible technologies to cope with this - like carbon capture and storage - they are unproven and 20-30 years from generalisation
Using more biomass puts pressure on land use which release soil carbon and speeds de-forestation.
again with negative climate effects.
Two Tasks for Climate Policy
This means that there are two current tasks for climate economic policy
(1) To stop putting CO2 into the atmosphere asap: This requires an effective and equitable mechanism to deliver guaranteed emissions cuts - not forgetting the need to prevent land and forest based emissions.
(2) To take CO2 out of the atmosphere asap: The only effective way to do this is using biomass and photosynthesis - then sequestering the carbon from the biomas.
Let us turn to each of these tasks in turn
Task 1. Reducing emissions asap
A policy for every emission in every context?
There are currently 30 different policy instruments at national policy level in the UK alone. Why? Well consider the dynamic of policy. Fossil fuels are used, directly or indirectly, in almost every aspect of our lives and in a huge range of settings.
One approach is therefore to introduce a policy for every setting and every kind of fuel use. You end up with a cap and trade scheme for large emitters (the EU Emissions Trading Scheme); a trading scheme for smaller emitters (the forthcoming Carbon Reduction Commitment) and then a levies, obligations, funds, codes of good practice, directives, regulations and standards for everywhere else.
The end result is a complicated and ineffective policy mix – which is arguably not adequate for delivering on the forthcoming Climate Act and is resented by everyone because they sense that they are being micromanaged by an interfering government.
The Rebound Effect - the need for a cap to "lock in" CO2 reductions
Making this worse many of such schemes are ineffective because they do not "lock in" their CO2 reduction successes.
e.g. energy saving light bulbs are cheaper to run so they are left on longer; more fuel efficient engines save money which people spend on driving further or taking an extra holiday – taken by air.
The growth imperatives on companies and economies encourages these extra uses for carbon energy – to prevent this requires absolute economy wide-caps to “lock in” the carbon reductions.
Lock in is best achieved upstream rather than downstream
"Lock in" requires an effective carbon cap, ideally for the whole economy and that is best enforced upstream. A reducing carbon cap to “lock in” carbon reductions is best imposed “upstream” on a small number of fossil fuel suppliers rather “downstream” on millions of energy users, usages and settings.
In the UK there are only 10 oil refineries, 4 natural gas terminals, 40 coal mines and 12 coal ports where greenhouse gases are introduced into the economy – this is where carbon control is ideally imposed. The strikers at Grangemouth provided a clue how to reduce carbon coming into the economy. At these places a “permit to sell” scheme could be introduced with the number of permits reduced rapidly year by year.
Despite being the current fashionable idea carbon taxes will never deliver
Unfortunately current policy fashions are turning towards carbon taxes. Although unpopular with the public taxes are well understood and tax enforcement arrangements are already in place so they can be introduced quickly. Proponents of carbon taxes argue that tax Revenue can be recycled to make their impact more equitable and palatable.
The trouble is that the opponents of a carbon tax are already organised whereas the potential beneficiaries of recycled tax revenues are not - which is why, for example in Germany, when there has been a long struggle for ecological taxes, they have not got very far. Indeed if you want to get a sense of the reasons why carbon taxes are never likely to work think of a tax which must be automatically increased every year for decades.
What makes carbon taxes worse is that they cannot deliver a definite result in terms of CO2 reductions. The same tax rate might have quite different effects on carbon emissions in a recession and in a boom. So the need to make constant adjustments would be permanent political football.
How Cap and Share Works
This is the case for Cap and Share which works in this way:
Governments make the selling of fossil fuels from upstream suppliers illegal without a permit for the greenhouse gases of that fuel when burned e.g. at refineries and gas import terminals.
The permits are denominated in the greenhouse gas content that the permitted fuels will emit when they are subsequently burned and the total number are reduced each year
Fossil fuel supplying companies are required to buy the permits.
The money from the permit sales goes to everyone equally which partially protects poorer energy
users.
The European Unions Emissions Trading System
Unfortunately for cap and share proponents the EU has already developed an emissions trading system (ETS).It is not based on these principles.
The ETS is imposed on the largest energy users (power stations, iron and steel blast furnaces etc) – about 900 in the UK and can be described as being "partially downstream".
Most permits to emit are distributed to the main emitters for free – so the companies capture the scarcity value of permits. This is effectively a “pay the polluter” principle.
More auctioning of permits is envisaged in the future so the revenue from permit sales will be captured by governments but note the implication - the right to use the earth's atmosphere is assumed to belong to polluters and/or to governments.
Who Owns the Sky?
Emissions permits are rights to use the atmosphere – they are a resource which gets a scarcity value equal to the carbon price. Current schemes like the ETS assume the carbon scarcity rent should go to polluters or governments - but doesn't it belong to us all? There are important implications as to who gets the scarcity rent.
If the scarcity rent goes to governments the revenue from permits may be spent on anything - for example road building. Indeed there were reports in the Independent last week that the Treasury are hostile to EU suggestions that permit revenues should be ring fenced for climate related projects.
If corporations get the carbon scarcity revenue then, if they use the rent for green purposes, they are likely to spend it on mega project solutions - like nuclear power, or carbon capture and storage. A heavier proportion of the costs of mitigation will be falling on those on low incomes which will exacerbate fuel poverty problems.
The alternative is that the public could get the scarcity rent on a per capita basis: those on low incomes - and the population in general - will then have more resources to spend on getting houses and communities in order – insulation, gardens, local renewable systems...
Hybrid Systems
In the field of realpolitik it seems likely that the ETS is likely to be with us for the time being. However there is nothing to stop cap and share being part of a hybrid arrangement. Thus one can have side by side: EU ETS to cover large fossil fuel users and Cap and Share to cover other emissions. Indeed the Irish Government are considering cap and share as a way of controlling transport and possibly household emissions alongside the EU ETS.
Taking CO2 out of the Atmosphere - The Options and their incentives
Finally, as I said earlier these measures will only stop CO2 increasing in the atmosphere. But the CO2 concentration is already too high so it must be brought down. At the moment the biomass is currently the only cost effective way of taking CO2 out of the atmosphere on a massive scale...as long as it doesn't go back there - for example through fire.
Thus the key question is - are there ways in which biomass captured carbon be sequestered long term? The answer is that there are - for example
(1) Burying wood anaerobically or
(2) Pyrolysis - baking biomass (e.g. agri wastes) without oxygen to drive off usable energy gases and chemicals leaving a char carbon residue. The char residue can then be put in soil and appears to be long term stable – and also appears to act as a soil improver and be long term stable.
Of the two it seems to me that the latter is preferable as there economic benefits which incentivise its use - e.g. the energy gases given off during pyrolysis as well as the soil fertility gains.
This concludes my talk - although I would just like to remember at this point my colleague Dr Will Howard, who died recently and who arranged that I come to speak to you.
Links and Further Information to Talk on Climate Economics
The Economics of Climate Change. The Stern Review
http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm
Feedback Dynamics and the Acceleration of Climate Change An Update of the Scientific Analysis
http://www.meridian.org.uk/Resources/Global%20Dynamics/Feedback%20Dynamics/index.htm
Critique of IPCC Report & Introduction to Apollo-Gaia
(YouTube mini-presentation)
Introduces evidence of the 'dumbing down' of the text of the Summary for Policy Makers of the current IPCC Report, followed by an outline of the need for a global response (the Apollo-Gaia Project).
http://www.meridian.org.uk/AVResources/apollogaia.htm
Political Corruption of the IPCC Report?
