Brian Davey

Mismodelling Human Beings

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Published on Credo Economics on July 21, 2017

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“rational economic men” in love, politics and everyday life

This chapter explores the assumptions about human nature on which mainstream economics is based. The description of “rational economic man” ignores most psychological and psychotherapy understandings of people.

Key to the conceptual confidence trick are assumptions about what people in general are like. It is all based on an implicit modelling of human beings. Certain types of behaviour (the type that allows economists to model people and markets) are called “rational”. Now, you might think that this description of people is meant by economists to be applicable only to economic and market activities. Certainly this was the point of view of one of the founders of the famous Chicago school of economics, Frank Knight. Although committed to the alleged virtues of the market, Knight was not naive about how far you could take economic analysis. In his book Risk, Uncertainty and Profit he concluded that economics only applied to the satisfaction of wants, and that this business of satisfying wants by no means accounted for all of human activity. Indeed Knight questioned how far one could go with a “scienti c treatment” of human activity and wrote of his own views:

In his views on this subject the writer is very much an irrationalist. In his view the whole interpretation of life as activity directed towards securing anything considered as really wanted, is highly artificial and unreal. (Backhouse, 2002, p. 204)

Some contemporary economists of the Chicago school don’t see it this way. If people are calculating their individual self interest in their economic dealings why should one assume that they do not do the same thing in their political, their social and their interpersonal dealings? Should we not also assume that government ocials are calculating their interests too? At the very least, why should contact between business and government not lead to a cosy relationship, particularly if people can leave government posts and get lucrative jobs with industry? What about bribes and kickbacks from business for special favours?

As I argued earlier, we can take the idea from Anaïs Nin that we do not see things as they are – we see things as we are. There is likely to be a loop in which a theory which describes how people are assumed to be, when powerfully propagated in textbooks as “social science”, will have an influence on how people behave. With economics we have a theory which argues that if people just look after their own interest that’s OK because “an invisible hand” described by wizard intellectuals delivers an approximation to an optimal allocation of resources. Under the influence of a view like this, concern about what is in a wider interest is not likely to blossom. It is unlikely to figure as a motivation or concern. As individualists people will look no further than themselves. They do not need to look further than themselves because the “invisible hand” will do the rest.

It is quite logical to believe that if people are actually like this then their attitude to the community and to the state will be framed in the same terms. Such people, customers of the state, rather than citizens and members of communities, will then have an interest in getting the best deal from the state to pursue their own individual agendas.

the context of Keynesian economics

When I studied economics at the end of the 1960s, the textbooks, for example by Paul A Samuelson, pictured a world where the state was essentially benevolent and independent from business. A democratic process determined what policies the state would adopt and economists were the technical advisers making clear what the policy options were. There was an implied idea that governments, politicians and public offcials would regulate markets without being contaminated by the self-interest motivation of those markets. The idea that the state could be captured by business interests while the majority of the people were effectively excluded from real influence was not expressed in the textbooks.

At that time, at the end of the 1960s, experience of the depression and then of the war had left an effect on public consciousness, including the consciousness of the elite itself – and it left its mark on economics. Fighting the war had been a massive common project which was collectively transforming. The values of British people shifted as a result of the equalising effect of the Second World War – rationing, conscription, the abolition of first class carriages in trains, evacuation and sharing bomb shelters. Military outlays as a per cent of national income in the UK went from 15% of national income in 1939 to 44% in 1940 to 53% in 1941 and as high as 55% in 1943. (Harrison (ed), 1998) After the war, the sense of what could be done when people worked together and decided what was a priority was quite different and there was a collective rejection of the idea of returning to the politics and economics of the 1930s. (Addison, 1975)

This was the context in which the welfare state and Keynesian economics was adopted. The allocation of resources mobilised for, and by, the state was something that a majority of ordinary people believed in. The mood was little different in the United States too, albeit that the US, having won the war, went straight into the cold war, involvement in Korea and the anti-communist hysteria of McCarthyism. Nevertheless there was a different context for textbooks like that of Paul Samuelson.

But by the late 1960s things were beginning to change again. Young people like myself took the welfare state for granted and chafed under the authoritarian paternalism of the elite. These conditions created the basis for a valid questioning of the disinterestedness of the state and its o cials. This idea evolved into “the new left ” but also towards the political right. A very different analysis to that of Samuelson in regard to the relationship between business and the state took hold in economics.

the rise of the chicago school

The idea that the state could be, and was captured by interest groups was valid. The hostility to the communist planned economy, the personal libertarianism born in cynicism about the paternalism and corruption of officials, as well as by backlashes against politicians, officials and the state, led to the growth of fervent market fundamentalism spearheaded by economists at Chicago University. Their ideal was to go all the way and for the state to be driven out of market activity to the maximum extent possible.

Milton Friedman and Arnold Harberger welcome the boys to class at the Chicago school of Economics.
Milton Friedman and Arnold Harberger welcome the boys to class at the chicago school of Economics.

To a new generation of Chicago economists, the rational utility calculating individual was a description that could be applied to the understanding of all human behaviour, not just that in the market place.

For example, to Gary Becker at Chicago, racism is a preference choice of who you want to live near and who an employer might want to employ. Note, Becker did not see himself as endorsing or condemning – he merely saw himself explaining and drawing out the consequences.

The model of “rational economic behaviour” was used by Becker and another theorist, Richard Posner, to explain “love”, marriage and prostitution in a utilitarian framework. Marriage is a relationship involving “reciprocal service provision” which saves on the transaction costs like pricing each “service” that a couple provide for each other, as in removing the need to keep accounts for these services. In this way of thinking prostitution is, by contrast, thought of as a “spot” sexual transaction where it is “more efficient” to pay for the service in money.

The same approach is used by Becker to explain crime. Most people don’t steal because it would not be profitable but in the life circumstances of criminals, the rational maximisation of costs and bene ts of crime does make it pay. This is another form of the redistribution of income in the same broad category as government welfare programmes. (Nelson R. H., 2001, pp. 166-189)

The trouble with this view is that it is at best tautologically true in a sense that is banal. People do things because they want to and thus, they must get satisfaction or utility from doing and deciding what they do. However, it makes little sense of the many actions taken by people where they are con icted; where they act in ways that involve self-sacrifice for moral reasons; where there is genuine anguish about their difficult decisions and where they do things because they think they ought to, not because it gives them any satisfaction at all. They act altruistically, get depressed, act out of compassion, and do crazy things. None of these fit into the model.

a faulty view of humanity

As Kalle Lasn puts it, in the book Meme Wars: The Creative Destruction of Neoclassical Economics “Neoclassical economics has achieved its coherence as a science by amputating most of human nature.” (Lasn, 2012)

This amputation is done on the assumption that unless some internal measure of happiness or freedom from pain – utility – acts as a common yardstick, it is not possible for human beings to evaluate between options and make their choices. However, as philosopher Alan Holland points out:

Happiness is not a homogenous item, but a mosaic of heterogeneous elements. There is just no common substance – no utility – by which to compare, for example, the suffering experienced by an experimental animal with the understanding gained by the experiment. Nor is this a point about moral reasons only but about reasons generally. The determined egoist, confronting a chocolate bar that will ruin his or her waistline, will soon find that he or she has to decide between vanity and greed, and will just as surely fail to find an appropriate value in terms of which to compare the alternatives. Self-interest is not such a value as it is as heterogeneous an objective as happiness. (Holland, 2002, p. 27)

As the example of Britain after World War II shows, values shift according to social, economic and political conditions. This alone makes nonsense of the idea that people are driven by personal utility calculations in the manner described by neoclassical economists.

Rather, psychologists have looked at what motivates people all around the world in different cultures and have come up with a more complex picture. Decades of research and hundreds of cross-cultural studies have identified consistently occurring human values which can be grouped into ten broad categories: universalism, benevolence, tradition, conformity, security, power, achievement, hedonism, stimulation and self-direction. (PIRC, 2011, pp. 12-20)

Each of us is motivated by all 10 of the value categories, albeit to varying degrees – and the ten groups of values can be divided along two major axes:

1. Self-enhancement (based on the pursuit of personal status and success) as opposed to self-transcendence (generally concerned with the well-being of others)
2. Openness to change (centred on independence and readiness for change) as opposed to conservation values (not referring to environmental or nature conservation, but to “order, self- restriction, preservation of the past and resistance to change”) (PIRC, 2011, p. 17)

Mainstream economists have identified a part of what motivates people but mislead because they have too narrow a view. The values that economists describe as motivating people are best described as “extrinsic”. Values that are centred on external approval and rewards e.g. wealth, material success, concern about image, social status, prestige, social power and authority. However, people are motivated by intrinsic motivations too. One of the themes of this book is to show that we get a clearer picture of reality when we describe actions and economic consequences arising from different starting motivations – some of which are anti-social and some of which are pro-social.

Using Energy to Extract Energy – the Dynamics of Depletion

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Published on FEASTA on June 21, 2017

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The “Limits to Growth Study” of 1972 was deeply controversial and criticised by many economists. Over 40 years later, it seems remarkably prophetic and on track in its predictions. The crucial concept of Energy Return on Energy Invested is explained and the flaws in neoclassical reasoning which EROI highlights.

The continued functioning of the energy system is a “hub interdependency” that has become essential to the management of the increasing complexity of our society. The energy input into the UK economy is about 50 to 70 times as great as what the labour force could generate if working full time only with the power of their muscles, fuelled up with food. It is fossil fuels, rfined to be used in vehicles and motors or converted into electricity that have created power inputs that makes possible the multiple round- about arrangements in a high complex economy. The other “hub interdependency” is a money and transactions systems for exchange which has to continue to function to make vast production and trade networks viable. Without payment systems nothing functions.

Yet, as I will show, both types of hub interdependencies could conceivably fail. The smooth running of the energy system is dependent on ample supplies of cheaply available fossil fuels. However, there has been a rising cost of extracting and refining oil, gas and coal. Quite soon there is likely to be an absolute decline in their availability. To this should be added the climatic consequences of burning more carbon based fuels. To make the situation even worse, if the economy gets into diffculty because of rising energy costs then so too will the financial system – which can then has a knock-on consequence for the money system. The two hub interdependencies could break down together.

“Solutions” put forward by the techno optimists almost always assume growing complexity and new uses for energy with an increased energy cost. But this begs the question- because the problem is the growing cost of energy and its polluting and climate changing consequences.

The “Limits to Growth” study of 1972 – and its 40 year after evaluation

It was a view similar to this that underpinned the methodology of a famous study from the early 1970s. A group called the Club of Rome decided to commission a group of system scientists at the Massachusetts Institute of Technology to explore how far economic growth would continue to be possible. Their research used a series of computer model runs based on various scenarios of the future. It was published in 1972 and produced an instant storm. Most economists were up in arms that their shibboleth, economic growth, had been challenged. (Meadows, Meadows, Randers, & BehrensIII, 1972)

This was because its message was that growth could continue for some time by running down “natural capital” (depletion) and degrading “ecological system services” (pollution) but that it could not go on forever. An analogy would be spending more than one earns. This is possible as long as one has savings to run down, or by running up debts payable in the future. However, a day of reckoning inevitably occurs. The MIT scientists ran a number of computer generated scenarios of the future including a “business as usual” projection, called the “standard run” which hit a global crisis in 2030.

It is now over 40 years since the original Limits to Growth study was published so it is legitimate to compare what was predicted in 1972 against what actually happened. This has now been done twice by Graham Turner who works at the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO). Turner did this with data for the rst 30 years and then for 40 years of data. His conclusion is as follows:

The Limits to Growth standard run scenario produced 40 years ago continues to align well with historical data that has been updated in this paper following a 30-year comparison by the author. The scenario results in collapse of the global economy and environment and subsequently, the population. Although the modelled fall in population occurs after about 2030 – with death rates reversing contemporary trends and rising from 2020 onward – the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. (Turner, 2012)

So what brings about the collapse? In the Limits to Growth model there are essentially two kinds of limiting restraints. On the one hand, limitations on resource inputs (materials and energy). On the other hand, waste/pollution restraints which degrade the ecological system and human society (particularly climate change).

Turner finds that, so far it, is the former rather than the latter that is the more important. What happens is that, as resources like fossil fuels deplete, they become more expensive to extract. More industrial output has to be set aside for the extraction process and less industrial output is available for other purposes.

With signficant capital subsequently going into resource extraction, there is insufficient available to fully replace degrading capital within the industrial sector itself. Consequently, despite heightened industrial activity attempting to satisfy multiple demands from all sectors and the population, actual industrial output per capita begins to fall precipitously, from about 2015, while pollution from the industrial activity continues to grow. The reduction of inputs to agriculture from industry, combined with pollution impacts on agricultural land, leads to a fall in agricultural yields and food produced per capita. Similarly, services (e.g., health and education) are not maintained due to insufficient capital and inputs.

Diminishing per capita supply of services and food cause a rise in the death rate from about 2020(and somewhat lower rise in the birth rate, due to reduced birth control options). The global population therefore falls, at about half a billion per decade, starting at about 2030. Following the collapse, the output of the World3 model for the standard run ( figure 1 to figure 3) shows that average living standards for the aggregate population (material wealth, food and services per capita) resemble those of the early 20th century. (Turner, 2012, p. 121)

Energy Return on Energy Invested

A similar analysis has been made by Hall and Klitgaard. They argue that to run a modern society it is necessary that the energy return on energy invested must be at least 15 to 1. To understand why this should be so consider the following diagram from a lecture by Hall. (Hall, 2012)


The diagram illustrates the idea of the energy return on energy invested. For every 100 Mega Joules of energy tapped in an oil flow from a well, 10 MJ are needed to tap the well, leaving 90 MJ. A narrow measure of energy returned on energy invested at the wellhead in this example would therefore be 100 to 10 or 10 to 1.

However, to get a fuller picture we have to extend this kind of analysis. Of the net energy at the wellhead, 90 MJ, some energy has to be used to refine the oil and produce the by-products, leaving only 63 MJ.

Then, to transport the refined product to its point of use takes another 5 MJ leaving 58MJ. But of course, the infrastructure of roads and transport also requires energy for construction and maintenance before any of the refined oil can be used to power a vehicle to go from A to B. By this final stage there is only 20.5 MJ of the original 100MJ left.

We now have to take into account that depletion means that, at well heads around the world, the energy to produce energy is increasing. It takes energy to prospect for oil and gas and if the wells are smaller and more difficult to tap because, for example, they are out at sea under a huge amount of rock. Then it will take more energy to get the oil out in the first place.

So, instead of requiring 10MJ to produce the 100 MJ, let us imagine that it now takes 20 MJ. At the other end of the chain there would thus, only be 10.5MJ – a dramatic reduction in petroleum available to society.

The concept of Energy Return on Energy Invested is a ratio in physical quantities and it helps us to understand the flaw in neoclassical economic reasoning that draws on the idea of “the invisible hand” and the price mechanism. In simplistic economic thinking, markets should have no problems coping with depletion because a depleting resource will become more expensive. As its price rises, so the argument goes, the search for new sources of energy and substitutes will be incentivised while people and companies will adapt their purchases to rising prices. For example, if it is the price of energy that is rising then this will incentivise greater energy efficiency. Basta! Problem solved…

Except the problem is not solved… there are two flaws in the reasoning. Firstly, if the price of energy rises then so too does the cost of extracting energy – because energy is needed to extract energy. There will be gas and oil wells in favourable locations which are relatively cheap to tap, and the rising energy price will mean that the companies that own these wells will make a lot of money. This is what economists call “rent”. However, there will be some wells that are “marginal” because the underlying geology and location are not so favourable. If energy prices rise at these locations then rising energy prices will also put up the energy costs of production. Indeed, when the energy returned on energy invested falls as low as 1 to 1, the increase in the costs of energy inputs will cancel out any gains in revenues from higher priced energy outputs. As is clear when the EROI is less than one, energy extraction will not be profitable at any price.

