Growthiness, growthiness, the grossest gift that I possess

We are in a very tricky situation, economically speaking. Not just globally but also here in Jersey. The foreseeable and inevitable clamp down of the UK on LVCR will shortly lead to more job losses locally. Today’s UK budget may also clamp down on those who hold their properties etc in companies to avoid personal taxation, the administering of which is one of the legs of our finance industry stool.

Globally, we have probably arrived at the point where further economic growth as prescribed by Finance Minister Ozouf, Economic development Minister Maclean, Osborne, Obama etc is not just unlikely but should be recognised as very undesirable.

Economies are limited by the availability of cheap, easily and economically available energy. Here’s a graph of oil prices in “real” dollar equivalents (click image for a larger version).



As you can see, adjusting for inflation, we are at round about the same real price that oil got to during the peak of the 1970's oil shock. Clearly it shows that we are at or beyond a similar situation to the 1970s when the oil price shock first manifested which was regarded as the first event since the Great Depression to have a persistent economic effect. It was associated with (coming soon after) the stock market crash of 73-74.

Some measures of well-being reckon that, at least in the developed world, human well-being peaked in the 1970s and has been declining more or less ever since. This was one of the themes behind Life on Mars where Sam Tyler finally chose to go back to the 70s rather than stay in the here and now.

Study the graph and what it shows about the world and why future growth is so unlikely that those who blindly continue to prescribe and work towards trying to engender it, should just get real and tell everybody that they are trying to chase a mirage.

We are at, or past, peak oil. New reserves being found are not keeping up with the demand. The giant oil fields (such as those in Saudi Arabia) found in the past are declining fast already and it now takes more and more energy to get each barrel up from the depths. EROEI (Energy Returned On Energy Invested) is the reason.

From Wikipedia (although there is naturally some argument about the figures):

"when oil was originally discovered, it took on average one barrel of oil to find, extract, and process about 100 barrels of oil. That ratio has declined steadily over the last century to about three barrels gained for one barrel used up in the U.S. (and about ten for one in Saudi Arabia)"

Some people believe that there will always be more to find if we just drill deeper or go further out to sea - they are sort of correct, but the view is not sensible. There is no point. As the EROEI falls to approach one barrel of oil needed to extract one barrel of oil, the benefit approaches zero and the carbon footprint of net usable extracted energy approaches infinity!

Things are going to go rapidly downhill unless you all start ignoring the Geoff Cook's and the Ozouf's and the Osborne's and their functionally insane belief that "growth" will be our saviour - start paying more attention to those talking about a genuinely sustainable strategy.

At the root of all the problems we have, and those problems yet to manifest fully, is one word -  growth. The superstar of the ecological economics movement, Herman Daly, has pointed out that economies have an optimum size. When they are small and the world is empty and the resources available to them are large compared with the demand, then growth has really beneficial effects at making people better off by generating wealth and employment etc. When an economy continues growing, however, a point is reached when the available space to expand into and the availability of economically extractable resources starts to peak, then plateau and eventually starts to decline. This peaking is the moment when the graph of benefits versus further growth starts to decline too – further economic growth leads to decreasing benefits. Daly himself somewhat clumsily calls this increasing “illth”.

We are at this point now. Further conventional economic growth, of the type which has worked well for us in the past, will not achieve the same results as all the conventionally educated experts and economists still expect – in fact it would achieve exactly the opposite. The more “they” try to restart growth in the global economy, the worse will be the eventual effects. One of the problems with conventional economics is it does not discriminate between desirable outcomes, such as increasing health and contentment and undesirable outcomes, when it measures the overall success or growth in an economy. Anything that generates money is counted as “good”.

An economy that has to spend a lot on the military because they are fighting a war or preparing for one as an eventuality, or has to expand spending on medicine and health care because the population is increasingly unhealthy can appear, by conventional measures, to be economically healthy whereas the economy of a peaceful, healthy, contented population not so wedded to ever increasing purchases of material goods to provide consumer satisfaction could appear as if it was flat-lining. Which society would you prefer to live in, though?

People may think these ideas are a recent invention but they have actually been part of the evolution of economic thought almost since the beginning. Even that darling of hard line right wingers Adam Smith - who wrote “The Wealth of Nations” – was aware of the ultimate limits to growth, but his ideas have been cherry picked for centuries. He theorised and observed that people trading in free markets leads to production of the right quantities of commodities, division of labour, increasing wages, and an upward spiral of economic growth. But he also recognized a limit to economic growth. He predicted that in the long run, population growth would push wages down, natural resources would become increasingly scarce, and division of labour would approach the limits of its effectiveness.