Analysis of changes in the Final Text of the "Summary for Policy Makers" of the Fourth Assessment Report, WG1: The Physical Science Basis, throws light on the direction in which political and economic interests have influenced the presented scientific material.
http://www.meridian.org.uk/whats1.htm
Oil and Gas Depletion plus coal and Bio-Mass
http://www.energybulletin.net/
Weekly round up of Oil Depletion Analysis Centre http://odac-info.org/newsletter/
Carbon Capture and Storage and Coal as an energy source
Brian Davey "The Future for Coal Power" Web Essay http://strategyforlosers.blogspot.com/2008/04/future-for-coal-power.html
Greenpeace Report on Carbon Capture and Storage
"False Hope:Why Carbon Capture and Storage Won't Save the Climate" -
http://www.greenpeace.org/raw/content/international/press/reports/false-hope.pdf
Pressure of Biomass and Biofuels on Climate
http://www.biofuelwatch.org.uk/
http://www.hiye.org.uk/climatechange/lecture05.htm
Carbon Trading and Carbon Markets
http://strategyforlosers.blogspot.com/2008/04/architecture-of-carbon-trading-who-owns.html
http://strategyforlosers.blogspot.com/2008/04/phoney-war-against-climate-change.html
Cap and Share
http://www.capandshare.org/
http://www.rsacarbonlimited.org/viewarticle.aspa?pageid=887
http://www.newstatesman.com/200801310021
http://www.feasta.org/energy.htm
Use of Biomass to Take CO2 out of the atmosphere
http://www.feasta-multimedia.org/2008/Peter_Read.mov
Fritz Scholz and Ulrich Hasse Permanent Wood Sequestration: The Solution to the Global Carbon Dioxide Problem at www.chemsuschem.org
Bio-Char to take CO2 out of the atmosphere
http://www.biochar.org/joomla/
http://www.css.cornell.edu/faculty/lehmann/biochar/Biochar_home.htm
http://www.biochar-international.org/aboutbiochar.html
The approach of mainstream economics as exemplified in the Stern Review
We can follow the argument by working our way down this diagram from page 330 of the Stern Review
Starting at the top the diagram shows a range of probabilities of temperature rises is associated with successive rises of concentration of CO2eq in the atmosphere.
For each increase in temperatures there is a range of impacts - for example on food supply, on water, on ecosystems, extreme weather events etc.
What Stern then does is to argue that for each of these impacts there is a level of costs expressed as a loss of gross world production. His review then compares the cost of mitigation to stabilise at each of the levels of greenhouse gas concentration compared to the (discounted) costs of impacts at that concentration level.
Using this methodology (and a low discount rate) Stern concludes that a 1% mitigation cost of gross world production is worth investing to prevent the loss of 5-20% of gross world production for ever.
In more recent statements Stern has said “We underestimated the risk, we underestimated some of the effects” May 2008. However he defends his costing of mitigation.
Flaws in the Stern Review Approach - non linearities and feedbacks in the climate system
The Stern Review is a massive piece of research and scholarship. However it is flawed in the implicit assumption of “stabilisation levels” - the idea that a stabilised concentration of Greenhouse Gases means a stabilised level of global temperatures. This is outdated climate science.
The current climate science uses system dynamics approaches which are non linear. Climate change appears to be accelerating because positive feedbacks (which amplify or reinforce the process) appears to predominate over negative ones (which would brake or dampen the process). This leads to the conclusion that the climate system can "runaway" with declining possibilities for human intervention and rising costs of mitigation to stop it happening the longer mitigation is delayed.
Positive or self reinforcing Feedbacks
An example of a positive feedback effect is that global warming melts ice, reducing the amount of energy and light reflected back into space so the earth gets warmer. This in turn means that yet more ice melts.
Note that, once started, this continues, feeding on itself, even if CO2 emissions have stopped increasing.
This is why leading climate scientists, like for example, James Hansen, are saying that "The Earth's climate is remarkably sensitive to global forcings. Positive feedbacks predominate. This allows the entire planet to be whipsawed between climate states. Recent greenhouse gas emissions place the Earth perilously close to dramatic climate change that could run out of our control with great dangers for humans and other creatures." James Hansen, Director, NASA Goddard Institute for Space Studies. 18th February 2007
It should be said that there are quite a few positive feedbacks. Another is that of methane, which is a far more powerful greenhouse gas than CO2. Global warming leads to the release of more methane from under the permafrost and from ocean beds but methane is a greenhouse gas so this leads to more global warming. Again, once started this would go on even if CO2 emissions have stopped.
The political suppression of the acceleration feedback message
It should be said that these dangers are not generally recognised and they are not getting the recognition that they deserve. According to an article by Fred Pearce in the New Scientist on 8th March 2007 the latest Intergovernmental Panel on Climate Change Assessment Report's Summary for Policy Makers Report was watered down when governments became involved in writing it.
The preliminary version produced by scientists in April 2006 contained many references to the potential for climate to change faster than expected because of "positive feedbacks" in the climate system. Most of these references were absent from the final version.
Safe greenhouse gas concentration limits dramatically revised
However a PR manipulation doesn't change the facts which is why many climate scientists are saying that we may be already over the safe limit for CO2 in the atmosphere.
For example James Hansen was recently quoted in the Guardian as saying that a safe limit for CO2 in the atmosphere may be 350ppm when we are already at 385ppm and the target of the EU and Stern is effectively 550 ppm. (The Guardian 7th April 2008)
As if this was not bad enough oil and gas depletion makes the situation even worse. Here again governments are in denial about peak oil and gas - although, following the International Energy Agency they do acknowledge problems. However, the evidence of rising energy prices is something everyone is aware of
Peak Oil and Gas makes the situation worse
India, China and other countries are joining Europe, the US and Japan on a fossil fuel powered development path at that point in history when global fossil oil and gas reserves are about one half exhausted – these were the cheap and easy to recover oil and gas reserves. What is left are the expensive to recover oil and gas reserves.
The fact that oil and gas are running out might seem to be a good thing but the currently available substitutes for oil and gas damage the climate.
The unmet demand for oil and gas is spilling over into increased demand for coal, biomass and bio-fuels.
But coal is a much more climate damaging fuel and although there are possible technologies to cope with this - like carbon capture and storage - they are unproven and 20-30 years from generalisation
Using more biomass puts pressure on land use which release soil carbon and speeds de-forestation.
again with negative climate effects.
Two Tasks for Climate Policy
This means that there are two current tasks for climate economic policy
(1) To stop putting CO2 into the atmosphere asap: This requires an effective and equitable mechanism to deliver guaranteed emissions cuts - not forgetting the need to prevent land and forest based emissions.
(2) To take CO2 out of the atmosphere asap: The only effective way to do this is using biomass and photosynthesis - then sequestering the carbon from the biomas.
Let us turn to each of these tasks in turn
Task 1. Reducing emissions asap
A policy for every emission in every context?
There are currently 30 different policy instruments at national policy level in the UK alone. Why? Well consider the dynamic of policy. Fossil fuels are used, directly or indirectly, in almost every aspect of our lives and in a huge range of settings.
One approach is therefore to introduce a policy for every setting and every kind of fuel use. You end up with a cap and trade scheme for large emitters (the EU Emissions Trading Scheme); a trading scheme for smaller emitters (the forthcoming Carbon Reduction Commitment) and then a levies, obligations, funds, codes of good practice, directives, regulations and standards for everywhere else.