Secondly, energy prices cannot in any case rise beyond a certain point without crashing the economy. The market for energy is not like the market for cans of baked beans. Energy is necessary for virtually every activity in the economy, for all production and all services. The price of energy is a big deal – energy prices going up and down have a similar significance to interest rates going up or down. There are “macro-economic” consequences for the level of activity in the economy. Thus, in the words of one analyst, Chris Skrebowski, there is a rise in the price of oil, gas and coal at which:

the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time. (Skrebowski, 2011)

This kind of analysis has been further developed by Steven Kopits of the Douglas-Westwood consultancy. In a lecture to the Columbia University Center on Global Energy Policy in February of 2014, he explained how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in “conventional oil” production but has merely served to slow what would otherwise have been a faster decline.

More specifically, the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that amount, $3.5 trillion was spent on the “legacy” oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production, it fell by 1 million barrels a day. By way of comparison, investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.

The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies cannot cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening. Another story provides a better metaphor – that story is “Catch 22”. According to Kopits, the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel.

But it is these oil prices that drag down the economies of the OECD economies. For several years, however, there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)

Since the oil price is never “just right” it follows that it must oscillate between a price that is too high for macro-economic stability or too low to make it a paying proposition for high cost producers of oil (or gas) to invest in expanding production. In late 2014 we can see this drama at work. The faltering global economy has a lower demand for oil but OPEC, under the leadership of Saudi Arabia, have decided not to reduce oil production in order to keep oil prices from falling. On the contrary they want prices to fall. This is because they want to drive US shale oil and gas producers out of business.

The shale industry is described elsewhere in this book – suffice it here to refer to the claim of many commentators that the shale oil and gas boom in the United States is a bubble. A lot of money borrowed from Wall Street has been invested in the industry in anticipation of high profits but given the speed at which wells deplete it is doubtful whether many of the companies will be able to cover their debts. What has been possible so far has been largely because quantitative easing means capital for this industry has been made available with very low interest rates. There is a range of extraction production costs for different oil and gas wells and fields depending on the differing geology in different places. In some “sweet spots” the yield compared to cost is high but in a large number of cases the costs of production have been high and it is being said that it will be impossible to make money at the price to which oil has fallen ($65 in late 2014). This in turn could mean that companies funding their operations with junk bonds could find it difficult to service their debt. If interest rates rise the difficulty would become greater. Because the shale oil and gas sector has been so crucial to expansion in the USA then a large number of bankruptcies could have wider repercussions throughout the wider US and world economy.

Renewable Energy systems to the rescue?

Although it seems obvious that the depletion of fossil fuels can and should lead to the expansion of renewable energy systems like wind and solar power, we should beware of believing that renewable energy systems are a panacea that can rescue consumer society and its continued growth path. A very similar net energy analysis can, and ought to be done for the potential of renewable energy to match that already done for fossil fuels.


Before we get over-enthusiastic about the potential for renewable energy, we have to be aware of the need to subtract the energy costs particular to renewable energy systems from the gross energy that renewable energy systems generate. Not only must energy be used to manufacture and install the wind turbines, the solar panels and so on, but for a renewable based economy to be able to function, it must also devote energy to the creation of energy storage. This would allow for the fact that, when the wind and the sun are generating energy, is not necessarily the time when it is wanted.

Furthermore, the places where, for example, solar and wind potential are at this best – offshore for wind or in deserts without dust storms near the equator for solar – are usually a long distance from centres of use. Once again, a great deal of energy, materials and money must be spent getting the energy from where it is generated to where it will be used. For example, the “Energie Wende” (Energy Transformation) in Germany is involving huge effort, financial and energy costs, creating a transmission corridor to carry electricity from North Sea wind turbines down to Bavaria where the demand is greatest. Similarly, plans to develop concentrated solar power in North Africa for use in northern Europe which, if they ever come to anything, will require major investments in energy transmission. A further issue, connected to the requirement for energy storage, is the need for energy carriers which are not based on electricity. As before, conversions to put a current energy flux into a stored form, involve an energy cost.

Just as with fossil fuels, sources of renewable energy are of variable yield depending on local conditions: offshore wind is better than onshore for wind speed and wind reliability; there is more solar energy nearer the equator; some areas have less cloud cover; wave energy on the Atlantic coasts of the UK are much better than on other coastlines like those of the Irish Sea or North Sea. If we make a Ricardian assumption that best net yielding resources are developed first, then subsequent yields will be progressively inferior. In more conventional jargon – just as there are diminishing returns for fossil energy as fossil energy resources deplete, so there will eventually be diminishing returns for renewable energy systems. No doubt new technologies will partly buck this trend but the trend is there nonetheless. It is for reasons such as these that some energy experts are sceptical about the global potential of renewable energy to meet the energy demand of a growing economy. For example, two Australian academics at Monash University argue that world energy demand would grow to 1,000 EJ (EJ = 10 18 J) or more by 2050 if growth continued on the course of recent decades. Their analysis then looks at each renewable energy resource in turn, bearing in mind the energy costs of developing wind, solar, hydropower, biomass etc., taking into account diminishing returns, and bearing in mind too that climate change may limit the potential of renewable energy. (For example, river flow rates may change affecting hydropower). Their conclusion: “We nd that when the energy costs of energy are considered, it is unlikely that renewable energy can provide anywhere near a 1000 EJ by 2050.” (Moriarty & Honnery, 2012)

Now let’s put these insights back into a bigger picture of the future of the economy. In a presentation to the All Party Parliamentary Group on Peak Oil and Gas, Charles Hall showed a number of diagrams to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff. Some of the production is consumer goods, either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production i.e. investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems, more and more production must go into energy acquisition, infrastructure and maintenance. Less and less is available for consumption, and particularly for discretionary consumption.


Whether the economy would evolve in this way can be questioned. As we have seen, the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices. However, the rest of the economy cannot actually pay this extra without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline would likely drag down the whole economy.

Over the last few years, central banks have had a policy of quantitative easing to try to keep interest rates low. The economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth, it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis and it will get a lot worse when oil production starts to fall more rapidly as a result of investment cut backs. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability, this is still a dead end and, at some point, people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why degrowth is needed.

Further ideas can be extrapolated from Hall’s way of presenting the end of the road for the growth economy. The only real option as a source for extra resources to be ploughed into changing the energy sector is from what Hall calls “discretionary consumption” aka luxury consumption. It would not be possible to take from “staples” without undermining the ability of ordinary people to survive day to day. Implicit here is a social justice agenda for the post growth – post carbon economy. Transferring resources out of the luxury consumption of the rich is a necessary part of the process of finding the wherewithal for energy conservation work and for developing renewable energy resources. These will be expensive and the resources cannot come from anywhere else than out of the consumption of the rich. It should be remembered too that the problems of depletion do not just apply to fossil energy extraction coal, oil and gas) but apply across all forms of mineral extraction. All minerals are depleted by use and that means the grade or ore declines over time. Projecting the consequences into the future ought to frighten the growth enthusiasts. To take in how industrial production can hit a brick wall of steeply rising costs, consider the following graph which shows the declining quality of ore grades mined in Australia.


As ores deplete there is a deterioration of ore grades. That means that more rock has to be shifted and processed to refine and extract the desired raw material, requiring more energy and leaving more wastes. This is occurring in parallel to the depletion in energy sources which means that more energy has to be used to extract a given quantity of energy and therefore, in turn, to extract from a given quantity of ore. Thus, the energy requirements to extract energy are rising at the very same time as the amount of energy required to extract given quantities of minerals are rising. More energy is needed just at the time that energy is itself becoming more expensive.

Now, on top of that, add to the picture the growing demand for minerals and materials if the economy is to grow.

At least there has been a recognition and acknowledgement in recent years that environmental problems exist. The problem is now somewhat different – the problem is the incredibly naive faith that markets and technology can solve all problems and keep on going. The main criticism of the limits to growth study was the claim that problems would be anticipated in forward markets and would then be made the subject of high tech innovation. In the next chapter, the destructive effects of these innovations is examined in more depth.

Economists as Priesthood

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Published on Credo Economics on May 22, 2017

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Economists as priesthood – a religion based on assumptions

Some of the ridiculous assumptions on which much of mainstream economics is constructed are explored in this chapter – for example the methodology that stresses individual decision- making, the assumption that decision-makers have the information that they need, the assumption of honesty, the default assumption of competition. (TEXT BOX: Labour market competition as an alternative to corporal punishment according to Hayek).

Today’s leading economic textbook writer, Greg Mankiw, has compared non-economists to “mere Muggles”, the ordinary people without magical powers described in the Harry Potter novels. His implication is that economists are “wizards”. (Mankiw, 2008)

Perhaps they are. However, people with magical abilities are not always to be trusted.

the conjuror - school of Hieronymous Bosch c1550 Public Domain image Wikimedia commons
the conjuror – school of Hieronymous Bosch c1550 Public Domain image Wikimedia commons

The ideas of the economists are important because they frame the way we understand the world, sometimes distracting us from understanding and living in the world in other ways. e economists claim that they describe the world as it is, rather than describing it as it should be, but there is an entire value system implicit in economics. It is implicit in their de nition of what it is to be “rational”. Implicitly, economists are making a truth claim about how human beings are, what makes them tick.

Unaware of the criticism of their model of rationality (or ignoring the criticism) it seems reasonable to economists to theorise human beings as if they act in a predictable way. Calculating their individual self-interest to maximise their utility and then acting accordingly. This makes possible a deterministic view of human action that allows economists to model markets as fundamentally positive social institutions which can solve virtually all problems.
In actual fact, economists are there as advocates for a particular kind of value system. They are not unlike priests whose job it is to argue that their beliefs should be guiding principles for life.

Some economists are well aware of this. Robert Nelson describes debates about economics as having a “theological character“. He worked as an economist in the US Department of the Interior with responsibility for the upkeep of national parks and landscapes in the USA:

If economists had any influence—which they sometimes did, if rarely decisive—it was seldom as literal “problem solvers”. Rather, the greatest influence of economists came through their defence of a set of values. Much of my own and other efforts of Interior (Ministry) economists were really to persuade others in the department to act in accordance with the economic value system, as compared with other competing priorities and sets of values also represented within the ranks of the department. (Nelson R. H., 2001, p. xiv)

Ridiculous assumptions

In other sciences ideas evolve by testing hypotheses against the facts. In economics what mostly happens is that simple models are created which have this kind of form:

Assuming human beings behave in a particular kind of way e.g. as consumers seeking to maximise their level of satisfaction through purchasing

And assuming their behaviour takes place in a particular set of conditions e.g. they are fully aware of all their consumption options available with their purchasing power

Then faced with a particular change in conditions it is possible to state how they will adapt, as well as to quantify this adaptation e.g. faced with a price change they will change how much that they buy by so much

This appears to be an exercise in logic rather like this – All men are mortal, Socrates is a man, therefore Socrates is mortal. The premises of this argument are things asserted to be true which in this case are that “all men are mortal” and that “Socrates is a man”. The conclusion that follows automatically is that Socrates is mortal. This conclusion does not really add any new information to the premises that have been proposed, it only draws out the consequence. In a sense, the conclusion is already contained in the premises.

In an apparently similar way the conclusions of economics follow from the starting points of their modelling analyses. However, the starting points of economic models are not premises asserted to be true but assumptions. These assumptions do not have a truth value status based on evidence but, on first impressions, appear to be plausible. (Bardsley, Cubitt, Loomes, Mo at, Starmer, & Sugden, 2010, p. Chtp5)

If many people do not realise that this is a fraud, it is partly because the mathematics, the symbols and the diagrams with which the models are expressed enable economists to distance themselves from ordinary people. Rather in the manner that speaking Latin enabled priests to put themselves above the common people.

Consider this proposition:

If Socrates is assumed to be a woman, and if all women are assumed to live forever, then it can be assumed that Socrates will be immortal.

It is obvious what is wrong with this proposition. Nevertheless, the falsity of economic propositions are not always so obvious. This is partly because some of the assumptions have a superficial plausibility and sometimes because the assumptions remain implicit, unstated and unexamined. The most important point here, however, is that there is no evidence for these assumptions. Read any economic textbook and you will find it rich in numerical examples that were made up by the author. They are neither taken from real life nor based on evidence. This is an ideal basis for a self-serving ideology in which this kind of “logic” can prove anything that is wanted according to the starting assumptions. Economics like this is not falsifiable because evidence is implicitly deemed to be unnecessary in the first place.

If you assume no problems at the start of the theory you will conclude that the economic world works without problems. For example, if, as was the case for many years, you assume that there are no problems in getting the information that you need to take economic decisions, then all the uncertainties, the dishonesty, the misinterpretation and the errors that take place in the real world disappear from the theory. The conclusions of models that do not draw on real world evidence are only as accurate as the assumptions they start with – no more and no less. A good deal of textbook economics is a description of what economists assume the world is like.

Even worse, the construction of models based on assumptions enables the imagination of a world akin to the one that Dr Pangloss believes he lives in. He is the character in Voltaire’s satire, Candide, who at every misfortune reassures everyone that all is for the best in the best of all possible worlds. Nothing will go wrong in the world of the mainstream economists because growth, technology, innovation, markets and entrepreneurial zeal together have the mechanisms for fixing all problems for ever. The message is perpetually upbeat and reassuring – which it can be when you construct a model of the world with assumptions that don’t include the problems.

Thus, markets are “efficient” and welfare outcomes are “optimal” when the starting assumptions contain none of the real life issues that would make them otherwise. In order to arrive at these optimal and efficient outcomes what is needed above all is “competition”. This is another very handy conclusion. It enables neoclassical economists to convince themselves and successive generations of students that, as long as the state minimises its involvement in markets, we live in this best of all possible worlds.

Competition is an idea which has many useful ideological functions. Instead of being a place of shambolic chaos, a competitive market is portrayed as having its own kind of order without a single big player – state or monopoly – needing to take all the decisions for overall coherence. With a set of assumptions that portrays this competitive market order as “optimal”, here is an argument that can be used as a default presumption against co-operation; against state regulations; against taxation; against trade union combination in the labour market. Competition is an idea that stands for general “freedom” from interference for powerful economic actors, against any limitation on their rights to act – and therefore for a general understanding of what “freedom” means for everyone else in society too. It can be used by those who are the strongest to prevent support for weakest, and generally in a self-celebratory way praising “success” as the result of “efficiency”.

But let’s look at some of the most common assumptions that underpin the key idea.

Methodological individualism

To take the first issue – in the textbooks, markets are places where there are lots of actors and, to get
a collective picture of what happens, you simply add up the actions of all the separate individuals. Of course, this does not rule out the idea that the separate individuals have previously influenced each other, but that is not what is explored. This is a version of what is called “methodological individualism” and there is no place in it for applying the insights of group psycho-dynamics. This is not because methodological individualists necessarily deny that the “preferences” that form people’s choices can be formed by social, interpersonal or community processes – it is rather because they take the “preferences” that give rise to choices as givens. They see themselves as modelling rational behaviour about what people will do with a pattern of preferences, a certain amount of purchasing power when faced with a set of prices. As economists, they are not concerned to delve further. In that sense, methodological individualism is a choice to ignore why people prefer and choose what they do. It is a choice to ignore and thus a choice to remain ignorant.

It is no wonder that, when criticising their teachers a few years ago, French economics students described neoclassical economics as “autistic”. Autism is a psychiatric disorder where a person is unable to recognise other people as people, as acting subjects. The autistic person is, thus, unable to form meaningful reciprocal relationships. Of course, in their private lives even neoclassical economists recognise that people act in groups in which they interact and have a reciprocal influence on each other – in families, in clubs, in associations, in societies, in crowds. A lot of what happens in markets is driven by crowd psychology. What is “fashion” if not a form of collective psychology? Arrangements made by producers try to influence and steer fashion processes which are only partly under their control.

When I go into supermarkets or department stores at the weekend it is full of families who are taking group decisions about purchasing. At other times, there are mothers who are taking decisions for partners and children. But that is not what most of the theories assume.

Ignoring ignorance – the myth of perfect information vs the thinking of the herd

Let’s look at another assumption. It is only in the last few decades that a new approach of “information economics” has evolved out of the recognition that access to information is crucial to decisions and market outcomes. Many of the textbooks from which today’s elite were taught assumed that markets had all the information that market actors needed. Indeed, some of the more elaborate models that “proved” the superiority of markets to allocate resources assumed that market actors had god like powers because they could make accurate assessments of the future too.