Other famous economic names were aware of the limits to growth too:

John Maynard Keynes, one of the most influential economists of the twentieth century, currently enjoying  a bit more popularity, after the Milton Friedman type policies of the past few decades start to look a bit "tired" now as the economic system faces collapse,  also considered the day when society could focus on ends (happiness and wellbeing, for example) rather than means (economic growth and individual pursuit of profit).
He wrote:

...that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable… We shall once more value ends above means and prefer the good to the useful.

and

The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems - the problems of life and of human relations, of creation and behaviour and religion.

John Stuart Mill, pioneer of economics and one of the most gifted philosophers and scholars of the 19th century, also anticipated the transition from economic growth to a "stationary state." In his Principles of Political Economy, he wrote:

...the increase of wealth is not boundless. The end of growth leads to a stationary state. The stationary state of capital and wealth… would be a very considerable improvement on our present condition.

and

...a stationary condition of capital and population implies no stationary state of human improvement. There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the art of living, and much more likelihood of it being improved, when minds ceased to be engrossed by the art of getting on."

The problem is that the cherry picking of the great economists’ thoughts has had the effect of only publicising that part of their work that supports unrestrained expansionism. It has been promoted by those who seek to accumulate ever greater wealth and personal power – in short, greed – without them seeming to understand the inherent limits to that way of being. As Simon and Garfunkle, in “The Boxer”, sung –

“a man hears what he wants to hear and disregards the rest”

 
More recently than those old time economists I mentioned, Bobby Kennedy expressed the basic ideas behind sustainable or ecological economics ideas on 18 March 1968, in an address to the University of Kansas at the height of the Vietnam war. This speech has just resurfaced, thanks to Youtube.   



So, why did I call this post “growthiness, growthiness”? It’s a reference to the Ken Dodd song “happiness”. In it he never once mentions getting a new IPad or the FTSE hitting 10,000!



We’ve all led ourselves to believe that happiness and contentment is largely achievable with continued economic growth. The idea is hard wired into the minds of most politicians, businessmen, civil servants, classical economists. It permeates the very fabric of human society. People who question it are sidelined or ignored by the powers that be, as if the vast majority are all operating under post hypnotic suggestions to avoid considering the very obvious and exponentiating flaws in the dream.

The advertising and P.R. industries that first mushroomed in the 1950s, as psychologists inspired by Edward Bernays started to consolidate how to really influence people by exploiting their inner unconscious fears and desires, are largely responsible for the hypnotic suggestions we have been swamped with that make unending growth and the consumer lifestyle it promises seem desirable, indeed “the way”.

It’s time to wake up.

Recession 2 - the sequel

Mike Higgins' talk at the Peirson attracted a roomful of people - about 23-24. Without wishing to stereotype, I would say that finance industry types were probably under-represented. I intersperse my own comments and interpretations throughout this piece.

Mike initially "did a Daniel" by discovering that he had forgotten part of his material but he managed to do a very interesting talk, that covered a lot of material, off the cuff - no-one would have realised if he hadn't told us... he wasn't a lecturer in economics for nothing!

He started by saying that Jersey was not technically in a recession yet but soon would be - this was due to the lag of the figures behind reality. A true recession needs two quarters of negative growth. A depression would be a long term 10% fall in growth. He sketched out the basic reasons why the global economy is in the state it is and suggested that one of the reasons for the almost total lack of credit available at the moment is because the banks and institutions are all suspicious of each other - they don't know who it is safe to lend on to, even if they get deposits, because they don't know who to trust with all the unknown amounts of toxic debts floating around on the other party's balance sheets.

With reference to the Jersey States, Mike said that it was proving extremely hard to get information out of civil servants and he suggested that the Island was run by the top civil servants (who are obviously un-elected). I can't see that this is a healthy situation as, let's just assume, if we had a situation where the top civil servants were neither civil nor our servants and their hierarchical organisation meant that anybody who didn't toe the "from on high" party line couldn't progress in (or even stay in the service), then this would have inevitably lead to a self-reinforcing, self-propagating and virtually impregnable system. Not good. If true, it explains an awful lot of what happens in Jersey. Even when we employ new civil servants from outside the Island, clearly the HR processes of the States are constrained to employ people who will fit in, and be cosy with, the existing Mandarins, structures, employees, beliefs and practices. Very not good.

We heard that in England and Wales, up to 1/3 of the shops are empty and it's a similar picture on the industrial estates.