The end result is a complicated and ineffective policy mix – which is arguably not adequate for delivering on the forthcoming Climate Act and is resented by everyone because they sense that they are being micromanaged by an interfering government.
The Rebound Effect - the need for a cap to "lock in" CO2 reductions
Making this worse many of such schemes are ineffective because they do not "lock in" their CO2 reduction successes.
e.g. energy saving light bulbs are cheaper to run so they are left on longer; more fuel efficient engines save money which people spend on driving further or taking an extra holiday – taken by air.
The growth imperatives on companies and economies encourages these extra uses for carbon energy – to prevent this requires absolute economy wide-caps to “lock in” the carbon reductions.
Lock in is best achieved upstream rather than downstream
"Lock in" requires an effective carbon cap, ideally for the whole economy and that is best enforced upstream. A reducing carbon cap to “lock in” carbon reductions is best imposed “upstream” on a small number of fossil fuel suppliers rather “downstream” on millions of energy users, usages and settings.
In the UK there are only 10 oil refineries, 4 natural gas terminals, 40 coal mines and 12 coal ports where greenhouse gases are introduced into the economy – this is where carbon control is ideally imposed. The strikers at Grangemouth provided a clue how to reduce carbon coming into the economy. At these places a “permit to sell” scheme could be introduced with the number of permits reduced rapidly year by year.
Despite being the current fashionable idea carbon taxes will never deliver
Unfortunately current policy fashions are turning towards carbon taxes. Although unpopular with the public taxes are well understood and tax enforcement arrangements are already in place so they can be introduced quickly. Proponents of carbon taxes argue that tax Revenue can be recycled to make their impact more equitable and palatable.
The trouble is that the opponents of a carbon tax are already organised whereas the potential beneficiaries of recycled tax revenues are not - which is why, for example in Germany, when there has been a long struggle for ecological taxes, they have not got very far. Indeed if you want to get a sense of the reasons why carbon taxes are never likely to work think of a tax which must be automatically increased every year for decades.
What makes carbon taxes worse is that they cannot deliver a definite result in terms of CO2 reductions. The same tax rate might have quite different effects on carbon emissions in a recession and in a boom. So the need to make constant adjustments would be permanent political football.
How Cap and Share Works
This is the case for Cap and Share which works in this way:
Governments make the selling of fossil fuels from upstream suppliers illegal without a permit for the greenhouse gases of that fuel when burned e.g. at refineries and gas import terminals.
The permits are denominated in the greenhouse gas content that the permitted fuels will emit when they are subsequently burned and the total number are reduced each year
Fossil fuel supplying companies are required to buy the permits.
The money from the permit sales goes to everyone equally which partially protects poorer energy
users.
The European Unions Emissions Trading System
Unfortunately for cap and share proponents the EU has already developed an emissions trading system (ETS).It is not based on these principles.
The ETS is imposed on the largest energy users (power stations, iron and steel blast furnaces etc) – about 900 in the UK and can be described as being "partially downstream".
Most permits to emit are distributed to the main emitters for free – so the companies capture the scarcity value of permits. This is effectively a “pay the polluter” principle.
More auctioning of permits is envisaged in the future so the revenue from permit sales will be captured by governments but note the implication - the right to use the earth's atmosphere is assumed to belong to polluters and/or to governments.
Who Owns the Sky?
Emissions permits are rights to use the atmosphere – they are a resource which gets a scarcity value equal to the carbon price. Current schemes like the ETS assume the carbon scarcity rent should go to polluters or governments - but doesn't it belong to us all? There are important implications as to who gets the scarcity rent.
If the scarcity rent goes to governments the revenue from permits may be spent on anything - for example road building. Indeed there were reports in the Independent last week that the Treasury are hostile to EU suggestions that permit revenues should be ring fenced for climate related projects.
If corporations get the carbon scarcity revenue then, if they use the rent for green purposes, they are likely to spend it on mega project solutions - like nuclear power, or carbon capture and storage. A heavier proportion of the costs of mitigation will be falling on those on low incomes which will exacerbate fuel poverty problems.
The alternative is that the public could get the scarcity rent on a per capita basis: those on low incomes - and the population in general - will then have more resources to spend on getting houses and communities in order – insulation, gardens, local renewable systems...
Hybrid Systems
In the field of realpolitik it seems likely that the ETS is likely to be with us for the time being. However there is nothing to stop cap and share being part of a hybrid arrangement. Thus one can have side by side: EU ETS to cover large fossil fuel users and Cap and Share to cover other emissions. Indeed the Irish Government are considering cap and share as a way of controlling transport and possibly household emissions alongside the EU ETS.
Taking CO2 out of the Atmosphere - The Options and their incentives
Finally, as I said earlier these measures will only stop CO2 increasing in the atmosphere. But the CO2 concentration is already too high so it must be brought down. At the moment the biomass is currently the only cost effective way of taking CO2 out of the atmosphere on a massive scale...as long as it doesn't go back there - for example through fire.
Thus the key question is - are there ways in which biomass captured carbon be sequestered long term? The answer is that there are - for example
(1) Burying wood anaerobically or
(2) Pyrolysis - baking biomass (e.g. agri wastes) without oxygen to drive off usable energy gases and chemicals leaving a char carbon residue. The char residue can then be put in soil and appears to be long term stable – and also appears to act as a soil improver and be long term stable.
Of the two it seems to me that the latter is preferable as there economic benefits which incentivise its use - e.g. the energy gases given off during pyrolysis as well as the soil fertility gains.
This concludes my talk - although I would just like to remember at this point my colleague Dr Will Howard, who died recently and who arranged that I come to speak to you.
Links and Further Information to Talk on Climate Economics
The Economics of Climate Change. The Stern Review
http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cfm
Feedback Dynamics and the Acceleration of Climate Change An Update of the Scientific Analysis
http://www.meridian.org.uk/Resources/Global%20Dynamics/Feedback%20Dynamics/index.htm
Critique of IPCC Report & Introduction to Apollo-Gaia
(YouTube mini-presentation)
Introduces evidence of the 'dumbing down' of the text of the Summary for Policy Makers of the current IPCC Report, followed by an outline of the need for a global response (the Apollo-Gaia Project).
http://www.meridian.org.uk/AVResources/apollogaia.htm
Political Corruption of the IPCC Report?