In fact the market is almost always shot through with a lack of information and/or information asymmetry. Perhaps in the world of Adam Smith’s small town butcher, baker and brewer, people could pick up gossip about their suppliers and even know them personally. But how does information work in a global market? How does it work with products made out of hundreds of components made out of hundreds of materials supplied by global supply chains? How does this work with meat products in the freezers of supermarkets? People buy what they think are beef products and are dependent on public health authorities to discover that they have been eating horse meat.

A very powerful reason why people have so much influence on each other lies in the absence of information and the uncertainty in which many economic decisions are taken. When you don’t know, you ask and/or you take your cues from other people.

Margaret Thatcher once famously said that “there is no such thing as society” which is one of those monumentally stupid things that powerful people can say and get away with because they are surrounded by sycophants. A very powerful person like Thatcher could doubt the existence of society because she had little need for the ideas and inluence of other people as she would have known that she was always right. By contrast mere mortals are influenced by others because we live in a world of uncertainty and inadequate information. Allowing ourselves to be in uenced by what others are doing and saying is a rough and ready way of coping with the information that we lack. Thus, we come to be influenced and swayed by social trends.

One cannot possibly understand the mentality of what are called “bubbles” in asset markets and speculation, except through collective psychology. Whether and how much of a commodity, or an asset, is purchased depends powerfully not just on current prices but on what people expect will happen to prices in the future. When they try to gure out what is likely to happen to future market valuations, perhaps the most powerful in uence of all is what other people are saying and thinking. Anyone who reads a newspaper like the Financial Times will be struck by the way it is full of reports which convey to the readers what the “market sentiment” is, that is, what others think will happen.
Up to a point, movements in market sentiment are exercises in self-ful lling prophecy. If a rise in price is taken to be indicative of an ongoing trend, which will lead to even higher prices later, then many traders will follow each other and be tempted to buy more now, before prices go higher. Possibly also to make money in the “rising market”. Perhaps speculators imagine that they can sell what they buy now on a rising price for an even higher price later. We have already seen how speculation drove up rising grain prices in the famines of India, taking food out of the mouths of the poor even in areas of good harvests.

Honesty and Dishonesty

Other, sharper, market actors seek to play these movements in a devious fashion. is brings us to
the third of our assumptions about why competitive markets deliver wonderful outcomes. It assumes that market players are honest when a lot are not. If people are only motivated by individualistically calculated self-interest why should they not resort to fraud and opportunism, to secrecy and misleading accounts of product quality?

This kind of duplicity affects what happens during speculative manias. For example, if you know that the shares of a company are going to lose value because you have insider information that a company or an industry is heading towards a big loss, if you have no commitment to the company or the industry, and if you no scruples, you will want to sell the shares at a high price before the truth gets out. So you might launch a PR campaign to hype the company or industry that you know is heading for a loss. at way you seek to create a rising market in order to offload your otherwise worthless shares on the people who get taken in. The game being played is to let other suckers take the losses.

That happened at the end of the subprime boom where bank traders sold what they referred to privately as “toxic waste” to unsuspecting customers as if these assets were of real value. A similar thing is happening at the time of writing in the gas fracking industry. All over the world, articles are appearing about the incredible potential for gas fracking. Meanwhile, industry insiders are pointing out the rapid depletion of the wells, the number of wells that come up dry and the high cost of drilling. If you believe the former narrative you put up money to enter the industry – and allow the insiders in the know to get out.

So here you have it. If we assume that most actors do not know what it going on and are able to influence each other, along with insiders who do have the best information acting as crooks trying to mislead and defraud other people, this gives us a far better fit for understanding what actually happens in markets. Instead, we have models which assume the reverse and this is what is taught to students.

Perfect competition

To be fair, neoclassical economists do get rather cross when businesses seek to accumulate monopoly power. is is paradoxical because competitive success leads to the weaker companies being driven out and/or taken over by the stronger ones thereby accumulating more monopoly power. Without competition the bracing Darwinist struggle between businesses does not deliver the benefits advertised in the textbooks, such as, cheaper products for all of us. For that reason some capitalist countries have “competition” policies and police against secret agreements between companies that “restrain trade” in favour of higher prices at the consumer’s expense. However, a closer examination of some of these policies often reveals that the intended result is the opposite of the stated one. As already mentioned, the ideology of competition through free trade is intended to clear the field for those companies in those countries that are already in the globally dominant position. It is about preventing competition emerging in the first place and consolidating global dominance. Throughout economic history the ideology of competition has been used to open up markets to the strongest market players and enable them to accumulate further market power. These are the players who will be most influential in political lobbying in the corridors of power. These are the very private sector players who will be influential in university departments of economics.






Text Box– Labour market competition as an alternative to corporal Punishment according to Hayek

Where neoclassical economists can be expected to get indignant if competition is limited is in the labour market. If workers form trade unions to create for themselves a countervailing power over and against their employer then economists are rarely sympathetic and almost always take the side of employers. Not many infants are born because their parents decided to do their bit to supply the future labour market. However, that does not excuse these infants, when they grow up, from their duty to compete in the labour market for work and take the going price. When there is full employment, this gives employees far too much “market power” for “optimality”. As Hayek puts it
in his book The Road to Serfdom, without unemployment, managers lose their ability to discipline workers and take on or lay off workers according to their plans.

“… there should be a place from which workers can be drawn, and when a worker is fired he should vanish from the job and from the payroll. In the absence of a free reservoir discipline cannot be maintained without corporal punishment, as with slave labour.” Quoted in (Smith & Max-Neef, 2011, p. 35)

Note the verb “should”… at the beginning of most textbooks there are usually little homilies that say economists describe the world as it is and not as it should be – but that’s not for Hayek. The labour market needs an alternative for corporal punishment if the workers is to be managed as an input to be used and disposed of as required. Workers are a means to the ends of employers.

At the risk of going off on a tangent, I cannot help but wonder what Hayek would have said about this famous principle from the philosopher Kant:

“Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end.” (Kant & (Tr.)Ellington, 1993, p. 30)

I’ve already claimed that human relationships are not the strong point of economists – neoclassical or Austrian. Hayek’s requirement for some kind of discipline derives as a self-fulfilling imperative from the mind-set of employers who use people merely as means, for example, as “factory hands”. If you treat and regard people only as means to your end is it surprising that their commitment to those ends is less than enthusiastic? Why should they feel committed? People do not take well to being used without consideration. It has a cost to their self-esteem, although, if one has no choice, if one is “disciplined” by unemployment, one may have to do it.

When you look at the world using economic concepts you are looking at the world as “snakes in suits” see it. They don’t get this idea that “human resources” are actually people with feelings and emotions. They don’t get the idea that most people are happy to co-operate with each other if they are treated with respect and their feelings acknowledged. This why they need alternatives to corporal punishment to maintain discipline and so they opt for unemployment to “create competition”. (In Britain the snakes are then disconcerted when they get a group of people who become long term unemployed. Rather than resort to corporal punishment for this group they intend to resort to psychological torture – making this group do completely futile time-wasting things for their benefits, like looking for employment when there is none).

Garbage hidden in mathematical formulas

I digress from the topic of unrealistic assumptions made by neoclassical and Austrian economists… If you assume away the real world in your model then the model will deliver a picture of ideal allocation outcomes – on the blackboard. Because the conclusions are arrived at in very sophisticated mathematics “mere Muggles” don’t understand the fraud that the wizards have perpetrated.

What “the mere Muggles” understand… or think they do… is a simplified version of the ideas of the wizards, or parts of these ideas. If the economists are akin to a priesthood who are trained in the theological details, then the mass of the general public are like a congregation who stitch together a vaguer and partial patchwork quilt of ideas from what they read in the newspapers, hear on the news, or perhaps pick up in books or even in introductory courses in economics. The more general “congregation” does not know all the ne details but knows bits that they adapt to their lives and local circumstances. is is what Richard B. Norgaard calls “economism”:

The mix of popular, political and policy mythology as well as practical beliefs that help us understand and rationalise the economy and how we live in it. People share some of those beliefs globally; other beliefs people adapt to fit particular national and regional situation; while yet others serve particular groups, including economists. (Norgaard, 2009, p. 80)

As Norgaard expresses it – a half of the global population is deeply immersed in the global economic system and like fish trying to grasp the nature of water, each of these individuals, playing their specialised roles, seeks to some degree or other to understand the bigger system of which they are a part. As the economy has become the window on which they see the world they use economism as “a set of beliefs constituting a secular religion guiding the remnants of our modern hopes for human progress: material, moral and scientific.” (Norgaard, 2009, p. 79)

John Maynard Keynes was, I believe, saying much the same thing when he wrote that:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. (Keynes 1936, p. XX)
What I am not saying here is that the priesthoods are supposed to have the correct version while the congregation more often have it wrong because of their simplifications and misunderstandings. It is more complicated than that. The mainstream theory always was “defunct” even in the form that is written out in difficult looking equations. You don’t need to understand the equations to understand that. You just need to examine the foundations of the subject. That said, the priesthood are a little more aware of the nuances in their theories.

Limits to Economic Growth

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Published on FEASTA on April 16, 2017

Discuss this article at the Economics Table inside the Diner

This lecture was presented at the University of Nottingham on April 4, 2017. Please click on the slides to enlarge them.

On April 3 in the Guardian there was an article about Christine Lagarde of the IMF concerned that the growth of productivity in many “developed countries” has been falling. There is a problem for the finance sector if growth falls away since additional income is needed for people to be able to service and repay their debts. Without growth the finance sector is destabilised and, indeed, it has been necessary to bring down interest rates to manage the situation.

But the problem is not only a practical one. Growth of production is central to the core ideology of the current economic system, to the idea of “development” and “progress”. It is central to the legitimacy of the people who run the global economy. Without it there is a legitimacy crisis.


Slide One


The idea of “progress” primarily emerged in what was called the European enlightenment of the 18th century and involved the idea that science and technology would enable the increase of material production and economic activity and it was this that made the “age of commerce” the highest point in human evolution. Basically technical progress and increased production was equivalent to moral progress because the chief problem facing humanity is want or “scarcity”.


The new heroes for humanity were now innovating entrepreneurs who risked money to back the production and marketing of machines that they had invented.


Slide Two

Graph by Krausman published by UNEP and available at:






Graph by Krausman published by UNEP and available at:






At first production increased was not measured comprehensively. However from the post world war two period onwards it became the practice to keep national income accounts and to keep track of economic growth figures as the chief measure of “progress”.

Extraction. This form of development led to a massive increase in the volume and weight of materials extracted out of the planet – over time a greater proportion being construction materials, minerals and energy minerals.

Magnitude…. Recent research from the University of Leicester calculated the total mass of all the artifacts produced by human society – buildings, cars, computers – a large part of which is now rubble and waste in dumps. They found it to be 30 trillion tons. That represents a mass of more than 50 kilograms for every square metre of Earth’s surface.

By contrast, the total amount of living matter, including people, plants, animals, insects and bacteria is estimated to be around 4 trillion tons of carbon = about 9 trillion tons.


Slide Three

Source: Malcolm Slesser and Jane King Not by Money Alone. Economics as Nature Intended Jon Carpenter Publishing 2002






Source: Malcolm Slesser and Jane King Not by Money Alone. Economics as Nature Intended Jon Carpenter Publishing 2002






From the 19th century onwards artistic visions of the future saw it as being one in which lots of clever powered machines would become available to transport people and products, to produce goods and to generally make life easier. Indeed while text books of economics describe a world of land labour and capital – a different description would have been people using and guiding machines and infrastructures powered by a succession of energy carriers – coal, oil, gas, electricity.


Slide Four: Human output as a measuring rod – concept of energy slaves

One link to a collection of links and resources on the concept:






One link to a collection of links and resources on the concept:






Energy slaves The result is a society dependent on ever increasing volumes of energy to power the machines and technical infrastructures. To put this in perspective we need some measurements and numbers. One way of measuring is by using the power capacity of the average human body as a unit of account. If we take an averagely healthy person and get them to peddle all day long on a peddle generator then they can, with their muscles, generate 3kWh a day – if they can stay awake for 24 hours. This would keep a light bulb lit all day.

The concept of energy slave was developed by Buckminster Fuller in the 1940s to describe how much human labour would be required to sustain a particular activity in the absence of fossil fuels. For example if would take 11 energy slaves to power a toaster. Thus since the average north american consumes 24 barrels of oil a year, and because a barrel of oil contains the energy equivalent of 8.6 years of human labour it would take 204 energy slaves to sustain an average US lifestyle and a 110 energy slaves to sustain an average Western European lifestyle.

Here’s another statistic to consider. If we were to try to power the (2012) internet with pedal-powered generators, each producing 70 watt of electric power, we would need 8.2 billion people pedalling in three shifts of eight hours for 365 days per year. (Electricity consumption of end-use devices is included in these numbers, so the pedallers can use their smartphones or laptops while on the job). 1,815 TWh equals three times the electricity supplied by all wind and solar energy plants in 2012, worldwide.”


Slide Five


The painting is by Lowry. On D H Lawrence:






The painting is by Lowry.
On D H Lawrence:






Progress or a gilded index of ruin? Ideologists of right and left bought into the idea of progress as technological change but disagreed over issues of social justice, distribution and how and who should manage the process of change.


Nevertheless there were always some critics of industrialism itself and not everyone accepted the narrative that economic growth was per se some kind of moral good. For example 19th century thinks like John Stewart Mill saw the possibility that growth could become uneconomic, denied that bigger was necessarily better and foresaw a case for an eventual “steady state economy” while John Ruskin wrote about uneconomic growth as “A gilded index of far reaching ruin” and how increasing wealth often went together with what he called increasing “illth”. Artists and writers like D H Lawrence were appalled at the “tragedy of ugliness” brought about by industrialism.

Some critics later in the 20th century had another message. The challenged the very idea that growth would be able to continue – according to Kenneth Boulding – ‘Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.


Slide Six

The original book, The Limits to Growth, is available as a scanned document at: Different model runs are on chapters 3 and 4 on different assumptions.






The original book, The Limits to Growth, is available as a scanned document at:
Different model runs are on chapters 3 and 4 on different assumptions.






Denied continued possibility of growth. In the early 1970s the famous Limits to Growth study was conducted by system scientists at the Massachusetts Institute of Technology under commission by a business group called the Club of Rome. The MIT group ran a computer model of the world economy in the world ecological system with basic variables being growing food and industrial output feeding a growing population. The growth of industrial production would however lead to increase pollution and wastes as well as to resource depletion. It would be these two processes that would feed back and eventually lead to a decline in both industrial and food production. Eventually the pollution and declining food and industrial production would lead to a increase in death rates and fall in birth rates.

Overshoot and collapse…. Unless anything was done there would be a period of overshoot and collapse. Production could grow at a rate that was unsustainable – that could not last, just as an individual or a company can spend more than its income by borrowing, by running down savings and by not fixing the roof – however that would lead, eventually to a collapse. So the global economy could grow at more than a sustainable rate but it would eventually lead to collapse.

Economists declare the study discredited. This study created fury among economists who declared the study discredited because, they argued, markets and technology would anticipate and solve any problems. But the LtG theorists had never denied that technological options were available and that alternative and substitute arrangements could be found. Their argument was that the alternative arrangements and technological options would themselves claim an increasing proportion of energy, material resources and time – in work-arounds and attempts at technical fixes. In the words of more recent authors there are technical alternatives but are they affordable in the context of keeping the rest of the economy going?

We will see that this is a serious problem for many purported solutions for ecological and environmental problems.


Slide Seven

The depletion diagram is of the Australian mining industry and used in my book Credo (Feasta Books 2015)






The depletion diagram is of the Australian mining industry and used in my book Credo (Feasta Books 2015)






So what is the evidence 45 years later? Let us look, first of all, at the dynamic of depletion. Resources are of different kinds – most biotic resources are renewable but they must not be taken at more than a sustainable rate. Trees that are cut down can regrow and fish that are taken out of the sea will breed – but not if the trees and fish are taken at too high a rate.

People who understand depletion rarely say resources are going to run out in any absolute sense – although biotic resources can be unsustainably harvested and drive species to extinction as is threated to various fish species.

With many mineral resources there is limited scope for any kind of renewal. They can often be re-used and recycled but that takes more energy and some of the resource will inevitably be lost. That means that with mineral resources what more normally happens is that lower and lower grade resources have to be used and this makes extraction more and more expensive. You can see this in the following chart of the grade of a variety of ores tapped in Australia.