Mike said that he had had meetings with the Fiscal Policy Panel, a high powered group of three national-level economists who advise the States of Jersey on financial matters. He asked them flat out what they thought about the situation and basically the truth of the matter is that absolutely nobody is sure how this will play out - it is an unprecedented situation - there have been recessions before, and also depressions, but there has never been a global depression/recession before. Bear this in mind next time you hear Terry le Sueur and Philip Ozouf metaphorically singing "the Sun'll come out tomorra - bet your bottom dollar".

Perhaps now the architects of globalisation, "efficiency", competition, mergers and acquisitions, consolidation, outsourcing and downsizing etc etc will come to realise the final consequences of their bankrupt philosophy as the sting in the tail of shifting most manufacturing to China and allowing international finance to grow too big, too speculative and too unregulatable comes home to roost (I love mixing metaphors!).

They all thought simple economic growth would lead everybody to prosperity, employment, security and cheap goods. Instead, it has put the world into a highly vulnerable situation for the next few years, not to mention possible environmental calamity. It's possible the world might just be pulling out of this current economic disaster in three or four years but then, waiting in the wings, there will be the colossal hammer blow of Peak Oil which is forecast to start affecting the global economy within five years as the rate of discovery of new oilfields starts to fail to keep pace with the demand. In this case, the price of energy will go up and up and won't come back down again. This will have an almost unimaginably serious impact on world food prices and availability. Conventional economic growth will become implausible, not to mention irresponsible. Listen to the greenies!

Surely some of the responsibility for the instability that is being played out on the world financial markets is down to the activities of hedge funds which promised to make money for their clients whether markets were rising or falling. When economies are in the "inflating bubble" stage, hedge funds tend to amplify that bubble. Unfortunately, due to their tendency to short currencies and industries during periods of weakness or setback, they act to amplify downturns - amplify recessionary and depressionary pressures. Apparently we have about 1600 hedge funds registered in Jersey which were encouraged to settle here by Philip Ozouf and Alan Maclean. One wonders what Barack and Brown and Sarkozy etc will make of this.

Everybody in the room pricked up their ears when Mike mentioned that at some financial meeting he was at, a figure of 10% GST was mentioned as a possibility and that a civil servant behind him gave a sort of "high-five" yesss! as if he had won a bet...

Mike passed on that the Fiscal Policy Panel say that we need to make contingency plans. For example, if we have a major contraction in Financial Services in Jersey, we will all be in serious trouble. Mike speculated that he thought there were probably people in the room who disliked Finance so much that they would be happy to see it go but he warned everybody that, if Finance went, it would not be pretty for those left. I am no fan of "yuppies" but too many ordinary people have built their lives around the presence of Finance for me to want it to fail. I think somehow Jersey needs a managed retreat from having all our eggs in one basket. It's often the ordinary people just trying to make a modest life for themselves who get hurt the most in these situations, while the Fred Goodwin's of this world waltz off into the sunset with their £600,000 pensions and severance pay. The £140 million Stabilisation fund that they're talking about is only for immediate needs and the £500 million Strategic Reserve - the "rainy day fund" - is for situations as serious as if Finance has to "exit Jersey, stage left".

Mike also talked about what is called "regulatory capture" which is another aspect of us having allowed Finance to get too dominant. The "too big to fail" approach has been used to force taxpayers to bail out and prop up ailing banks and financial institutions because, if we didn't, it is said the ensuing financial meltdown would be too horrendous to contemplate. Similarly, "regulatory capture" refers to the banks and institution's excessive power to dictate the terms under which they operate, or to influence the drafting of Laws to benefit themselves, in their chosen area. Basically, if the States don't play ball with them, they threaten to take their ball away and go somewhere else. In essence, Finance has been able to dictate to government. Our States do not appear to have the testicular fortitude to show any poker playing ability inasmuch as they never - ever - seem to call a bluff (q.v. the Les Pas Holdings silliness).

Clearly, the processes of competition, globalisation, rationalisation, mergers and acquisitions and all the familiar "yuppie" philosophy etc have created monsters which are too big and dangerous and arrogant - they have ended up being pathological to the economic and environmental safety of the world. Of course, in the discipline of ecological economics, the dangers of allowing any one financial "species" to get too dominant or too destructive are all too obvious. It's just a shame that the proponents of classical economics do not realise that they are bound by exactly the same fundamental rules as a biological habitat. "Ye cannae change the laws of physics, Jim!"

Attempting (metaphorically) to create a global "rat and cockroach" economy and doing the equivalent of introducing goats or cane toads into vulnerable environments, was always bound to lead to tears before bedtime. It's just a pity that those in power didn't listen. They're not listening still - perhaps they never will.