Analysis of changes in the Final Text of the "Summary for Policy Makers" of the Fourth Assessment Report, WG1: The Physical Science Basis, throws light on the direction in which political and economic interests have influenced the presented scientific material.
http://www.meridian.org.uk/whats1.htm
Oil and Gas Depletion plus coal and Bio-Mass
http://www.energybulletin.net/
Weekly round up of Oil Depletion Analysis Centre http://odac-info.org/newsletter/
Carbon Capture and Storage and Coal as an energy source
Brian Davey "The Future for Coal Power" Web Essay http://strategyforlosers.blogspot.com/2008/04/future-for-coal-power.html
Greenpeace Report on Carbon Capture and Storage
"False Hope:Why Carbon Capture and Storage Won't Save the Climate" -
http://www.greenpeace.org/raw/content/international/press/reports/false-hope.pdf
Pressure of Biomass and Biofuels on Climate
http://www.biofuelwatch.org.uk/
http://www.hiye.org.uk/climatechange/lecture05.htm
Carbon Trading and Carbon Markets
http://strategyforlosers.blogspot.com/2008/04/architecture-of-carbon-trading-who-owns.html
http://strategyforlosers.blogspot.com/2008/04/phoney-war-against-climate-change.html
Cap and Share
http://www.capandshare.org/
http://www.rsacarbonlimited.org/viewarticle.aspa?pageid=887
http://www.newstatesman.com/200801310021
http://www.feasta.org/energy.htm
Use of Biomass to Take CO2 out of the atmosphere
http://www.feasta-multimedia.org/2008/Peter_Read.mov
Fritz Scholz and Ulrich Hasse Permanent Wood Sequestration: The Solution to the Global Carbon Dioxide Problem at www.chemsuschem.org
Bio-Char to take CO2 out of the atmosphere
http://www.biochar.org/joomla/
http://www.css.cornell.edu/faculty/lehmann/biochar/Biochar_home.htm
http://www.biochar-international.org/aboutbiochar.html
Wednesday 30 April 2008
The De-Growth Economy and Lifestyles
Paper produced for Economic De-Growth for Ecological Sustainability and Social Equity, Paris, 18/19th April 2008 http://events.it-sudparis.eu/degrowthconference/en/themes/
Abstract
The transition to a de-growth economy cannot be effected in gradual incremental change and will be experienced by most people as a lifestyle transition from one life style "package" to another. Most of the time people manage their lives in largely stable routines in which they more or less hold in balance an age related job with a pattern of skills and abilities, a level of income (and debt), habitat and domestic arrangements including their diet, a state of health and disability, a network of emotional and instrumental relationships. All of these reflect and give rise to a corresponding mind-set of assumptions, aspirations, expectations and social and community values. Inside this interrelated complex structure there is an inertial weight which bestows on certain behaviours addictive features. For example the network of relationships and geographical habitat make it difficult to break consumption patterns that are shared by peers without risking damaged relationships - e.g. meal routines and rituals with close relations provide security in a changing world or again a routine weekend leisure journey may provide the binding features to a close relationship.
A transition to a de-growth economy caused by oil and gas peaks, responses to climate change and the credit crisis will create radical disjunctures and a break up of these routines for millions of people in a way that will be frightening and disorientating for many. There is a danger that groups will channel their anger at scapegoats - perhaps led by demagogic thugs with simple explanations for the crisis that blame vulnerable people and foreigners. Millions of single unsupported people will find it difficult to cope. Practical movements like that of the UK Transition Towns are needed to provide people with new models for their lifestyles in order to avoid a community health crisis. The Transition Towns are beginning to provide a social network in which people support each other to develop new skills to conserve resources and supplement their means of living close to their habitats. They help collectively develop alternative energy and resource-light lifestyle packages and community focused value systems. A movement like this will be needed to provide people with an alternative basis for self respect and dignity as more and more recognise the futility and destructiveness of living according to the values and goals of the debt burdened consumer society.
End of Abstract
"The great advantage of being in a rut is that when one is in a rut, one knows exactly where one is" Arnold Bennett - British novelist and playwright 1867-1931
Routines
It is sometimes by re-examining the most mundane and obvious, that which we take for granted, that we learn the most.
Most of the time most people live in routines which are the constants, the stability in their lives. It is very difficult not to - no individual and no society could function if all its members were constantly on the move, constantly changing jobs, constantly changing instrumental and work relationships. Although nomadic lifestyles and a range of agriculture and pastoral skills can make for great variety even they must happen in known locations. They must involve arrangements between people in conformity to routines imposed by the seasons and nature - the need to sow and to harvest at the same times of the year. Matching temporal rhythms are also necessary if people are to sustain relationships - to be in a relationship people must not only spend time together they must to a degree synchronise their emotional states and practical inclinations. Thus it is that to find their identity people must hold in balance a habitat with all its domestic arrangements and chores of eating, sleeping, toilet and hygiene with their work and income and their network of instrumental and emotional relationships. These are constituted as interrelated patterns - as a generalisation we cannot have a large habitat without a large income. The number and quality of our relationships will depend upon the size of our habitats. Our income will depend partly on our work and skills. Our work, skills and incomes will determine our relationships. These in turn will affect our state of health, our morale and aspirations. How these arrangements are managed together depends on our age, gender, state of health and disability. They also embedded in spatial, economic and cultural arrangements which will affect what kind of neighbourhood or settlement we live in, how it organises the supply of essential means of life, how far we must travel to work.
Lifestyles considered as "packages" and lifestyle transitions
Because the different elements in our lives have to be managed as a package - as interrelated elements which must be consistent with each other - the routines and the ordinary features of our lives can be thought of as having an inertial character. To be sure, even a routinised lifestyle will have some variety and novelty in each day, up to a point - however, beyond that point, adjusting one aspect of our lives to a greater extent will mean that we must adjust other elements in our lifestyle package. In turn this will is likely to bring with it a degree of uncertainty and unpredictability. To take an example - if we decide to move where we live then we will be faced with different financial circumstances and that will have a knock on effect on work, relationships and so on.
As is obvious periods of comprehensive lifestyle change are of different types. There are some changes which are inevitable age specific processes - the obvious cases being late adolescence and early adulthood when most people start living independently, move from education to a job (if they are lucky) with an independent income and set up their own adult sexual relationships. As they are doing this all at once it is a difficult and challenging time - but it is happening with all the others of their age group. At the other end of life there are the challenges associated with retirement. In between there are also typical lifestyle transitions triggered when children leave home, parents die, people evaluate their lives so far and perhaps have a mid life crisis, deciding if they really want to live as they have been doing for the rest of their lives. As should be clear there are situations where a life style shift is happening to all one's peers - for example when a firm goes bust and there is mass redundancy which affects an entire community and there is the rather different situation in which only one person, or a family, decides to launch out in a change of direction. There are situations too which are willed, which are entered into deliberately and those which are entered into because people are forced to change - as in the redundancy situation.
The risks of launching into the unknown
Now it is clear that all these situations share in common that they involve largely launching out into the unknown. As such all these situations involve risks. As the English author Arnold Bennett expressed it:
“Any change, even a change for the better, is always accompanied by drawbacks and discomforts.” Arnold Bennett
At its worst a change in life launched into with insufficient skills, resources and friends can go badly wrong. Indeed there are arguments that mental breakdowns sometimes have this character. The stresses, tedium and limitations of an existing lifestyle may become too much and a person decides to launch into new territory - risks leaving a job without a new one, risks changing where they are, leaving a relationship and giving up a secure habitat in the process. To others this seems like a crazy choice as they do not have the resources and skills and support to make the move - and indeed they fall in the process. Their emotional turmoil therefore becomes greater. This is described by the psychiatrist Anthony Storr in psychological terms
"Suppose that I become dissatisfied with my habitual self, or feel that there are areas of experience or self understanding which I cannot reach. One way of exploring these is to remove myself from present surroundings and see what emerges. This is not without its dangers. Any form of new organisation or integration within the mind has to be preceded by some degree of disorganisation. No one can tell, until he has experienced it, whether or not this necessary disruption of former pattern will be succeeded by something better". (Anthony Storr, "Solitude", HarperCollins 1994 page 35)
This is a very good description of how madness might arise in a lifestyle transition that goes wrong. Sometimes the new surroundings and new setting are not better and the people in the old relationships resist or counsel against the change. Sometimes the change, which has financial implications, is badly managed. Sometimes the new surroundings requires skills and an orientation that we do not have. In those circumstances the psychological stresses that have impelled our movement become even worse in our new surroundings. To those who observe the process it appears that we have gone mad, that we have chucked ourselves recklessly into a new lifestyle for which we are not suited and not equipped.