Now the point is that if as is shown here, say with copper, the ore grade falls from a 25% to a 5% copper content then 5 times the energy has to be used to extract and smelt it – and it leaves 5 times the tailings. That becomes a problem if the cost of energy is high or if the economy cannot afford to pay more for the product.


Slide Eight

Depletion of Energy Minerals and Fracking – See my presentation to the Degrowth Conference, Budapest, September 2016 king.pdf?1472027087






Depletion of Energy Minerals and Fracking – See my presentation to the Degrowth Conference, Budapest, September 2016 king.pdf?1472027087






Fossil fuel depletion. This problem of having to use progressively inferior resources as depletion occurs is also especially true of fossil fuels because once they have been burned they cannot be re-cycled or re-used. Use of energy mineral resources involves an entropy change. The energy converted during use for human purposes is still there afterwards as heat but dissipated in the environment and no longer available for further use.

The depletion of non renewable energy resources makes it necessary to extract them from more sources that are more difficult, and expensive, to access. The greater resort to unconventional oil and gas – using fracking – is an example.

What you have in fracking or, more generally, the resort to so called “unconventional oil and gas” are technologies to extract fossil fuels from harder to access geological sources. When oil and gas is extracted from conventional wells it is being tapped from porous reservoir rock – the oil flows underground to the well and thus a single well can draw from a wide area. In unconventional wells the oil and gas is trapped in an impervious rock so it is necessary to create an artificial or engineered porosity. That involves a lot more use of energy, lot more work, a lot more wells, a lot more opportunity for accidents and things to go wrong and a lot more money cost too. Of course, the technology changes over time – with longer well lengths, bigger fracks and multi well pads. The fracking companies learn through experience. But this is still an expensive and limited resource that is resorted too because conventional wells are depleting.

That explains why unconventional gas is more expensive to extract and has struggled to make a profit. When oil and gas prices are low they do not cover these high costs and US oil and gas producers and many producers have made a loss. What keeps this show on the road is faith – belief that prices will recover and profits are possible


Slide Nine

Steffen et al “Planetary Boundaries” Science, Feb 2015 at: Kevin Anderson “Duality in Climate Science” - about recognising unpalatable realities in climate science Eriksen M et al “Plastic Pollution in the World's Oceans” PLOS One 2014






Steffen et al “Planetary Boundaries” Science, Feb 2015 at:
Kevin Anderson “Duality in Climate Science” – about recognising unpalatable realities in climate science
Eriksen M et al “Plastic Pollution in the World’s Oceans” PLOS One 2014






Much discussion about the environment takes place as if the only problem is climate change and reducing carbon emissions. While climate change is a serious problem other pollutants and wastes are also serious problems – to the point of being describable as “planetary boundaries” which is is dangerous to cross. These are problems like ocean acidification, biodiversity collapse with pesticides killing many beneficial species like bees. In recent years there has also been a realisation that we have a major problem of pollution of the oceans – and also the atmosphere – from large amounts of plastic trash. This does not biodegrade but it does eventually break up into smaller and smaller pieces and is ingested by marine animals. The impact of plastic has now been documented on over 600 species.

As regards climate change the problem is not only caused by CO2 but also N2O caused by overuse of fertilisers, hydroflurocarbons and methane from rice paddies, land use change, cattle and from leakages during the operations of the global oil and gas industry.

Probably at 1.5 degrees C increase over pre-industrial runaway process – release of methane clathrates in arctic tundra and arctic seas – releasing methane

On current trends it looks likely that global temperature rises will be way above 2 degrees C compared to pre-industrial times. The likely result of this will be the melting of Antarctica and Greenland – the melting of Greenland alone will raise global sea level by 7 metres – or 21 feet which means flooding all the world major coastal cities and large areas of farm land – close to home we are talking of Hull and the Lincolnshire coastline going under the sea.


Slide Ten






Article by Mike Aucott and Charles Hall: Does a Change in Price of Fuel Affect GDP Growth? An Examination of the U.S. Data from 1950–2013 Energies, October 2014 wth_An_Examination_of_the_US_Data_from_1950-2013






Both fossil fuel corporations and companies producing and promoting green technologies have developed and are promoting responses to depletion and pollution –there are technical fixes – but the key issues are whether these fixes are economically affordable for the rest of the economy plus whether they are acceptable to the public given what often turn out to be wider social, health and other concerns (so called externalities).

In recent years we have seen examples of “technical fixes” that have stalled and not got beyond the early phase of development – because the money cannot be found to develop them further. An example is carbon capture and storage.

All such fixes typically mean that energy costs more to supply – but because energy underpins all economic activity that is a serious matter. It takes money out of people’s pockets that they cannot then spend on other things. Studies have suggested that in the USA if the amount of national income spent on energy exceeds 5.5% the economy crashes.

To the extent that these costs are money ones the issue of unaffordability can be temporarily masked masked by debt where there is an expectation that the affordability problem is temporary. Debt can work in this way. Individuals, families, companies and government may assume that current difficulties and unaffordability is a temporary problem and the future will be brighter. For example companies may assume that technologies like fracking will improve and bring down extraction costs – or they may gamble that energy prices will rise in the future after all. So they borrow. This borrowing is helped by central banks keeping official interest rates low or even below zero.


Slide Eleven






Renewable Energy
Patrick Moriarty and Damon Honnery ‘Can Renewable Energy power the Future?’ Energy Policy 2016 Our Renewable Future by Richard Heinberg and David Fridley, Island Press, 2016 – see:
Critique by Ted Trainer
– links to acrimonious discussions of Hall and Prieto's landmark analysis of Spanish solar voltaic industry






But what about renewables? Can they fill the gap left by depleting sources of fossil fuels – and can they do so without greenhouse gas emissions and accumulating wastes?

Composition of renewables. First of all we should note that nearly half of the global renewable energy supply is what is called “traditional biomass”. For example this will include firewood from rainforests and marginal land harvested by indigenous people or cow dung which is burned in India.

In addition to this quite a high proportion of so called “modern renewables” is biomass from plantations and agriculture grown as an energy crop – either for burning for heat, or for burning to generate electric power or for coverting into biofuels. Hydro power is next in size.

By contrast, what many people immediately think of when they think of renewables – solar voltaics or wind power – or even smaller tidal or wave energy – is very small indeed. It is growing incredibly rapidly but it has a very long way to go.

Will the growth of renewables be sufficient to sustain economic growth and sustain a consumer society? Some people think so. But among experts there is a huge gulf in opinion and the debate has sometimes been acrimonious.

On this there is a great gulf between what I would term the cornucopians and those who are more sceptical to the point of being described as doomers. The distance in estimates of future potential is really huge. A recent article in the journal “Energy Policy” pointed out that estimates of the global technical potential for renewables vary by up to two orders of magnitude – in other words the optimists think there is 100 times more available energy than the pessimists.

How do we account for these huge differences?

1. Counting energy costs – it is net energy that matters. Optimists often do not calculate the energy inputs needed to tap their renewable energy source. They give estimates of gross potential but net potential is what is needed. This is not just the energy cost of the solar panels and wind turbines but the costs of building the factories to built them, the cost of the transport and installation, the cost of maintenance, the energy cost of the administration – and being realistic about how long they will last.

2. Infrastructure costs Properly speaking the calculations should include additional energy inputs like those involved in (a) a need to extend grids and infrastructures – where the sun shines and the wind blows is not necessarily where you want the power that it generates – so connections must be built.

3. Costs of buffering intermittency…. To allow for the fact that one day the wind may be blowing north of you, the next day east of you, the next day south of you, and the next day west you may decide that to be reasonably sure that you can tap some wind energy you need to put turbines north, east south and west. But in this case your greater security of supply would be purchased by 4 times the capital cost compared to a single fossil fuel fed power station. (b) you may need your energy in the evening rather than midday when the sun is shining strongest so you put in battery storage – but what if the wind does not blow for several days? In the UK the solar energy coming in is 9 times more powerful in July compared to December when it is very dark – but you need more energy for heat in December – battery storage between July and December would be a hugely expensive undertaking.

4. When non electrical energy carriers are needed. Another point is that renewables that are electrical don’t answer your needs when you ultimately want heat, or a liquid fuel for vehicle transport. Yes, you can convert electricity into heat or into battery storage for vehicles or into hydrogen. However there are conversion losses when that happens. A further major consideration is that you not only have the costs of making, installing and connecting wind turbines or solar panels. There is also the cost of developing and manufacturing differently designed vehicles or heating systems that run on a different basis.

5. It is not just fossil fuel minerals where it is necessary to resort to progressively inferior sources. An anaologous problem besets renewable sources of energy too. After the best locations for wind speed, sun, water flow etc have been taken – to continuing expanding capacity it it necessary to resort to the inferior places with lower energy return yield next.  

6. Potential short supply for materials needed for the manufacture of some technologies – rare earths.

7. Some technologies give rise to emissions themselves – e.g. hydro power leads to increased methane emissions when vegetation is submerged. 

8. Climate change may lead to a decline in renewable energy yield and costs – eg changing rainfall impacting hydro power, climate change reducing biomass and wind and cloud cover impacting wind or solar – though that may be in either direction, wind speeds may be higher in a warmer world…


Slide Twelve

LtG Background to Current Conflicts Nafeez Mosaddeq Ahmed 'Failing States, Collapsing Systems. Biophysical Triggers of Political Violence' Springer Briefs in Energy, 2017 pp 49-52






Hopes re Negative Emissions:
James Hansen et al “Young People’s Burden. Requirement of Negative CO2 emissions” Earth System Dynamics Journal at:
Also on negative emissions see:
Moriarty and Honnery “Review. Assessing the Climate Mitigation Potential of Biomass” in:

Land and Water Grabbing grabbing/links/5481de440cf2e5f7ceaa723d.pdf
Source of Africa map:






Bio-energy as renewable energy resource…. An important part of this whole debate relates to the role of bio-energy – wood that can be burned directly or other crops that can be turned into fuels. Biomass is a renewable energy source in that the ground on which it has been grown can be used again using the solar energy that proceeds the next harvest. Unlike wind or solar energy biomass is stored energy that can be combusted at a time of choice – so it does not have the problem of intermittency that wind and solar do. So there is a lot of hope that biomass – or bio-energy – can provide energy in forms that wind and solar cannot. Bio-energy has come to seen as a source for surface transport on sea and land – as well as a fuel for airplanes. On top of that some scientists see it as a feedstock to replace petroleum based chemicals and other materials.

BECCS….. There is even a hope that biomass and bioenergy can provide a carbon negative energy source – this is called BECCS. The argument goes plants take CO2 out of the atmosphere and embody it in their cellular structures. This returns to the atmosphere when they are burned and thus, so the argument, biomass based energy is carbon neutral. It then….supposedly….becomes a carbon negative energy form if burned in power stations specially equipped to take the CO2 out of the combustion gases, liquify them and then pump them underground for the next tens of thousands of years. All we need is to plant up an area one to three times the area of India to use for their fuel

But where is the land and the water to come from for all of these hopes? So where do we find the area?

Displacement of other land uses….. The point is that growing bio-energy crops will either displace food crops or crops used for fibres (clothing) or for building material – or alternatively it will involve displacing vegetation on what is called marginal ground and displacing communities who use that land but in a low impact way. In addition, “wild” areas like the rain forests have other important eco-system functions and cannot be cut down, ploughed up of converted into urban areas and flooded by dams without different kinds of negative consequences. When Brazil cuts down its rainforests it reduces rainfall and that has knock on consequences for its hydropower and for indigenous communities living in the forest…in their forest.

Generating food, fiber and other biomass-based products that people currently consume utilizes roughly 75% of the world’s vegetated land. Over 70% of the water withdrawn from rivers and aquifers is used by agriculture and fertiliser use has doubled the amount of reactive nitrogen in the world, leading to large-scale pollution of aquatic ecosystems, extensive algal blooms and bodies of waters with low levels of oxygen. Even so, agricultural and forestry practices have not, on balance, increased the total quantity of biomass production: they have merely transformed natural ecosystems to produce goods and services for human consumption. Humans cannot increase at will the global amount of biomass or the proportion of that they take.

Feeding the world in the future will be difficult enough already… A study by the University of Reading modelled scenarios for global food production and nutrition by mid century based on current technologies and inequality of access to food. The found that 31% of the global population would be at risk of malnourishment by 2050 with no climate change and 52% of the global population (an extra 1.7 billion people) were at risk of malnourishment when climate change is taken into account.

Not only is climate change negatively impacting harvests but there are also problems of depleting aquifers and soil erosion. Many pesticides are losing their effectiveness and there is competition for farm land from non agricultural uses like for urban building land. Depletion of oil and natural gas will make fertilisers more expensive and more difficult to supply.

Land and water grabbing……. The drive of corporations to develop bio-energy sources is in competition with food security in many countries. There is a corporate land and water grab across the entire world and much of this takes place to grow biofuels and biomass, particularly in Africa. Multinational corporations make deals with national governments and at the local level people find that land their families have been using for generations is taken away from them for “development”.

Is Bio-energy really carbon neutral? Although the growth of bioenergy crops absorbs carbon, using the land to grow bioenergy crops sacrifices the sequestration of carbon in land that is left to revert to forest. This foregone carbon sequestration, which is not considered in current GHG accounting related to bioenergy, may be substantial. For example, in the western Ukraine forest growth following abandonment of farmland resulted in a net carbon sink of almost one ton of carbon per hectare forest and year


Slide Thirteen

LtG Background to Current Conflicts Nafeez Mosaddeq Ahmed “Failing States, Collapsing Systems. Biophysical Triggers of Political Violence” Springer Briefs in Energy, 2017 pp 49-52






LtG Background to Current Conflicts
Nafeez Mosaddeq Ahmed “Failing States, Collapsing Systems. Biophysical Triggers of Political Violence” Springer Briefs in Energy, 2017 pp 49-52






So what does a LtG future look like? Of course everywhere will be different but we have some frightening examples. Let us take Syria for example.

Up until the mid 1990s Syria was a good example of “development” – there was growing oil production sold on the world market that gave the Syrian government revenues that it could use to subsidise food and fuel as well as spend on armaments.

After 1996 Syrian oil production began to fall and by 2010 was only one half its 1996 level. This had a drastic financial impact on the government and forced it to cut fuel subsidies.

2002- 2008 water resources dropped by a half due to waste and overuse. That was followed by a drought between 2007 and 2010 which was the worst on the instrumental record – widely judged by climate scientists to be the result of climate change. Tens of thousands of people – whole villages of Sunni cultivaters abandoned their homes in the countryside and moved into the cities like Aleppo, dominated by Alawite communities, leading to rising ethnic tensions. Between 2010 and 2011 the global price of wheat doubled. Assad was unable to maintain food subsidies because of falling oil revenues.

In the rising tensions outside powers have intervened with their own agendas – and those agendas have been rival oil and gas pipeline routes – either from Iran to Europe or from Qatar and Saudi Arabia to Europe. In this Russia has allied with Iran to defend the Assad regime and the US and UK are covertly allying with fundamentalist Sunni rebels to topple Assad and establish their own regime for their pipeline routes where there would be a role for Halliburton and Exxon.

In a number of other countries there has been a convergence of food, energy and water crises.


Slide Fourteen

Environmentalism of Poor and Environmental Justice and Martinez Alier, et al “Trends in Social Metabolism and Environmental Conflict- a comparison between India and Latin America” chapter 9 in Gareth Dale et al (ed) “Green Growth” Zed Books 2016.






Environmentalism of Poor and Environmental Justice and
Martinez Alier, et al “Trends in Social Metabolism and Environmental Conflict- a comparison between India and Latin America” chapter 9 in Gareth Dale et al (ed) “Green Growth” Zed Books 2016.






Oppositional and resistance struggles against environmental impacts have occurred the world over. The latest in the global north is a movement against fracking that has sprung up internationally.

Conflicts about environment have also been documented and studied by academics – for example with the Environmental Justice Atlas which has details of about 1,000 environmental conflicts world wide – against land grabbing, against resource extraction, against toxic waste dumps and pollution processes, against deforestation and plantations including biofuel plantations. Although activists in the global north and global south are increasingly networked there are clear differences between movements in the global north and south.