Degrowth as a political-cultural movement for lifestyle transitions
In so far as the idea of "de-growth" becomes a cultural movement that inspires people to change their lifestyles it is enormously helpful that there are other people who are treading the same path and helping each other along the way. This gives some sense of what to do and what to expect. In this sense de-growth as a movement, with complementary and similar movements like permaculture, can be a powerful support for change. The risks are that much less when one is not on one's own in the change process. It is perhaps for this reason that movements that form around causes can be so intoxicating. Although one knows that change will be challenging and discomforting the fact that other people are making these changes in the services of a cause is actually making it easier.
“A cause may be inconvenient, but it's magnificent. It's like champagne or high heels, and one must be prepared to suffer for it.” Arnold Bennett
Without such causes the danger of being stuck in a rut is that one does not explore sides of oneself and that by staying in situations of safety one limits what one can become.
“The real tragedy is the tragedy of the man who never in his life braces himself for his one supreme effort, who never stretches to his full capacity, never stands up to his full stature” Arnold Bennett
It is in this way that one can understand the attraction and the possibility that people would decide to adjust their lives and be prepared to sacrifice their income and purchasing power to be able to do so. The attraction of de-growth is clearly that by having less income and purchasing power to acquire consumer goods one will be able to get certain experiences and satisfactions in life that money cannot buy directly. Perhaps it is more time to spend with one's children as they are growing up. Perhaps it is too learn a new trade that is regarded as more interesting, more challenging and more socially responsible. Perhaps it is to engage with social and community responsibilities. At such times the absence of work and contractual obligations may free people up to be more creative and use their time better. The purchase of freedom by less money is often a very good bargain.
Downshifting and upshifting
The number of people who have made this choice over recent years, for a preferred lifestyle at a lower income, is not inconsiderable in rich industrial countries. The term "downshifting" has been used to describe what is happening. In his book, 'Growth Fetish', Clive Hamilton, reports a number of studies on the extent of downshifting. For example 19% of the US adult population declared that over the previous five years they had voluntarily decided to make a change to their lives that resulted in making less money. This fifth excluded those taking a scheduled retirement. A similar survey in Australia found that 23% of 30-60 year olds had downshifted, citing as their reasons a desire for more balance and control in their lives, more time with their families and more personal fulfilment. ("Growth Fetish", Pluto Press, 2004, page 206)
For all of those people who have chosen to make a lifestyle change of this type there will be others who want to make this kind of change but who, whether because of a lack of support, knowledge or resources may lack the will to take the plunge. Perhaps, with more support, they can be persuaded to do so. However there are also people who will have only recently entered into lifestyle choices which are fundamentally antithetical to a de-growth agenda - perhaps they will just be starting or consolidating a lifestyle which is fundamentally growth focused and within the mainstream values of the current economic system. After all there are powerful forces encouraging them to do so. Perhaps they will be too tightly bound into the messages and values of the growth system, its routines and its obligations, particularly debt and a consumption lifestyle to even consider or be aware of a degrowth approach to life. At the moment it has to be said that this group probably constitutes the majority of the population and this group are only amenable to change messages at those points where they are going through fundamental changes - like moving job or house, or having a child, which compel a re-evaluation of self and behaviour.
Growth and mainstream institutions
This group are bound into a relationship with the mainstream institutions of our society who can only run smoothly if the future is predictable and mostly organised in bureaucratic routines. Growth gives the arrangements and routines of an increasingly complex society leeway for adjustment and for coping with stresses and change. Access to additional resources is typically seen as the way to solve problems and these resources are seen as arising out of extra income, extra production or through borrowing. In the last case extra resources to solve problems are generated by shifting payment into the future and paying an interest payment to buy the right to do this. However any macro growth of output and real income is ultimately only possible through an increase in physical energy available to the economy multiplied by the efficiency with which the energy can be applied to the production process. Once the amount of energy available is no longer rising the scope for real output growth dries up. At that point solutions for problems cannot be found in extra resource availability but must be found in greater ingenuity for improvised solutions working with the same or less. This means more psychic work and stress levels may rise.
Downshifters as a pioneering minority
This majority are however currently stressed and challenged by the difficulties of the economy. So far this paper has described the situations of people who have decided to change their lives in a degrowth direction. These people may be acting, whether they are aware of it or not, as the leaders and pioneers of new life styles. They create the community gardens, the social enterprises, the community exchange systems, the cultural arrangements which provides seeds for a new de-growth economic order. Hopefully those who have voluntarily changed their lives will have created the lifeboat institutions and arrangements which can support millions who are compelled to change when the existing economic system can no longer continue.
Degrowth as an involuntary process
As is obvious some life transitions are not voluntarily entered into. Sometimes abrupt lifestyle shifts take place across society that most people do not want. In the early stages of wars and economic catastrophes people may watch with interest the novelty of things going seriously awry. They may even, perversely, celebrate in the hope that change will make a normally humdrum existence more exciting and dramatic. However grim experience may take away the excitement, replacing it with unwanted and unpleasant experiences that had not been expected. Fundamental change may confront a lot of people with painful and frightening challenges.
This possibility cannot be avoided. Most people are likely to be forced into degrowth lifestyle changes that they have not wanted. They may enter the process enormously stressed, very angry, frightened and unhappy. This would be very dangerous - historical experience suggests that millions of people can be mobilised by channelling their emotions of frustration and fear against scapegoat minorities and foreign enemies. We are already seeing how shortages of oil and gas are being conceptualised by governing elites and the media as "energy security" issues in which nations are pitted against each other. Military intervention to secure oil and/or gas fields and pipeline routes has inflamed and polarised cultural and religious divisions. Such conflicts are in the short term interests of armaments manufacturers, aerospace, military logistics, security companies and the builders of gaols. Opportunities for profit in these circumstances will increasingly arise out of what Naomi Klein has termed 'disaster capitalism' or 'shock capitalism'. The degrowth movement will have its work cut out to develop a positive alternative to this frightening scenario of increasing conflict and destruction.
Reaching the limits to growth
Degrowth as an involuntary process which people are flung into looks increasingly likely as the outcome of both the credit crunch and the oil and gas supply crisis. The degrowth agenda derives from the sustainability agenda. 'Sustainability' has been a word in circulation for over a decade and the people who use the word have mostly lost sense of its original meaning. To be sustainable means to be able to continue. If something is unsustainable then it cannot continue and comes to an end. If there are limits to growth then, at some point, growth will no longer happen.
The climate crisis occurs with a time lag which has lulled political and economic elites into a false sense of security. However, the increasing costs of recovering depleting fossil fuels compared to the global demand for those fuels is taking place in real time. The credit crisis, which is as an over extension of the globalised banking system, is also taking place in real time. Together with imbalances arising out of the uneven development of the global economy these processes look set to throw millions of people into a period of economic chaos. Taken together they will compel lifestyle changes which provide the possibility and necessity to change to a de-growth economy and society.
There is thus no doubt that degrowth will happen - but not mainly as the result of a political and cultural degrowth movement but, rather, because of the consequences of passing the peak of global oil production, then global gas production, and because of the overextended position of the global financial system which cannot any longer be propped up.