Environmentalism of the Poor….Joan Martinez Alier refers to a Environmentalism of the Poor in the global south. In this case the poor are often defending the eco-system on which they rely for vital resources like firewood or food in a subsistence economy. Indigenous communities are often struggling to defend ancestral homes and sacred sites. For these communities the eco-system is more than a resource store. It is integral to their spirituality and cultural identity as a community rooted in a particular place occupied by their ancestors since time immemorial. The place does not belong to them but they belong to the place – nature is not a store of resources but part of their being. They have a kinship with the species of plants and animals. Nature is Pachamama – mother earth in a very real sense.

The data in the Env Justice Atlas shows that indigenous communities are playing a disproportionate role defending nature in India, South America and Africa.

Some parallel movements also exist in the Global North – like movements by the First Nations in Canada and the USA to defend their ancestral lands – as for example against oil and gas pipelines recently in Dakota with the high risk or leakage and spillage.

There is also an Environmental Justice Movement. Concern and influence by the wealthy in the global north ensures that polluting and toxic industries as well as waste dumps are located away from rich communities. They are sited near poor ones, often where ethnic communities live. It is such communities that will get sick from the toxins or from fracking and they have organised to defend themselves.


Slide Fifteen






Brian Davey “Credo. Economic Beliefs in a world in crisis” Feasta Books 2015 Chapters 40 and 49 Available for free download at
D’Alisa G., Demaria F and Kallis G. “Degrowth. A Vocabulary for a New Era” Routledge, 2015






Not all green activism is reactive and oppositional. There have been many pro-active and experimental projects on a small scale to pioneer and develop examples of green economy, green lifestyle and a complementary style of politics.

The words ecology and economy originate from a greek word oikos – the household – so effectively meaning the management of a household – many green pre-figurative experiments and projects are about the transformation of household, garden and wider neighbourhood to make them more self sufficient and efficient in providing for human needs.

In the last few decades typical projects like community gardens have sprung up all over the world – including in decaying urban areas and rust belts or in refugee camps.

Thousands of Eco-villages have been developed too – although one can argue that they are the normal way of living for countless thousands of communities in the global south, in the global north are intentionally established and often have multi-functional purposes – as therapeutic and mental health projects, as art projects and to experiment with ecological gardening and cultivation, the promotion

There are likewise community energy, community transport and cycling and recycling projects whose aim is to help their members participate practically in a green transition.

From isolated projects/struggles to a movement with a narrative for the future of society. Many activists have realised the need to network and make alliances and need for political representation to combat the way that the toxic economy uses the state to advance its own purposes and agenda. To combat this the green movement must be more than a collection of isolated struggles and projects but needs to come together as a movement with its own ideological narrative for the future of society. This has included challenging the desirability and critiquing the prospects for the growth economy. Many groups therefore share an overarching vision of the need for a Great Transition – and for “Degrowth”.







Entrepreneurship in the Social and Solidarity Economy

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Published on Credo Economics on February 22, 2017

Discuss this article at the Economics Table inside the Diner

Co-operatives have been described as freshwater fish in a saltwater environment. In the 1930s, the co-operative sector in many countries was very powerful but it was destroyed by fascist and communist regimes. What was it that the authoritarians found so threatening in co-operation? Alternative economic models like co-operatives and social enterprises are explored, together with the arrangements that can help sustain them, like co-operative federations and support networks. However, there are no panaceas – co-ops and social enterprises fail too.

As I have been at pains to point out, the role of the entrepreneur is an idealisation and there is not a simple picture. While a very large proportion of entrepreneurs are crooks, especially in elite positions, this is by no means true of everyone. For example, a book by Claudio Sanchez Bajo and Bruno Roelants shows that, during the economic problems of the last few years, co-operatives have had fewer problems. This is because there are less perverse incentives and co-operatives have less scope for control fraud by their managers because of the shared ownership, participative management and better integration with communities and other stakeholders.

Cooperatives tend to have a longer life than other types of enterprise, and thus, a higher level of entrepreneurial sustainability. In [one study], the rate of survival of cooperatives after three years was 75 percent, whereas it was only 48 percent for all enterprises… [and] after ten years, 44 percent of cooperatives were still in operation, whereas the ratio was only 20 percent for all enterprises. (Bajo & Roelants, Capital and the debt Trap. Learning from Co-operatives in the Global Crisis, 2011) (p. 109)

The fact is then, that entrepreneurs are of many different types, with many different motivations
and standard economic theory tells us almost nothing that would help to understand them. In a study based on 26 Czech and 45 British social enterprises, Nadia Johanisova finds that the most important success factor is motivation. The motivation of social entrepreneurs is not for money or fame but more for self-fulfilment, commitment to place where they have roots and an opportunity to make a difference. Johanisova comments:

This casts doubt on economic theory which assumes financial motivation to be the principal incentive for work….The social enterprises profiled in this report defy conventional economic wisdom in other ways as well: (1) by definition their remit stretches beyond the financial to the social and/or environmental, (2) they are need as well as market driven and may juggle diverse activities instead of specialising, (3) more than half do not particularly wish to grow beyond their current size… Yet they survive and sometimes thrive in an unforgiving environment. (Johanisova, 2005, p. 93)

Co-operatives would have been a lot further forward had not their gains been brutally repressed, particularly in the 1930s and 1940s, by the fascist and communist governments. In her book, Johanisova describes the incredible achievements of the Czechoslovak co-operative movement up to the 1930s. Over decades, small credit co-operatives in rural areas called Kampelika had become an important
part of village life. Despite the voluntary and amateur nature of the administration of the Kampelika, they were efficiently run and were able to eliminate rural usury, educate farmers about accounting and thrift, purchase farm machines for members, install scales in villages to check weights, plant trees and organise cultural events. They complemented other co-operatives i.e. marketing, processing, flour mills, distilleries and so on. They also played a major role in the development of an electric grid connecting 15,000 villages. (Johanisova, 2005, pp. 28-29)

The psychopaths strike back – what they find so threatening in co-operation

This entire movement then disappeared almost without trace because of the Nazis and then, subsequently, the communist regime. Pat Conaty and Michael Lewis draw on a book by Johnston Birchall to describe how similar set-backs occurred in other countries in the interwar period. In Italy, Mussolini seized the assets of 8000 Italian co-ops and took them over, killed leaders and burned shops. In Russia, Lenin repressed them but allowed them to revive before Stalin destroyed agricultural co- operatives (providing 65% of food provisions) in favour of forced collectivisation. Urban co-ops were then closed in 1935. In Germany, Hitler seized their assets and nationalised 1100 consumer co-ops, 21,000 credit unions, 4000 co-op savings banks and 7000 agricultural co-ops. In Austria, where one out of every 3 three households had been members of consumer co-operatives, Hitler’s invasion led to the leaders of the co-ops being replaced by fascists while their assets were seized and handed over to private business owners. In Spain, Franco arrested and killed many co-op leaders while many others took exile in Latin America. (Conaty & Lewis, 2012, pp. 220-221)

One may ask why this happened. One answer, when co-operative assets were seized and passed over to private owners, or to the fascists, was that the co-operatives had been too successful for the private economy and the real basis of economic power in society was being revealed – violence was being
used to re-stabilise the private sector. There is a deeper answer too. All entrepreneurial activity, all business activity, is based on an ethical and a value system, and that ethical and value system, whether consciously or not, implies a vision for society. As regards Czechoslovakia, the co-ops were a threat to the dictators – fascist and then communist – because they represented a self-organised society where people took decisions for themselves and were well-organized to do so.

A form of economic organisation and entrepreneurship that tries to embody and embed democratic principles implies a deeper form of political democracy too. Not least in the sense that co-operatives imply practical participation in economic decision-making by ordinary people who thereby develop skills for a genuinely participative political democracy. John Stewart Mill realized the implications when he wrote:

We do not learn to read or write, to ride or swim, by being merely told how to do it, but by doing it, so it is only by practicing popular government on a limited scale, that the people will ever learn to exercise it on a larger. (On Liberty)

This is why this movement has always been an anathema for autocrats who reserve for themselves alone the power to decide what they deem in the best interests of society. On the other hand, Mill’s insight helps to explain why generations of heretical economic thinkers and social philosophers have tried to revive the social justice tradition of the guilds, recreating the commons and an economics based on co- operation and community.

Alternative economic models in india

The attempt has been international – and not just confined to Europe or the Anglo Saxon world. Gandhi’s vision for economic development for an independent India was as a co-operative path promoting self-sufficiency and self-rule (Swaraj). In his vision, economic activity involved people “developing themselves”, including in a spiritual, self-transformative dimension. (Schroyer, 2009, pp. 82-85)

After Gandhi’s death in 1947, Vinoba Bhave and JP Narayan organized a Bhoodan (land gift) and then a Gramdam (village gift) movement because, without land, there was no way that the village poor in India could be self-sufficient and participate in economic life. The basic idea of both movements was therefore to urge large landlords to gift part of their land to the rural poor. Although significant acreage was donated, the movement ran up against the problem that the rural poor did not have enough money or access to low cost finance. When recipients of the land gifts borrowed, using the land as collateral, much was repossessed.

The village gift movement learned from the repossessions. The amended idea envisaged gifted land organized through village trusts to overcome the risk of repossession. Overall Bhoodan and Gramdan secured 5 million acres over 20 years. The idea spread internationally. Experiments like these inspired Martin Luther King and then a Community Land Trust movement in the United States and elsewhere. (Schroyer, 2009, p. 85) (Conaty & Lewis, 2012, p. 87)

Co-operatives and social enterprises today

At the present time, at least one billion people on the planet are members of co-operatives, though you would never know that from mainstream economic textbooks. In over 800 pages, Mankiw and Taylor’s economic textbooks never discuss co-operatives at all. They only mention “co-operation” as an economic phenomena that they consider is unlikely to happen but which does so occasionally nevertheless. If you are educated in Harvard where Mankiw teaches, you might never find out, therefore, that co-operatives employ more people than the multinationals and provide services to 3 billion people weekly. That is about 40% of people on the planet.

Co-operative federations and support networks

There are remarkable success stories. In the Basque country in Spain, the Mondragon Corporation
has evolved from small beginnings in 1956 to a business group with 80,000 employees, operating transnationally in finance, the manufacture of industrial goods, retail and knowledge – the latter being linked to the Co-operative University of Mondragon. Mondragon is a network that has evolved its own federated support institutions and infrastructure which is crucial to the success of the associated co- operative businesses.

The fact is, that for hundreds of years, and in our own time, huge numbers of people have tried to organise business on ethical, community focused and co-operative principles. However, they have operated in a hostile business environment. As Professor Jaroslav Vanek of Cornell University puts it:

If you go to a bank and ask for a loan to start a co-op, they will throw you out. Co-ops in the West are a bit like sea water fish in a freshwater pond. The capitalist world in the last 200 years has evolved its own institutions, instruments, political frameworks etc. There is no guarantee that another species could function if it had to depend on the same institutions. In capitalism, the power is embedded in the shares of common stock, a voting share. This has no meaning in economic democracy. Economic democracy needs its own institutions for one simple reason. Workers are not rich. Let’s face it, most working people in the world today are either poor or unemployed. They do not have the necessary capital to finance democratic enterprises. Hence, we need some instruments and institutions which make this possible. Why? Because we know that once democratic firms are organized, or even if they have all the elements of democratic principles, they work far better than capitalist enterprises. (Vanek, 1995)

However, while the Mondragon Corporation as a network is a powerful example of what is possible when communities and workers federate, it does have its problems. At the time of writing, Fagor, one of the largest of the Mondragon co-operatives, has had to file for protection against its creditors as it tries to re-organise. The co-operative Bank in the UK has also been in difficulties at the time of writing. It took over the Britannia Building Society that had too many bad debts.

It is therefore necessary to inject a note of caution into the discussion of co-operatives – and into thinking about the whole social economy.

There are no panaceas – co-ops and social enterprises fail too

Co-ops and social economy enterprises fail too. Nothing is eternal, conditions of uncertainty apply to co-ops too and poor decisions are taken by people no matter how ethical or community orientated they are. Nor are the motivating values and ethical systems that apply in co-ops and social economy enterprises always what they seem to be. One may think that the social entrepreneurs are motivated by the ideals of co-operation, the love of their fellow human beings and the environment, indeed they can loudly proclaim that they do. Yet, in practice you sometimes find people who are actually motivated to be seen to be virtuous – and a lot more virtuous than anyone else. These top dogs and leading experts in co-operation may turn out to be condescending micro-managers who always know what is in everyone else’s best interests. Now and then, unfortunately, one meets virtuous people who see themselves as so much better at co-operation than anyone else. Stated values may not align with realities when people
are lacking in self-awareness about their holier than thou stance. Such narcissists may be inclined to petulance and even vindictiveness if and when challenged – as can easily happen because they are such a pain to work with or under.

No organisational form, no ownership regime, is a cure all. It is impossible to design a system that will solve all problems. Karl Marx once wrote that we make our own history but not in conditions of our own choosing. Some of the conditions that may not be of our own choosing include the personalities of our colleagues and co-workers. As therapists will tell you, people’s personalities can be changed slowly – but it takes time. People need to want to change and they are rarely open to therapeutic suggestions from their colleagues.

Freshwater fish in a saltwater environment

Other conditions constraining organisations in the social and ecological economy are those kind
of institutional mismatches that Jaroslav Vanek refers to. It does not help that co-operatives, social enterprises and not for profit organisations exist in a market, institutional and cultural environment that is not set up for them. It is clear, for example, that the current difficulties of Fagor of Mondragon are related to the Eurozone financial crisis and the catastrophic economic conditions in Spain. (Written early 2014). These, in turn, were largely the result of real estate speculation pumped up by the Spanish banks, which are hardly the fault of Fagor, though it is now a victim of the fall out.
There is a deeper lesson here. Co-operatives and social economy organisations can be pulled down
in the collapse of the general economy. Indeed, the closer they are aligned with and integrated into the economic mainstream, the more likely this is to happen. Workers’ ownership and control will not prevent this happening on its own.

This brings me to the example of the John Lewis Partnership. This is the largest worker owned company and third largest private business in the UK with over 70,000 partners. It is sometimes held up as wonderful example to show how successful a trusteeship model for a business can be. For example,
by Lewis and Conaty in their book The Resilience Imperative (Conaty & Lewis, 2012, pp. 280-283) or by Marjorie Kelly in her book Owning our Future (Kelly, 2012, pp. 177-184). As with the Mondragon Corporation, the gains of the John Lewis Partnership are shared between the worker partners.

The Partnership has mechanisms to hold management accountable, to debate and suggest policies in a transparent and accountable system, while power is shared in a federated system of councils which Lewis and Conaty describe as “reminiscent of the guilds”. Like Mondragon, the Partnership has secured its growth through self-financing thereby avoiding the instability and speculation of the capital markets.

Yet for all of these successes, there is a tremendous paradox with the John Lewis Partnership. In an era of consumer capitalism where the economic system is banging up against the Limits to Growth and millions of people are groaning under unsustainable debts, the John Lewis Partnership runs a chain of stores that are veritable temples to consumerism. There is no doubt about it – the partners do sell these consumer goods very successfully, but are these purposes a contribution to sustainability and the future of humanity? According to Marjorie Kelly, the JLP are stepping up their environmental commitments. Under pressure from Greenpeace, the JLP recently backed down from a tie up between its associate company, Waitrose, and Shell. Despite this, the JLP focus on growth means that its carbon emissions are still growing in absolute terms.

In her book, Kelly describes asking someone from the JLP the very pertinent question: “How can a department store chain shift into a low-consumption, no growth economy?” and says of the person that she asked “He doesn’t have an answer. Maybe none of us do.” (Kelly, 2012, p. 184)

Indeed! The purpose of department stores simply does not match a future of energy descent and degrowth, whether they are owned by their staff or not.

Perhaps a better model for the future is provided in Italy, where there has been a 20 year explosive growth of co-operatives providing social services in ways that integrate the participation of disadvantaged groups. In 2013, these Italian co-operatives employed 360,000 paid workers including 40,000 people from disadvantaged groups, with over 31,000 volunteers. They now provide for almost
5 million people and have a turnover of 9 billion euros. These co-operatives also illustrate again the importance that has developed at Mondragon – a level of supportive “enterprise ecology” where there is co-operation among co-operatives – networks and an infrastructure shared between organisations with common values and purposes. (Conaty & Lewis, 2012, pp. 251-257)

The specific client focus of the Italian co-ops is relevant too. In an era of stagnation and even collapse in the so called “developed countries”, when a bulge of elderly people are reaching retirement and will have plenty of needs in their last years, in an era when many others are being thrown into unemployment, poverty and ill health, what the Italian co-operatives are doing will need to be a major direction for the social economy.

The central point is this – companies that focus solely on return on capital alone cannot do a number
of jobs, despite all the “invisible hand” clap-trap. The ethos of extrinsic motivations gives rise to types of enterprise culture that are antithetical to authentic care for people and places. Co-ops and social enterprises can be formed to work for intrinsic motivations, rather than for monetary rewards – but that does not mean, of course, that they can neglect attention to covering their costs. They are not necessarily profit focused if they are trying to make a surplus in what they do so as to ensure their long run financial stability.

Further, much more radical models exist which turn away from consumerism. Throughout Germany, one can find centres set up with equipped workshops which people can use to develop skills to make things DIY. There are also “repair centres” and networks so that people can give away or exchange used products, not to mention community gardens to grow your own food – all a little bit different from John Lewis and its associate organisation, upmarket supermarket Waitrose. (HEi, 2014) (Verbund Offener Werkstaetten (Association of Open Workshops), 2013)

Georgist Macro-Economics and the Land Value Tax

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Published on Credo Economics on October 15, 2016


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The ideas of Henry George are still very relevant for economic theory. A site value tax would help to stabilise property market cycles and promote greater spatial efficiency. However, while helpful, market mechanisms like a site value tax will not, on its own, fully resolve the environmental crisis.

Why the real estate market plays an integral role in macro-economic conditions

Given the way that land was dismissed out of the theory, including in the writings of John Maynard Keynes, it was not that surprising that it has been left to a few economists working in the Georgist tradition to explore and unravel the interplay between the banking system and the real estate, housing and land markets in the explanation of the economic cycle. For example, (Harrison, 2005) and (Anderson, 2009)

The link between real estate and finance is clear and obvious. A great deal of the collateral underpinning bank lending is real estate and housing. In the UK about 70% of bank collateral is tied up in this way, with a similar large proportion in many other industrial countries. It is therefore not surprising that there is a close relationship between the economic cycle in the real estate market and financial crises.

Because it is “embodied”, any form of economic development has a spatial dimension. It “takes PLACE”. Economic development involves the need for locations – for factories, offices, roads, railways and housing. Some sites emerge as particularly favourable – particularly when opened up by infrastructure investment – often paid for by taxes. The wonder of the market economy is claimed to be that if prices signal that something is profitable more of that thing will be created. But you cannot increase the amount of land, and each location is always unique. So, during economic development booms, the land price soars in specific locations (the capitalised rents for owning particular locations). Recognising which locations to get hold of is a way of making a lot of money. You do this by getting credit to buy up land and property and then persuading politicians to spend tax money on infrastructure to boost the value of the purchased locations.

Tycoons can make serious money like this – as long as landowners can ensure that the value that they capture remains untaxed. A modern day example can make this point clearer. London’s extension of the Jubilee Tube Line to Canary Wharf cost £3.5 billion but increased property values by an estimated £13 billion along the route. Landowners did nothing to earn this windfall except owning the land. (TransportforLondon, 2004)

So who does create this rising value of land? What people are prepared to pay for a location reflects the value of adjacent amenities which are either public goods financed out of taxes or advantages created by the surrounding population living there, for example, social networks; a rich job market; services and cultural activities. These collective amenities incur costs and need to be maintained so it is only fair that the landowners should pay for them in taxation. When no taxation occurs, landowners get the desirable features for free and someone else pays, wealth is transferred into landowner pockets – as well as enriching the banking sector. (Lyons, 2012, p. 104)

The chief economics commentator for the Financial Times, Martin Wolf, put it succinctly when he described the gains made by landowners, as “the reward of owning a location that the efforts of others have made valuable”

Property market cycles and their bubbles

By making money for themselves like this from other people’s efforts, the finance and real estate sector also seriously destabilise the economy. Property market cycles tend to be about 14 years in length. The long run rate of interest is about 5% and, bearing in mind the rent that people pay, affordable house prices work out at a sum which is equal to about 14 years in rent. If land, house and property prices are bid any higher, debts become unserviceable and the housing and property market grinds to a halt.

Economic cycles tend to end in “bubbles”. The rising price of particular classes of assets like land or property creates a collective euphoria or mania. People borrow to buy this asset, or invest all their savings in it on the anticipation that they will make more money as its price continues to rise. Their credit inflated purchases chase up the price until the price of the asset and the servicing of debt become unsustainable. Confidence falters and the crash occurs. The big money is to be made by getting in a bubble early and getting out early. Banks are left with debtors who have lost money and cannot pay up who then have the collateral seized from them.

None of this would happen if the original idea of the Physiocrats, Smith, Ricardo and George had come to pass – that the landowners forfeit the rising land values (capitalised rental values) through a tax. A land value tax would remove the incentive for land price speculation pumped up by bank credit creation. There would be no point in speculation because gains would go to the taxpayer. There would be no
point in buying and hoarding land and then leaving it unused, on the anticipation that its value will rise. Hoarded land would have to pay tax, and if it was unused, it would still pay a tax, thus, speculative holding of idle land would lead to loss. A site value tax would release land onto the market and actually bring down land prices.

Spatial inefficiency

The failure to impose a site value tax has far reaching knock-on consequences for the natural environment because of spatial inefficiency. If, for example, we look at Ireland we can see that the speculative property boom that led to the financial collapse of 2008 led to a lot of building that was never completed, as well as a dispersed settlement pattern that is very inefficient in the use of space, infrastructure and resources. In the absence of land value tax, the system of land planning was abused to zone inappropriate areas as development land. Rezoned land went up in price and was sold on to developers for a windfall profit in which local authorities revenues were also swollen. The resulting spatial allocation of building resources made no sense. Ireland is now one of the most car dependant societies in Europe. Spread out like this, many Irish people have a sedentary and car based lifestyle which is partly why 61% are overweight or obese. (Osbourne, 2012, p. 134)

This car use also generates greenhouse gases making Ireland vulnerable to oil depletion and rising fuel prices.

Had there been a site value tax, landowners would have had to pay for vacant sites as well as used ones. They would have had an incentive either to use empty urban spaces or sell these spaces to those who would use them. This would have protected the countryside by making urban sprawl unnecessary. Cities and towns would have used urban space more efficiently and compactly. The need to travel distances would have been reduced and more people would be able and willing to get around by foot or by bicycle.

Arguments like these are persuasive – they suggest that smart taxation will go some way to help resolve a number of serious economic, environmental and social problems. It is why it is so encouraging that, in late 2014, the Scottish government are considering land reform and measures such as a land value tax. (Hunter, J. Peacock P. Wightman, A. Foxley M. n.d.)

This has led some thinkers to conclude that if “land” (expanded as a concept category to mean all “natural resources”) is given a price, either as a tax, or through some other mechanism like auctioning permits to authorise natural resource use, then all will be well. Humanity will be able to resolve the environmental crisis solely with market mechanisms. In the next few chapters we will examine why it is not as simple as that because this is still framing human-nature interactions inside an anthropocentric view. If we frame things through markets driven by what humans find desirable we are still seeing nature as a “resource” which is only of instrumental value. This very reductionist, human centred attitude is itself a major part of the problem.

Marginal Productivity Theory

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Published on Credo Economics on September 21, 2016


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This chapter describes the “marginal revolution” of neoclassical economics. The idea of marginal productivity and payments to “factors of production” was developed for ideological reasons to counter thinkers like Marx and George. The theoretical framework learned by generations of students is contradicted by the evidence. The ideas of capital and land in neoclassical economics are incoherent.

Economists tell us how consumers on the market, “voting” with their purchasing power got what they wanted and wealthy landowners got the economic theory that they wanted. It was economists like J.B. Clark that were necessary if your economics department was to become well-funded.Clark moved to Columbia University in 1895. The university was blessed by funding from Wall Street banker J. P. Morgan.

The key idea for theorists like Clark was that “factors of production” earned what they added to production “at the margin”. If adding an extra worker to the payroll adds more to production, sales and revenues, than that worker costs to hire, then it was in the interests of the employer to hire the extra worker. The same logic continued to apply as long as each additional worker enabled more money revenue to come in from extra production and sales than they cost. The process of adjustment by hiring more workers would stop at the point where the last worker (marginal worker) was adding as much to enterprise revenues as they were costing. Now what could be fairer than that? Employers would employ more workers until a point where each worker is being paid the same amount of money as the value they have added to production can be sold for.

The same logic is applied to explain the income being earned by the other “factors of production”, namely, an amount equal to the revenue from the sale of their marginal products. This idea was an ideological construction that suited business interests nicely.

Critics have pointed out the flaws in this reasoning. A technical argument about where a business person will no longer find it worthwhile, under tightly defined conditions, to add more and more labour to his capital, has been fudged as an ethical argument justifying the income distribution between that business person and his employees and ignoring the underlying social relationship between the wage labourer and the capitalist. In the words of Joan Robinson:

The very essence of the theory is bound up with a particular institution — wage labour. The central doctrine is that “wages tend to equal marginal product of labour”. Obviously this has no meaning for a peasant household where all share the work and the income of their holding according to the rules of family life; nor does it apply in a [co-operative] where, the workers” council has to decide what part of net proceeds to allot to investment, what part to a welfare fund and what part to distribute as wage. Joan Robinson quoted in (What is Wrong With Economics, 2009)

Neoclassical economics thus, emerged, originating in an ideological imperative, namely, the justification of property incomes. This new approach concocted an elaborate fiction that was subsequently fed to each generation of students which purports to describe how companies decide how much they are going to produce.

If you ask most business people what determines how much they produce they will probably say that they are limited by how much they can sell or how much capital they can raise to expand production – which will also depend on them convincing a capital provider of how much they can sell. To the neoclassical economist, however, what limits what a firm will produce is not only that it may have to reduce its prices if it tries to sell more but that, as the firm increases, its production its costs will rise.

In the textbooks there is a picture of what happens in the production arrangements of companies which goes like this: If a company wants to expand its output “in the short run”, it will find itself unable to alter the availability of some “factors of production” like its premises and its capital equipment. However, it will be able to vary the input of other factors of production like its labour force. But adding more and more workers to the fixed quantity of capital equipment will eventually lead to “diminishing returns”. The neoclassicals want us to believe that output will increase but at a diminishing rate. The reason is that the ratio of workers to capital equipment becomes less than optimal after a certain point. Indeed at some point adding another worker would lead to no extra output at all. The last worker would simply get in the way and might even reduce total production.

The implication of “diminishing returns” from the variable factors of production (e.g. labour) is that if companies try to expand output they find that their costs will rise. Let us illustrate by imagining a company in which, in the early stages of an expansion process, there is little labour and much capital equipment. In this company, in order to expand production by 10 units a week it would require one extra worker costing an extra £100 a week to hire. An example of what “diminishing returns” would mean is that, to produce a further 10 units a week beyond this might require 2 extra workers costing £200 to hire. An extra 10 units a week again might cost 4 extra workers at £400. This being the case, if this imaginary company is to be induced to produce more and more, its owners will want to be able to sell the greater number of units at higher and higher prices so that they can cover the higher and higher costs. Since the company is unlikely to be able to get consumers to buy more at higher prices its expansion will be choked off by the diminishing returns which has led to rising costs.

Well, that is the textbook story anyway – but it is a conceptual house of cards which was dreamed up for ideological purposes in order to justify the distribution theory. The idea of diminishing returns is 164 important because, if you think about it, it implies that to employ more workers the labour force must take a wage cut. In the imaginary story an employer who employs more people is getting less and less additional product for each additional worker. To induce him to do this, he has to be able to pay them less to make it worth his while. It’s obvious then, isn’t it that, if there is unemployment in the economy, it is because wages are too high. Wouldn’t you know it – once again the poor have only themselves to blame.

Steve Keen quotes Galbraith:

Neoclassical economics can be summed up, as Galbraith once remarked, in the twin propositions that the poor don’t work hard enough because they are paid too much, and the rich don’t work hard enough because they are not paid enough. (Keen, 2011, p. 119)

What all of this has got nothing to do with, however, is the real world. This theory has been tested against empirical research over a hundred times and shown not to be true. If the theory were true it would be demonstrated by rising costs as companies try to expand, but these are not the findings. A few companies have cost structures like this but the vast majority don’t. The evidence is in cited in Keen’s book Debunking Economics.

For example, a study by Alan Blinder surveyed 200 medium to large US firms which collectively accounted for 7.6% of America’s GDP admitted that:

The overwhelmingly bad news here (for economic theory) is that, apparently, only 11% of GDP is produced under conditions of rising marginal cost… Firms report having very high fixed costs – roughly 40% of total costs on average. And many more companies state that they have falling, rather than rising marginal cost curves. While there are reasons to wonder whether respondents interpreted these questions about costs correctly, their answers paint an image of the cost structure of the typical firm that is very different from the one immortalised in the textbooks. Blinder 1998 quoted in (Keen, 2011, p. 126)

Blinder’s research is not alone. Steve Keen mentions 150 empirical studies. Every study found the majority of firms acting in a way that contradicts the textbook theory. (Keen, 2011, p. 125)

The reason is that the idea of “diminishing returns” is wrong. It is far more accurate to describe short term expansion (or contraction) in an industrial economy as involving “constant returns” as production is scaled up or scaled down. The “constant returns” occur at the same time as an increase or decrease in capital utilisation.

Here is another imaginary example that is a little more realistic. You wish to set up a business in the clothing trade employing (mainly) women who each work with a single sewing machine. You do it by acquiring premises and putting a number of sewing machines in the factory. The price of the premises, the sewing machines and other equipment are your fixed costs. As you start up you may use only half of the sewing machines and half of the production space of the factory, depending on the size of the market but if your product becomes more popular you hire extra women to sew using the otherwise unused sewing machines and the previously unused factory space. The sewing machines and space brought into use do not cost any more. These are fixed costs that were already being paid for and are now being spread across a larger volume of production. Nor are there any “diminishing returns” to the increased labour input, because, just as before, each worker works with one sewing machine and in the same amount of space, specifically for their work.

Fact is that production in an industrial economy requires an often tightly defined specialisation of labour functions and/or a specific relationship of workers to production equipment. There is no point in varying the worker to sewing machine ratio. Two or more workers per sewing machine at any one time makes no sense at all. Likewise, at any one time, just one lathe will be used by just one worker. A blast furnace has just so many workers with specific functions. The technical ratios between specialist workers in teams and between the workers and machines cannot be varied. To have flexibility one must have spare capacity – and then employ that capacity in the appropriate ratios that make for team work and relate workers with specific trade skills to specific kinds of equipment. The capacity, unused and used, represents a fixed cost that, when spread over increasing production, brings unit costs down. Because expansion is an expansion of all factors of production in a technically defined and fixed ratio, no such thing as diminishing returns occurs. What occurs is that capital utilisation rises or falls spreading the fixed costs over a varying output.

All this was largely worked out by a critic of the neoclassical school, Piero Sraffa in a paper written in 1926 that was published in the Economic Journal (Sraffa, 1926 ). It forms the basis for the chapters in Steve Keen’s book from which I have taken this very brief account. Keen quotes Sraffa:

Business men, who regard themselves as being subject to competitive conditions, would consider absurd the assertion that the limit to their production is to be found in the internal conditions in their firm, which do not permit of the production of a greater quantity without an increase in cost. The chief obstacle against which they have to contend when they want to gradually to increase their production does not lie in the cost of production – which, indeed, generally favours them in that direction – but in the difficulty of selling the larger quantities of goods without reducing the price, or without having to face increased marketing expenses. (Keen, 2011, pp. 116-117)

This way of explaining things helps to explain the rise and rise of the marketing industry. If, as neoclassical economists claim, it is diminishing returns and rising internal costs that prevent companies selling more and more then why would they bother to advertise? If the adverts worked they would be pushing themselves into a zone where rising internal costs would choke off further production anyway. On the other hand, if unit costs fall as production expands, then as long as the price is greater than that unit cost the company will make more the more that it sells. What limits the company then is the ability to sell its product. If the company reaches full capital utilisation then what limits it is the ability to raise 166 new capital to expand – and that partly depends on being able to convince an investor of increased sales in the future.