The financial system has 'dis-credited' itself in both senses of the world - though a radical loss of reputation and as a loss of its ability to lend into an economy where debt had reached its mathematical limits of financial sustainability. In the financial newspapers we read over and again the idea that the banks do not trust each other. This is ironic because the original meaning of the word "credit" is trust and belief. Without trust and belief the financial system cannot continue to expand and it will not continue to expand - it will collapse.
This does not mean that the promotion of degrowth economics and politics has been a waste of time. To prevent the coming collapse turning into a catastrophe we need the prior development of a movement which can show how a degrowth economy and society might be managed. Without this ability to show how things might be organised differently we will be tipped into a catastrophe of wars and conflicts. We need arrangements to manage life within the capacity constraints of the global ecological system in ways that are felt as equitable and fair. Otherwise the eco-system will be destroyed and society will tear apart.
Common resources which we share must be managed in the interests of everyone in contemporary society as well as in the interests of future generations. For example, in rationing and reducing greenhouse gas emissions, the scarcity rent for permits for using the earth's atmosphere should go to citizens directly - not to the state and certainly not to the big companies. The atmosphere is a commons and should be managed as such - that means propertising it but not privatising it. A Global Atmosphere Trust should be under a legal obligation, enforceable by the courts, to manage the atmosphere in the interests of everyone equally. The monetary system can also be regarded as a common arrangement that should be managed in the interests of all. Currency trusts with duties, enforceable by the courts, need to be set up to manage the money system in the interests of everyone in a currency zone equally. Instead of debt money, repayable with interest, created and owned by private banking corporations, with an inherent growth dynamic, we need a non debt money supply made available for and through the people, including at a local level.
These are the kinds of overarching framework institutions that we need in an ecological society. They will complement the local projects and arrangements to meet basic needs that people will be forced to make to try to re-stabilise lives which are in turmoil. That means creating initiatives like local community gardens and food arrangements; make do and mend initiatives for clothes; mutual aid and simple support for building and rebuilding structures to make them energy efficient; arrangements to help people share resources, tools and skills for energy light lifestyles. We need to create local renewable energy systems where we can. We will need cultural and artistic programmes for people to find new reasons for living and simpler pleasures.
Transition Initiatives and the Degrowth Process
In the UK the Transition Initiatives movement is beginning very much to occupy the space for this movement. The prospect of energy famine requires the organisation of a response and Transition Initiatives are a way of preparing at a community level. There are now many Transition Initiatives springing up around the country - initially in small towns like Totnes, Stroud, Lewes, Falmouth, Penwith but increasingly also in cities like Bristol, inner city areas like Brixton and in Nottingham.
The thinking behind Transition Initiatives (formerly Transition Towns) is simply that settlements using much less energy and resources than we presently consume could, if properly planned for and designed, be more resilient, more abundant and more pleasurable than at present. Transition
Initiatives develop Energy Descent Action Plans as a tool for designing a positive timetabled way down from the oil peak AND as a response to climate change.
The basic formula for the development of Transition Initiatives is a number of steps
1. Awareness Raising about peak oil and gas as well as climate change and its implications.
2. Lay the Foundations of groups and networks to respond to the crisis.
3.The Official "Unleashing" - telling the public with much publicity that you are there and what it is all about.
4. Forming Groups - for example around food and peak oil, transport, health and social welfare and the support of vulnerable people etc etc
5. Use Open Space - this is a way or organising meetings where the agenda is not pre-fixed but is created by and from the people who have come to the meeting.
6. Develop Visible Practical Manifestations of the Project - for example in Totnes they have started to plant nut trees as a way of re-developing local food sources. This should not be a talking shop!
7. Facilitate The Great Reskilling helping people with the skills they will need in the very different economy that will develop on energy descent - e.g. skills to grow, cook and prepare food, repairing bicycles etc.
8. Build a Bridge to Local Government - obviously we want support if we can get it and need a harmonious working relationship. At some point we will need policy support - the sooner the better.
9. Honour the Elders - elder people will still have skills developed in a less energy intensive era. (They will also be vulnerable in energy descent)
10. Let it Go Where It Wants to Go and Reflections…not pre-planning or trying to fix or steer such a big process too much.....
To conclude with another quote from Arnold Bennett:
“Pessimism, when you get used to it, is just as agreeable as optimism.”
Brian Davey
March 2008
Abstract
The transition to a de-growth economy cannot be effected in gradual incremental change and will be experienced by most people as a lifestyle transition from one life style "package" to another. Most of the time people manage their lives in largely stable routines in which they more or less hold in balance an age related job with a pattern of skills and abilities, a level of income (and debt), habitat and domestic arrangements including their diet, a state of health and disability, a network of emotional and instrumental relationships. All of these reflect and give rise to a corresponding mind-set of assumptions, aspirations, expectations and social and community values. Inside this interrelated complex structure there is an inertial weight which bestows on certain behaviours addictive features. For example the network of relationships and geographical habitat make it difficult to break consumption patterns that are shared by peers without risking damaged relationships - e.g. meal routines and rituals with close relations provide security in a changing world or again a routine weekend leisure journey may provide the binding features to a close relationship.
A transition to a de-growth economy caused by oil and gas peaks, responses to climate change and the credit crisis will create radical disjunctures and a break up of these routines for millions of people in a way that will be frightening and disorientating for many. There is a danger that groups will channel their anger at scapegoats - perhaps led by demagogic thugs with simple explanations for the crisis that blame vulnerable people and foreigners. Millions of single unsupported people will find it difficult to cope. Practical movements like that of the UK Transition Towns are needed to provide people with new models for their lifestyles in order to avoid a community health crisis. The Transition Towns are beginning to provide a social network in which people support each other to develop new skills to conserve resources and supplement their means of living close to their habitats. They help collectively develop alternative energy and resource-light lifestyle packages and community focused value systems. A movement like this will be needed to provide people with an alternative basis for self respect and dignity as more and more recognise the futility and destructiveness of living according to the values and goals of the debt burdened consumer society.
End of Abstract
"The great advantage of being in a rut is that when one is in a rut, one knows exactly where one is" Arnold Bennett - British novelist and playwright 1867-1931
Routines
It is sometimes by re-examining the most mundane and obvious, that which we take for granted, that we learn the most.
Most of the time most people live in routines which are the constants, the stability in their lives. It is very difficult not to - no individual and no society could function if all its members were constantly on the move, constantly changing jobs, constantly changing instrumental and work relationships. Although nomadic lifestyles and a range of agriculture and pastoral skills can make for great variety even they must happen in known locations. They must involve arrangements between people in conformity to routines imposed by the seasons and nature - the need to sow and to harvest at the same times of the year. Matching temporal rhythms are also necessary if people are to sustain relationships - to be in a relationship people must not only spend time together they must to a degree synchronise their emotional states and practical inclinations. Thus it is that to find their identity people must hold in balance a habitat with all its domestic arrangements and chores of eating, sleeping, toilet and hygiene with their work and income and their network of instrumental and emotional relationships. These are constituted as interrelated patterns - as a generalisation we cannot have a large habitat without a large income. The number and quality of our relationships will depend upon the size of our habitats. Our income will depend partly on our work and skills. Our work, skills and incomes will determine our relationships. These in turn will affect our state of health, our morale and aspirations. How these arrangements are managed together depends on our age, gender, state of health and disability. They also embedded in spatial, economic and cultural arrangements which will affect what kind of neighbourhood or settlement we live in, how it organises the supply of essential means of life, how far we must travel to work.