Capital in neoclassical theory

The fact that the theory does not match reality does not stop marginal productivity theory and diminishing returns being reproduced in the textbooks because it is useful ideologically as an “explanation” of income distribution. “Land”, “labour” and “capital” “get what they contribute at the margin” according to the theory when things are presented in this way. It is not within the scope of this book to go into these ideas in depth because I am trying to review the foundational issues that underpin economics in a simple way. Unfortunately, it is not possible to ignore them either and, in fact, there is a whole set of questions about “capital theory” where Ricardian economists in Cambridge in the UK and neoclassical economists in Cambridge in the USA (at the Massachusetts Institute of Technology) clashed about how to understand the “returns to capital”. These are described in Steve Keen’s book Debunking Economics where he does a good job in describing a very complex debate in which neo-classicals like Samuelson eventually acknowledged that the Cambridge economists in the UK had established their point. In effect, the UK economists challenged the idea that profit is the reward for capital’s contribution to production.

For neoclassical theory to be a complete picture of income distribution in society it has to scale up from how individual firms operate. This meant that economists needed to assume that units of labour and “capital” were identical or homogenous entities that move between economic sectors and firms as they adjusted continually to try to achieve their optimal outputs. Now, that idea is understandable when it comes to labour moving from one company or economic sector to another. But a loom cannot “flow” into work as a lathe. A lorry is a piece of capital equipment that cannot flow into use as a computer. Land cannot flow either. It is stuck where it is.

Economists have had lots of fun over the years dreaming up metaphors to try to get around this problem. Much effort has been devoted to creating “models” where “capital” as a physical entity is thought of in malleable terms in order to rescue neoclassical distribution theory. Capital in a “putty” form, or models using capital that could be reconstituted in a different form like Meccano, have been put forward. This was all in order to have “capital” that could move from sector to sector.

J B Clark started the process with what was called the “jelly theory of capital”. Naturally, Clark recognised that capital goods differ from industry to industry and from time to time. To cope with this conceptual problem, he regarded capital goods as being specific and transient embodiments of a general and permanent “essence of capital”. This is the fund accumulated by the economy’s savings up to any point in time and ploughed into specific capital goods.

Mason Gaffney describes this way of thinking as “endowing capital with a Platonic essence”. The ancient Greek philosopher Plato thought that what we experience in the physical world is an imperfect reflection of eternal perfect “forms” that exist somewhere. Ideal objects that capture the “real essence” of the things dimly reflected in our imperfect everyday physical existence. Thus, particular machines – lathes, looms, tractors – were an imperfect reflection of the “essence of capital”. The rationale of thinking in this way is something like this: capitalists use their resources in processes that “turns over” capital. Assuming they are involved in production they start with money, go on to buy machines, buildings, materials and hire workers, organise a production process and then sell the products to make a “return” which brings their money back with, as they hope, more money than they started. In this process, and over time, they will hold back some of the money returned to replace and buy new machinery. (Gaffney, 1994)

However, the only thing that looms, lathes and lorries, as items of capital equipment have in common is the fact that they have a money value. Neoclassical economists ignore the differences and just count the money value of the different kinds of machines as the common element making for comparability and measurability. But there is a problem of using price as a common way of counting different kinds of capital goods. The price of capital goods depends on the rate of profit and the rate of profit is the very thing that you are trying to explain. What one can do, however, is think of “capital goods” as commodities which enter into the production of other commodities. With this idea, Piero Sraffa at Cambridge UK succeeded in showing that you could make calculations based, not on money prices, but from calculating commodity inputs into the economic process as “dated labour inputs”. Ultimately, any lathe, loom or lorry is made with labour and with other inputs. These other inputs were made from labour and even earlier inputs. The earlier inputs were made from labour and other inputs made even further in the past and so on. If you go back far enough, you only have labour inputs – but you have to adjust your calculations to allow, at each stage, for a profit rate which has been taken out; and for the fact that different kinds of commodities enter into the production of other kinds of commodities in variable ratios.

What this exercise establishes is that, rather than the rate of profit depending on the amount of capital used as neoclassical economists would like us to believe, the measured amount of capital depends upon the rate of profit.

This, in turn, grounded the idea that the distribution of income is not the result of impersonal market forces but reflects the power relationships between different social classes as well as the technical capabilities of factories.

In later chapters I will explore ideas about production not developed by either Cambridge, England or Cambridge, USA – to explore the idea that the production of society depends on one input in addition to labour that enters into absolutely all economic activity – energy. Since energy is a commodity that enters into the production of all commodities, it is absolutely crucial and, as we will see, if the amount of energy needed to produce energy rises, and if the amount of energy needed to produce other raw materials rises too, then society will be in deep trouble.

J B Clark was not just interested in providing ideological cover for the property income to capitalists. He was concerned about landed income too. Perhaps conscious of the need to counter the arguments of Henry, George Clark described “land” as just another purchased input, another form of capital. Adding land to the picture of capital as Clark did was, as Tobin pointed out, a step that destroyed the equation of the capital stock being equal to the society’s accumulated savings. One may save resources (hold back from consuming them) in order to create machinery instead, but no one saves up to create land. Leaving aside polders and other reclaimed land, land is already there.

No matter – for Clark capital could “transmigrate” into land – a metaphor that made land and capital the same kind of stuff. This theoretical sleight of hand had the useful function of getting rid of the Ricardian theory of rent and provided the appearance of an answer to Henry George in the process.

Henceforth, most economists just focused on “labour” and “capital” as concepts to explain production. Land, with its distinctive features – spatial, temporal and environmental, largely disappeared from economic theory.

Thirty years after Clark, John Maynard Keynes wrote his General Theory of Employment, Interest and Money and declared that the influence of land was restricted to an agricultural age. It was capital and particularly, financial capital, which was the important influence in the modern age (cited in Harrison, 2005, p. 142)

Trying their best to be helpful to the elite, the idea of rent was also muddled by creating a new definition for it. “Economic rent” is now said to be the difference between what each factor of production is paid and how much it would need to be paid to remain in its current use – a definition of rent that rests upon the idea of opportunity cost.

Taking land out of economic theory meant that economic theory was “dis-located” or “dis-placed”. The conceptual category of “land”, and the linked concept of “rent”, represented real influences in the world that the system of ideas called “economics” was struggling to represent. Making these categories disappear from the constellation of ideas that made up economic theory had serious implications. The theory lost dimensions of inclusiveness and clarity. It was impoverished. More events could now happen in reality than the concept system had terms to explain. What was disappearing from theory when the concept of land was fudged into the concept of capital was the likelihood of further investigations into the distinctive features of land – spatial, temporal, environmental and ecological – all those things that I have tried to put back into this book. Even considered in narrowly economic terms, land is a very distinctive kind of asset because it is one of the main forms of collateral for the banking and finance system.

Discussions of production as the relationship between capital and labour were no longer “grounded”. The embodiment of economic activity in the physical world disappeared. The sense that it entails natural fertility; specific production locations; the extraction of matter and energy sources from out of the planetary crust and, consequently, putting wastes back into the earth; into the rivers and the atmosphere. All these kind of things were effectively out of sight of the theory and out of the mind of the theoreticians. Out of sight and out of mind was exactly how the landed elite liked it – particularly in Britain where the power and inequality involved in landed property has been deliberately hidden by an aristocracy anxious to avoid the threat of a land value tax and to enjoy their privileges undisturbed.

Kevin Cahill’s book Who Owns Britain sets out the figures starkly: the UK is 60m acres in extent, and two-thirds of it is owned by 0.36% of the population, or 158,000 families. In Scotland it is even worse – 432 individuals own half the private rural land. In contrast 24 million families live on the 3m acres of the Britain’s “urban plot” – and then buy into the idea that Britain is a severely overcrowded country in which land is extremely scarce. (Adams, Tim 2011 ).

“Much of this can be traced back to 1066. The first act of William the Conqueror, in 1067, was to declare that every acre of land in England now belonged to the monarch. This was unprecedented: Anglo- Saxon England had been a mosaic of landowners. Now there was just one. William then proceeded to parcel much of that land out to those who had fought with him at Hastings. This was the beginning of feudalism; it was also the beginning of the landowning culture that has plagued England – and Britain – ever since.” (Kingsnorth, Paul 2012.)

However, in the last few years a large amount of landed property in the UK has been purchased by the moneyed members of the global elite from the descendants of early medieval gangsters. The astronomic house prices and rents in London as well as in some of Britain’s country estates is because the property magnates of the world are buying up the place. (Adams 2011)

Concluding remark – different meanings of “diminishing returns”

It was Ricardo who first utilised the concept of “diminishing returns”. He realised that different areas of land as a resource had different fertility and different degrees of desirability in other senses too e.g. distance to markets. He used this idea of differences in desirability in his theory of rent. Ownership of the most fertile land nearest to market meant the ability to charge more rent than in less fertile and more out of the way places. What happened was that the neoclassicals tried to adapt Ricardo’s explanation for rent for other factors of production by claiming diminishing returns in different circumstances – where factors of production were used in differing ratios with each other. As we have seen, this was not an appropriate thing to do in most industrial production processes but the idea of diminishing returns is useful in some contexts. As we will see, it is useful in office work and service contexts and it is, above all, useful in describing the relationship between the economic system and the ecological system. As the size of the economic system expands in relation to the fixed size of the ecological system, there are indeed diminishing returns. When the best sources of fuels, minerals and soils are used first, depletion means that the cost of extracting increasing amounts for economic use increases. More resources have to extract resources. Furthermore, if wastes and pollution from production increase then more resources have to go to deal with the consequences. This is diminishing returns. Those problems are the limits to economic growth. Ironically neoclassical economists seem unable to acknowledge these diminishing returns as a problem.

Who are the parasites?

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Published on Credo Economics on August 14, 2016


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The radical implications of classical economics

Henry George and Karl Marx developed alternative radical theories out of the ideas of Adam Smith and David Ricardo.

The classical economists did not mince their words. As Mason Gaffney puts it:

… classical political economy was a remarkable phenomenon. Its major writers in England were able to portray the dominant class of rent-takers as idlers and superfluous drones. One surmises they got by with this because the idlers were proud of it. In their value-system, labour was not respected; conspicuous leisure was. Saving was regarded contemptuously as stinginess: conspicuous consumption was the mark of a gentleman and aristocrat. (Mason Gaffney, “the Corruption of Economics”. (Gaffney, 1994)

Ricardo and land rent

The Physiocrats, Adam Smith and especially David Ricardo theorised land rents as the ideal source for taxation. Ricardo’s key insight was that economic rent is not a cost of production. No one produced the land, it was a free gift of nature so there was no cost involved in using it for production. Landowners could charge rent for its use because of their ownership alone. Their income was not really a cost, it was a re-distribution of what had been produced but without the landowners doing anything at all, except diverting some of the produced income to themselves “unearned”. The value of a location is not the result of anything that the landowner does – the landowner reaps where they have not sown.

In Ricardo’s definition, rent arises in the difference between the costs of production from different acreages of land. Some acreages are preferable as locations because the soil is better, or these locations are closer to market and to sources of inputs that have to be transported in. At the preferable locations, more money could be made by farmers but landowners could ask more rental, siphoning off the monetary benefits of the advantageous location from the farmers into their own pockets because of competition between farmers.

The classical economists realised that if the landowners had their rental incomes taxed, they could not add the tax charge to the rental charge since renting farmers were already being charged up to the maximum that they were prepared to pay. If more rent was demanded from the farmers in order to pay for the tax that had been imposed on the landowner, it would be in the interests of the farmer to move. The tax would have to be paid out of the rent and could not be added on top of it. That was the theory anyway – if there’s going to be taxation, then it should be on land rents was their message. The trouble was that the landowners were politically powerful and able to block taxes being placed upon rents.

This is a recurring theme in economics. Economists have an idea – but the political power of interest groups is so powerful that the idea remains of purely theoretical interest. What did, however, happen early in the 19th century was a successful campaign against landowning interests organised by the Corn Law League. Tariff protection to prevent cheap grain being imported into the UK had kept grain prices high. This, in turn, had enabled a high rake off by landowners who could charge higher agricultural rents from their tenant farmers who were getting a good price for their grain. The people who paid were workers whose food prices were higher than they might otherwise be, and their employers who had to pay higher wages. Eventually the Corn Laws were swept away – a success for the growing industrial employers and for the economics of free trade – in the UK at least.

Henry George

Apart from their defeat by the Corn Law League in the UK, the landowners in many countries were able to hang onto their power and influence in the 19th century. However, towards the end of that century a campaign by American journalist, turned tax activist, Henry George, used the ideas of Ricardo and the classical economists, and gave landowners in a number of countries a serious scare. He succeeded in popularising the idea that taxes should focus on land rentals. What’s more he popularised a view of social inequality that focused on landownership as the cause. In the view of George, landowners acquired property titles that enabled them to channel the increasing wealth of society into their own pockets even though they made no positive contribution to the development process. Economic development inevitably takes a spatial form. It happens somewhere and if the landowners own that somewhere they can make money without doing anything else.

For instance, consider a railroad that joins a city to a town on the coastline. Now city people can travel to the coastal town with relative ease for holidays and recreation. The smart money will then move to buy land around the coastal town. When people want to build hotels they will have to pay rentals to the landowners. It is the landowners who are able to make the wealth that the railroads bring about by building and running hotels and the other facilities of a seaside resort. They don’t have to lift a finger to earn this rent. They just have to buy up the land – which they can often do cheaply because they have insider information and realise before anyone else what is being planned. Then the work of other people, developing a tourist resort, will make their newly acquired land valuable.

Towards the end of the 19th century, economists were pre-occupied, indeed obsessed, with analysing the sources, determinants and social rationales of interest and other income returns to private property. Apart from theorists and campaigners like Henry George, who focused in landowner rental income, the trade union and socialist movement were emerging and developing their own critical and challenging ideas. Influenced by theorists like Karl Marx, the very legitimacy of property income was in question. Answering Marx was a strong motivation for many economists. (Tobin, 1998)

Karl Marx

Marx’s key idea was that the source of property incomes was “surplus value” produced by labour. What workers and their families needed as wage income, in order to reproduce and maintain their own “labour power”, was less than the full value of what they produced. In effect, workers spent part of the day working for the wages to maintain themselves and their families (the next generation of workers) while the rest of the day they produced exchange value that was paid out to others as property income – distributed as profits, interest and rents.

For Marx, therefore, the division of income was explained in terms of the power asymmetry underlying the social relationships of capitalists and workers. Workers were driven to work for the employing class. They had no choice but to work on terms largely favourable to their employer because they, or their ancestors, had lost access to the means of production though processes like the enclosures. Their only hope was to organise for greater bargaining power and try to enhance their bargaining position by engaging in class struggle. (The working class were obliged to exchange their labour power on a market for wages but this was a market where there were trading under an institutionalised form of duress. Without access to means of production to work for themselves there was a structural power inequality underpinning the labour market).

On the question of land rents, both Marx and George agreed that they should be spent on public purposes. Though George did not agree on the nationalisation of land, it was enough for him to tax away the land rental from the landowners.

The first demand of The Communist Manifesto by Marx and Engels was the nationalisation of land and the devotion of its income to public purposes.

For a time, the ideas of Marx and those of George were competing forms of radical thought that located contemporary problems either in the capitalist class or in the landowning class. Both strands of radicalism had their roots in classical economic theory and conservative economists decided that classical economic ideas needed to be neutered. That is largely why we now have neoclassical economics. The conclusions that were being drawn from classical economics were suddenly very threatening to propertied people. As Gaffney explains in relation to George:

The menace George posed to rent-takers is clear from how he viewed them. To George, the landowner per se is non-functional (unproductive), a layabout drone, a drain on the hive, a transferee, a welfare case. Worse than that, he or she often makes the land itself lay about, too: then he or she is dysfunctional or counterproductive, a double-dipper. Worse yet, landowners become triple-dippers when they use their discretionary income and wealth to dominate politics and drain away yet more treasure through subsidies, public works and services, protections from competition, cheap credit, and so on. Often they are not just passive drones, but active predators. (Gaffney, 1994)

Landowners in the USA funded academic economists in order to put up a counter argument while using their influence in the universities to ensure that academics who supported George were fired. In this way, the others got the message in an era in which there was no such thing as academic tenure. It was a period in which businessmen, landowners and wealthy people were replacing clerics on the boards of colleges. Economics began to change. Classical economics became neoclassical.