Lifestyles considered as "packages" and lifestyle transitions
Because the different elements in our lives have to be managed as a package - as interrelated elements which must be consistent with each other - the routines and the ordinary features of our lives can be thought of as having an inertial character. To be sure, even a routinised lifestyle will have some variety and novelty in each day, up to a point - however, beyond that point, adjusting one aspect of our lives to a greater extent will mean that we must adjust other elements in our lifestyle package. In turn this will is likely to bring with it a degree of uncertainty and unpredictability. To take an example - if we decide to move where we live then we will be faced with different financial circumstances and that will have a knock on effect on work, relationships and so on.
As is obvious periods of comprehensive lifestyle change are of different types. There are some changes which are inevitable age specific processes - the obvious cases being late adolescence and early adulthood when most people start living independently, move from education to a job (if they are lucky) with an independent income and set up their own adult sexual relationships. As they are doing this all at once it is a difficult and challenging time - but it is happening with all the others of their age group. At the other end of life there are the challenges associated with retirement. In between there are also typical lifestyle transitions triggered when children leave home, parents die, people evaluate their lives so far and perhaps have a mid life crisis, deciding if they really want to live as they have been doing for the rest of their lives. As should be clear there are situations where a life style shift is happening to all one's peers - for example when a firm goes bust and there is mass redundancy which affects an entire community and there is the rather different situation in which only one person, or a family, decides to launch out in a change of direction. There are situations too which are willed, which are entered into deliberately and those which are entered into because people are forced to change - as in the redundancy situation.
The risks of launching into the unknown
Now it is clear that all these situations share in common that they involve largely launching out into the unknown. As such all these situations involve risks. As the English author Arnold Bennett expressed it:
“Any change, even a change for the better, is always accompanied by drawbacks and discomforts.” Arnold Bennett
At its worst a change in life launched into with insufficient skills, resources and friends can go badly wrong. Indeed there are arguments that mental breakdowns sometimes have this character. The stresses, tedium and limitations of an existing lifestyle may become too much and a person decides to launch into new territory - risks leaving a job without a new one, risks changing where they are, leaving a relationship and giving up a secure habitat in the process. To others this seems like a crazy choice as they do not have the resources and skills and support to make the move - and indeed they fall in the process. Their emotional turmoil therefore becomes greater. This is described by the psychiatrist Anthony Storr in psychological terms
"Suppose that I become dissatisfied with my habitual self, or feel that there are areas of experience or self understanding which I cannot reach. One way of exploring these is to remove myself from present surroundings and see what emerges. This is not without its dangers. Any form of new organisation or integration within the mind has to be preceded by some degree of disorganisation. No one can tell, until he has experienced it, whether or not this necessary disruption of former pattern will be succeeded by something better". (Anthony Storr, "Solitude", HarperCollins 1994 page 35)
This is a very good description of how madness might arise in a lifestyle transition that goes wrong. Sometimes the new surroundings and new setting are not better and the people in the old relationships resist or counsel against the change. Sometimes the change, which has financial implications, is badly managed. Sometimes the new surroundings requires skills and an orientation that we do not have. In those circumstances the psychological stresses that have impelled our movement become even worse in our new surroundings. To those who observe the process it appears that we have gone mad, that we have chucked ourselves recklessly into a new lifestyle for which we are not suited and not equipped.
Degrowth as a political-cultural movement for lifestyle transitions
In so far as the idea of "de-growth" becomes a cultural movement that inspires people to change their lifestyles it is enormously helpful that there are other people who are treading the same path and helping each other along the way. This gives some sense of what to do and what to expect. In this sense de-growth as a movement, with complementary and similar movements like permaculture, can be a powerful support for change. The risks are that much less when one is not on one's own in the change process. It is perhaps for this reason that movements that form around causes can be so intoxicating. Although one knows that change will be challenging and discomforting the fact that other people are making these changes in the services of a cause is actually making it easier.
“A cause may be inconvenient, but it's magnificent. It's like champagne or high heels, and one must be prepared to suffer for it.” Arnold Bennett
Without such causes the danger of being stuck in a rut is that one does not explore sides of oneself and that by staying in situations of safety one limits what one can become.
“The real tragedy is the tragedy of the man who never in his life braces himself for his one supreme effort, who never stretches to his full capacity, never stands up to his full stature” Arnold Bennett
It is in this way that one can understand the attraction and the possibility that people would decide to adjust their lives and be prepared to sacrifice their income and purchasing power to be able to do so. The attraction of de-growth is clearly that by having less income and purchasing power to acquire consumer goods one will be able to get certain experiences and satisfactions in life that money cannot buy directly. Perhaps it is more time to spend with one's children as they are growing up. Perhaps it is too learn a new trade that is regarded as more interesting, more challenging and more socially responsible. Perhaps it is to engage with social and community responsibilities. At such times the absence of work and contractual obligations may free people up to be more creative and use their time better. The purchase of freedom by less money is often a very good bargain.
Downshifting and upshifting
The number of people who have made this choice over recent years, for a preferred lifestyle at a lower income, is not inconsiderable in rich industrial countries. The term "downshifting" has been used to describe what is happening. In his book, 'Growth Fetish', Clive Hamilton, reports a number of studies on the extent of downshifting. For example 19% of the US adult population declared that over the previous five years they had voluntarily decided to make a change to their lives that resulted in making less money. This fifth excluded those taking a scheduled retirement. A similar survey in Australia found that 23% of 30-60 year olds had downshifted, citing as their reasons a desire for more balance and control in their lives, more time with their families and more personal fulfilment. ("Growth Fetish", Pluto Press, 2004, page 206)
For all of those people who have chosen to make a lifestyle change of this type there will be others who want to make this kind of change but who, whether because of a lack of support, knowledge or resources may lack the will to take the plunge. Perhaps, with more support, they can be persuaded to do so. However there are also people who will have only recently entered into lifestyle choices which are fundamentally antithetical to a de-growth agenda - perhaps they will just be starting or consolidating a lifestyle which is fundamentally growth focused and within the mainstream values of the current economic system. After all there are powerful forces encouraging them to do so. Perhaps they will be too tightly bound into the messages and values of the growth system, its routines and its obligations, particularly debt and a consumption lifestyle to even consider or be aware of a degrowth approach to life. At the moment it has to be said that this group probably constitutes the majority of the population and this group are only amenable to change messages at those points where they are going through fundamental changes - like moving job or house, or having a child, which compel a re-evaluation of self and behaviour.
Growth and mainstream institutions
This group are bound into a relationship with the mainstream institutions of our society who can only run smoothly if the future is predictable and mostly organised in bureaucratic routines. Growth gives the arrangements and routines of an increasingly complex society leeway for adjustment and for coping with stresses and change. Access to additional resources is typically seen as the way to solve problems and these resources are seen as arising out of extra income, extra production or through borrowing. In the last case extra resources to solve problems are generated by shifting payment into the future and paying an interest payment to buy the right to do this. However any macro growth of output and real income is ultimately only possible through an increase in physical energy available to the economy multiplied by the efficiency with which the energy can be applied to the production process. Once the amount of energy available is no longer rising the scope for real output growth dries up. At that point solutions for problems cannot be found in extra resource availability but must be found in greater ingenuity for improvised solutions working with the same or less. This means more psychic work and stress levels may rise.
Downshifters as a pioneering minority
This majority are however currently stressed and challenged by the difficulties of the economy. So far this paper has described the situations of people who have decided to change their lives in a degrowth direction. These people may be acting, whether they are aware of it or not, as the leaders and pioneers of new life styles. They create the community gardens, the social enterprises, the community exchange systems, the cultural arrangements which provides seeds for a new de-growth economic order. Hopefully those who have voluntarily changed their lives will have created the lifeboat institutions and arrangements which can support millions who are compelled to change when the existing economic system can no longer continue.
Degrowth as an involuntary process
As is obvious some life transitions are not voluntarily entered into. Sometimes abrupt lifestyle shifts take place across society that most people do not want. In the early stages of wars and economic catastrophes people may watch with interest the novelty of things going seriously awry. They may even, perversely, celebrate in the hope that change will make a normally humdrum existence more exciting and dramatic. However grim experience may take away the excitement, replacing it with unwanted and unpleasant experiences that had not been expected. Fundamental change may confront a lot of people with painful and frightening challenges.
This possibility cannot be avoided. Most people are likely to be forced into degrowth lifestyle changes that they have not wanted. They may enter the process enormously stressed, very angry, frightened and unhappy. This would be very dangerous - historical experience suggests that millions of people can be mobilised by channelling their emotions of frustration and fear against scapegoat minorities and foreign enemies. We are already seeing how shortages of oil and gas are being conceptualised by governing elites and the media as "energy security" issues in which nations are pitted against each other. Military intervention to secure oil and/or gas fields and pipeline routes has inflamed and polarised cultural and religious divisions. Such conflicts are in the short term interests of armaments manufacturers, aerospace, military logistics, security companies and the builders of gaols. Opportunities for profit in these circumstances will increasingly arise out of what Naomi Klein has termed 'disaster capitalism' or 'shock capitalism'. The degrowth movement will have its work cut out to develop a positive alternative to this frightening scenario of increasing conflict and destruction.
Reaching the limits to growth
Degrowth as an involuntary process which people are flung into looks increasingly likely as the outcome of both the credit crunch and the oil and gas supply crisis. The degrowth agenda derives from the sustainability agenda. 'Sustainability' has been a word in circulation for over a decade and the people who use the word have mostly lost sense of its original meaning. To be sustainable means to be able to continue. If something is unsustainable then it cannot continue and comes to an end. If there are limits to growth then, at some point, growth will no longer happen.
The climate crisis occurs with a time lag which has lulled political and economic elites into a false sense of security. However, the increasing costs of recovering depleting fossil fuels compared to the global demand for those fuels is taking place in real time. The credit crisis, which is as an over extension of the globalised banking system, is also taking place in real time. Together with imbalances arising out of the uneven development of the global economy these processes look set to throw millions of people into a period of economic chaos. Taken together they will compel lifestyle changes which provide the possibility and necessity to change to a de-growth economy and society.
There is thus no doubt that degrowth will happen - but not mainly as the result of a political and cultural degrowth movement but, rather, because of the consequences of passing the peak of global oil production, then global gas production, and because of the overextended position of the global financial system which cannot any longer be propped up.
The financial system has 'dis-credited' itself in both senses of the world - though a radical loss of reputation and as a loss of its ability to lend into an economy where debt had reached its mathematical limits of financial sustainability. In the financial newspapers we read over and again the idea that the banks do not trust each other. This is ironic because the original meaning of the word "credit" is trust and belief. Without trust and belief the financial system cannot continue to expand and it will not continue to expand - it will collapse.
This does not mean that the promotion of degrowth economics and politics has been a waste of time. To prevent the coming collapse turning into a catastrophe we need the prior development of a movement which can show how a degrowth economy and society might be managed. Without this ability to show how things might be organised differently we will be tipped into a catastrophe of wars and conflicts. We need arrangements to manage life within the capacity constraints of the global ecological system in ways that are felt as equitable and fair. Otherwise the eco-system will be destroyed and society will tear apart.
Common resources which we share must be managed in the interests of everyone in contemporary society as well as in the interests of future generations. For example, in rationing and reducing greenhouse gas emissions, the scarcity rent for permits for using the earth's atmosphere should go to citizens directly - not to the state and certainly not to the big companies. The atmosphere is a commons and should be managed as such - that means propertising it but not privatising it. A Global Atmosphere Trust should be under a legal obligation, enforceable by the courts, to manage the atmosphere in the interests of everyone equally. The monetary system can also be regarded as a common arrangement that should be managed in the interests of all. Currency trusts with duties, enforceable by the courts, need to be set up to manage the money system in the interests of everyone in a currency zone equally. Instead of debt money, repayable with interest, created and owned by private banking corporations, with an inherent growth dynamic, we need a non debt money supply made available for and through the people, including at a local level.
These are the kinds of overarching framework institutions that we need in an ecological society. They will complement the local projects and arrangements to meet basic needs that people will be forced to make to try to re-stabilise lives which are in turmoil. That means creating initiatives like local community gardens and food arrangements; make do and mend initiatives for clothes; mutual aid and simple support for building and rebuilding structures to make them energy efficient; arrangements to help people share resources, tools and skills for energy light lifestyles. We need to create local renewable energy systems where we can. We will need cultural and artistic programmes for people to find new reasons for living and simpler pleasures.
Transition Initiatives and the Degrowth Process
In the UK the Transition Initiatives movement is beginning very much to occupy the space for this movement. The prospect of energy famine requires the organisation of a response and Transition Initiatives are a way of preparing at a community level. There are now many Transition Initiatives springing up around the country - initially in small towns like Totnes, Stroud, Lewes, Falmouth, Penwith but increasingly also in cities like Bristol, inner city areas like Brixton and in Nottingham.
The thinking behind Transition Initiatives (formerly Transition Towns) is simply that settlements using much less energy and resources than we presently consume could, if properly planned for and designed, be more resilient, more abundant and more pleasurable than at present. Transition
Initiatives develop Energy Descent Action Plans as a tool for designing a positive timetabled way down from the oil peak AND as a response to climate change.
The basic formula for the development of Transition Initiatives is a number of steps
1. Awareness Raising about peak oil and gas as well as climate change and its implications.
2. Lay the Foundations of groups and networks to respond to the crisis.
3.The Official "Unleashing" - telling the public with much publicity that you are there and what it is all about.
4. Forming Groups - for example around food and peak oil, transport, health and social welfare and the support of vulnerable people etc etc
5. Use Open Space - this is a way or organising meetings where the agenda is not pre-fixed but is created by and from the people who have come to the meeting.
6. Develop Visible Practical Manifestations of the Project - for example in Totnes they have started to plant nut trees as a way of re-developing local food sources. This should not be a talking shop!
7. Facilitate The Great Reskilling helping people with the skills they will need in the very different economy that will develop on energy descent - e.g. skills to grow, cook and prepare food, repairing bicycles etc.
8. Build a Bridge to Local Government - obviously we want support if we can get it and need a harmonious working relationship. At some point we will need policy support - the sooner the better.
9. Honour the Elders - elder people will still have skills developed in a less energy intensive era. (They will also be vulnerable in energy descent)
10. Let it Go Where It Wants to Go and Reflections…not pre-planning or trying to fix or steer such a big process too much.....
To conclude with another quote from Arnold Bennett:
“Pessimism, when you get used to it, is just as agreeable as optimism.”
Brian Davey
March 2008
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