Fantasies of “Socialism with an Ipad”

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Published on FEASTA on August 14, 2016

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Inventing the Future by Nick Srnicek and Alex Williams: Review


Sometimes you read a book that helps to crystalize your thinking, not because you agree with it, but because you don’t. Inventing the Future by Nick Srnicek and Alex Williams (Verso 2015) is such a book. It has been widely praised by a number of left wing intellectuals and is said to be an influence in a new trend to “Corbo-Futurism” or “Socialism with an iPad”. I came to read a copy because, with politics in the Labour Party in flux and feeling sympathetic to the social justice agenda of many new members, I have been thinking that the best place to promote the convergence of left and green politics is inside the Labour Party. I have wanted a dialogue with the activists there and in one conversation it was suggested that I read the Srnicek and Williams book. I am glad that I did because I discovered an attack on the thinking of much of the green movement.

On the surface this book is mainly about the threat to workers posed by automation and the increasingly precarious existence of millions of people. Yet it also purports to contain a response to the ecological and climate crisis that will allow the convergence of the left, green (and feminist) movements around a populist vision of the future. It even claims to be a way forward for indigenous peoples. It does not lack ambition. It has been written to promote a new ideological hegemony to be counterposed to neoliberalism. It wants to put forward an attractive picture for a “post work” society founded on “four minimal demands” – 1. Full automation; 2. The reduction of the working week; 3. The provision of a basic income and 4. The diminishment of the the work ethic. I don’t disagree with the last three but it is the first that seems to me to be highly questionable on sustainability grounds.

It’s not difficult to understand how and why the authors would arrive at their conclusions about automation. Technology and automation is part of a trend that is exacerbating unemployment and “precarity” (increasingly precarious living conditions). The authors describe the growth of what they describe, using Marxist jargon, as a “surplus population” . There are decreasing employment opportunities and people are being persecuted because of their impoverished and/or unemployed state. Rather than oppose automation the authors want to embrace and even promote it, but in a “re-purposed” form, with state support and as a means to a different kind of society. In their view digital technology, robotics and automation, funded and promoted by the state, can give us all we need – but we should propose using what automation can provide not to enrich ourselves but to free ourselves from the slavery of stressful work, making sure everyone gets the benefits with a reduced working week and through a universal basic income. They propose sharing the work and wealth more fairly – as well as encouraging people not to be so hung up about working hard. There should be a right to be lazy – eroding a prevalent work ethic that makes it possible to scapegoat “the precariat” for conditions that they did not create and have no control over. They argued that this will be good for the ecological system and the climate because automation will not be used to produce more stuff but to reduce the amount we have to work. This will help the cause of women’s liberation because some household and care work can be automated too. “Domestic tasks like cleaning the house and folding clothes, for example, can be delegated to machines” . A “post work politics” will build upon the struggles of post colonial and indigenous peoples, they claim, by providing a means of subsistence for the massive informal labour force as well as mobilising against barriers to immigration.

For our two authors this is a way of reviving the idea of “progress” and taking it back from the pessimists who have given up on it. It is revival of the idea that the future could be one of human liberation. They warn, however, that there is nothing inevitable about the realisation of their vision. It will require a long term project of constructing a popular alliance to capture ideological hegemony away from the neoliberal consensus. Neo-liberalism achieved its successes against the post war Keynesian consensus in a long term systematically organised campaign for ideological dominance. It will now be necessary to organise an equally systematic and long term campaign to develop an alternative “common sense”. This will need to be very different from the current politics of the left. They describe this disparagingly as a “folk politics” of the small scale and local, a politics that rejects all hierarchy as well as giving up on the attempt to operate at the global scale. But this is where real power is exercised.

Writing as a former member of the far left I can understand why many leftists find this book attractive. It presses a lot of left wing buttons. Unfortunately, even if the proposed automation is devoted to reducing working time rather than producing a flood of consumer goods I think there is a flaw in the reasoning. Just to create the infrastracture and equipment for the high tech future that is described is almost certainly a task too far in a global economy teetering on the brink of the limits to economic growth. It would involve a huge ecological footprint and is not a sustainable idea.

What the authors do not consider is that there is already a huge ecological footprint for the existing digital economy and for automated production systems. What they propose would magnify it beyond the limits of ecological possibility. The automation revolution which the two authors call for would require a lot of energy which is not going to be available. The flaw in their thinking shouts at you from the top of page two where they write that “Clean energy technologies” will “make possible virtually limitless and environmentally sustainable forms of power production” .

….as if!

I’m in favour of renewables too but please let’s get real about their potential. This is commonly overestimated by enthusiasts like Srnicek and Williams because they are unaware of the energy costs of developing the renewables infrastructure, including the energy costs of balancing intermittancy. I will return to this question below after first giving important details about the ecological footprint of digital technology and computer controlled production.

The Ecological Footprint of the Digital Economy and Automation

Getting an accurate measurement of the ecological footprint of digital technology and of automation is not easy but it is huge. There is a danger of falling for the illusion that the footprint is low if one thinks only in terms of the energy use of the gadgets at home and in the office – computers, I phones, tablets and the like. What can easily get unnoticed is the energy used in the supporting infrastructure of servers, data storage and, crucially, in the energy used to manufacture the infrastructure and equipment – plus the energy used to make the power plants that are needed to power the additional equipment.

The fact that components like microprocessors are very small can give the misleading impression that the energy used in creating the infrastructure and processing the materials to create those components is small. The contrary is the case – to create and control the manufacturing environment in which precision micro components can be produced and assembled requires a great deal of energy. Many materials for this and complex parts also have to be assembled from all over the world with a further huge energy usage in transport, communications and logistics. When you take all of this together the energy consumption is enormous. One study found that the internet consumed 1,815 TWh of electricity in 2012 – which corresponded to 8% of global electricity production in that year.

In energetics one way of trying to get a sense of the dimensions of energy usage is to compare it with the energy generated by a healthy human body – for example generating electricity using a pedal generator. Before industrialisation work literally was powered by our bodies – labour power – or the bodies of work animals. So what is 1,815 TerraWatt hours using a literal “labour power”yardstick?

“If we were to try to power the (2012) internet with pedal-powered generators, each producing 70 watt of electric power, we would need 8.2 billion people pedalling in three shifts of eight hours for 365 days per year. (Electricity consumption of end-use devices is included in these numbers, so the pedallers can use their smartphones or laptops while on the job)….. 1,815 TWh equals three times the electricity supplied by all wind and solar energy plants in 2012, worldwide.”[1]

The fact that computers and I phones are “cheap” in a financial sense tells us not only about the low pay of exploited workers in the global south. Even more it is a testimony to the low cost of fossil energy and the “work” that that energy does for humans when it powers that machines that we use to produce things.

It is a similar story – of high energy usage and a large footprint – if we focus more specifically on producing and running digital production technologies. When Srnicek and Williams wax lyrical over the potential of automation they appear unaware of the energy intensity of what they are describing.

The switch from human and water powered tools to fossil fuel powered tools increased production but, of course, it also contributed to the greenhouse effect and relied upon depleting fuel resources. The further switch to computer controlled machine tools is more energy intensive still.

According to a detailed study in the Low Tech magazine:

“A comparison of the maximum power requirements by three CNC milling machines (from 1988, 1998 and 2000) and one hand-operated milling machine (from 1985), all cutting a similar workpiece, revealed that the digital machines require 2.5 to 67 [sic] times more power than the manual machine. At full operation, the hand-operated machine tool used 2.8 kW, while the digital machines used 7 kW for the 1998 machine, 9.4 kW for the 1988 machine, and 188 kW for the 2000 machine.”

Even worse for the Srnicek and Williams argument the potential for energy savings improvements are rather small. The same article in the Low Tech magazine quotes a German research agency:

“According to the Frauenhofer Institute, ‘there is no single option with a large environmental improvement potential, and moderate savings of 3-5% can be realised only with the implementation of several individual options’. For metal working machine tools, they estimate the savings potential at 4%.” [2]

It is not only a problem of energy use. The increased production brought about by automation will likely lead to more waste and more non CO2 emissions. But for simplicity let us just stay focused on the energy requirements implied by the Srnicek and Williams vision of automation. As is already clear from what I have quoted current renewable energy resources are completely inadequate even to power the existing internet, let alone a further automation of the economy. But could not renewables be expanded to provide the power? Is not the potential “virtually limitless” as Srnicek and Williams claim?

“Virtually limitless” sources of renewable power?

Actually no. One study that tries to calculate the global potential for renewable enery concludes that

“the global shift to RE will have to be accompanied by large reductions in overall energy use for environmental sustainability” [3]

So what’s the problem?

Most people who are even partially informed realise that intermittency is an issue with renewables – that’s the problem of matching the time that the wind does not blow and the sun does not shine with the time when people actually want to use electricity. At this time the intermittency of renewables can buffered by turning up and down gas, coal or nuclear power stations to fill in the gaps. (Something that makes them intermittent too and increases their costs – it is no wonder that they struggle to compete).

However, how is intermittancy to be buffered in the future when gas and coal (and hopefully nuclear too) has been phased out? If they think about this problem at all most people probably assume that it will be solved by energy storage and/or by smart grids which would turn the washing machine on when the wind is blowing and/or when the sun is shining. I’m supposing Srnicek and Williams share this view because they have not explained how they see the intermittancy issue being resolved.

Yet it is necessary to do the maths rather than simply assume that “buffering” is a simple solution. When you do the maths it becomes clear that a future of “virtually limitless” clean and sustainable energy is not so straightforward. This being so the creation of the infrastructure of automation will not be straighforward either. I write that with reluctance but one has to face the facts. If one cannot create an infrastructure for automated society using energy from renewables it will not be possible to create it at all. Using fossil fuels in the future to generate the power for creating an automation infrastructure would be highly problematic both for reasons of climate change and because of the depletion of fossil fuels (On these points more later). [4]

So why is intermittency such a problem? The answer is that what looks technically possible – developing storage and a smart grid – itself necessitates a great deal of energy. There is an energy cost that must be deducted from the gross energy yield to get the net energy yield.

It takes energy (including electricity) to create, install and maintain the equipment and infrastructure to harvest the sun and wind. It also takes energy (and electricity) to create, install and maintain the equipment and infrastructure to deliver the energy from where it is harvested to its point of use. It also takes energy to create energy storage devices and smart grids too. Before you have a NET energy supply all of these energy costs have to be taken off the GROSS energy yield of systems to repay the energy costs of setting up and maintaining the system. At the moment almost all of the energy being used to manufacture, install and maintain renewables, storage devices and grids actually comes from fossil fuels.

To be sustainable, to work for the long term without climate damage and depletion, the energy inputs to produce the infrastructure of harvesting, delivery and storage needs to come from wind and solar too (and not from fossil fuels). To assess the feasibility of doing this you need to calculate the energy-in to energy-out ratio. In the jargon of energetics this is the EROIE ratio, energy return on invested energy. 

Doing calculations of this sort necessitates a lot of data. For example, if you are doing calculations for solar panels you need to specify where the panels will be installed. The inward solar energy will vary with how close to the Equator you are and with average weather and cloud patterns. You will need as well to specify how long your equipment is going to last – you can’t use it for ever, hail stones damage solar panels for example. You will need to make assumptions about storage systems and so on.

The problem is this. When you do the sums and calculate the energy returned on your energy invested you find little, if any net gain. In fact in many places you are likely to get less out than you put in. A recent study by Ferruccio Ferroni and Robert J Hopkin in the peer reviewed journal Energy Policy looks at solarvoltaics in Northern Europe. It is titled “Energy Return on Energy Invested for Photovoltaic Solar Systems in regions of moderate insolation”. It finds that the energy return on the energy invested is 0.85. You get less energy out of the system than you put into creating it – plus or minus 15% you get 85% of the energy out that you put in to create it.[5]

Other studies for other kinds of solar systems in other places – e.g. concentrated solar power using mirrors located in the deserts of North Africa – give higher results. However they would require considerable land. In northern europe wind turbines give a much better energy return on investment but once you put in the energy needed to construct and maintain the storage systems the net energy is very low for wind too. I won’t go into the details but this graph tells an important story. In it “buffered” means when you calculate the energy return on energy invested in a way that includes the energy for creating, installing and maintaining energy storage to match the needs of the intermittent system (which you don’t need for biomass, coal, gas, or nuclear).

Energy intensities, EROIs (energy returned on invested), and energy payback times of electricity generating power plants from Energy 52 (2013) 210e221 D. Weißbach, G. Ruprecht, A. Huke, K. Czerski, S. Gottlieb, A. Hussein





Energy intensities, EROIs (energy returned on invested), and energy payback times of electricity generating power plants from Energy 52 (2013) 210e221 D. Weißbach, G. Ruprecht, A. Huke, K. Czerski, S. Gottlieb, A. Hussein





There are no “virtually limitless” sources of clean energy and that undermines the Srnicek and Williams argument. That’s because the generalised automation that they want to see would require a lot of energy to create and its not clear where it would come from. Politics has to be based on physical realities too!

Biophyical Limits

The key problem with this book is that Srnicek and Williams have not taken into account bio-physical limits. Of course they are partly aware of the environmental crisis in its climate dimension but that is only a part of our problems. The carbon footprint of humanity is 54% of a bigger ecological footprint – the other 46% must be considered too. It includes deforestation, the pressure on land with overgrazing, top soil loss, a crisis of bio-diversity and loss of species, over-use of fresh water supplies, ocean acidification, fisheries collapse and other problems.

Humanity is currently consuming resources and generating wastes as if we had the equivalent of 1.6 planets. Since the early 1970s humanity has been in “overshoot” – like a household consuming more than its income by running down its savings and by accumulating debts. In this case the “ecological debts” will be paid for by future generations who will inherit degraded ecological systems. Their idea of “re-purposing” yet further technological development so that machines can fold their clothes when the energy to do all of this is not available will seem a little bit crazy to future generations as they struggle to survive in a degraded environment.

The rich part of humanity in “developed economies” has create a global economy that is in ecological “overshoot”. The global economic juggernaut is using more resources than can be sustained here and now and humanity as a whole is being carried into a crash. When a household consumes more resources than its income allows the savings eventually run out. A time comes when the debts can no longer be repaid or serviced and its dilapidated home lets in the wind and rain. Overshoot is possible for a time but ends abruptly and catastrophically. The ruling elite are trying to solve problems with ever more ecologically and politically destructive processes like fracking, underground coal gasification, tar sands extraction and the like, as well as policies that generate conflict and pipeline wars. They save money by not treating atmospheric pollution so that now, in China 17% of all deaths are the result of coal emissions and 60% of aquifers are contaminated[7]. A looming problem of melting ice caps is acknowledged but then addressed with technological fantasies for mega engineering solutions that are simply not feasible.

As the environmental, social and financial costs of extracting fossil energy have risen the ability to cope with the harms and to pay the costs has been falling. Rising costs for companies and households have been paid for by debt creation on the assumption that current debts can be repaid out of future growth, as in the past. However, as costs have risen, particularly energy extraction costs, the growth has not been there to repay the debts and that has led, in turn, to deflation and falling prices. Economies are struggling under the deflation-inducing burden of growing financial debt. These deflationary trends are pulling down the prices at which oil, gas, coal and other energy sources can be sold. They leave the energy sector in a catch 22. Its extraction costs are rising but the prices that it can get for the oil, gas and coal that it extracts are not high enough in a deflationary environment for it to make a profit. The “solution” is also unsustainable – to borrow more and get even deeper into debt.[8]

This is another way of understanding “precarity”. I do not doubt that automation has been a threat to jobs over the last few years but the bigger context is a global economy at the ecological limits to growth with a slide into huge and catastrophic problems. The outcome will be similar to that envisaged by Srnicek and Williams – namely an economic crisis in which large numbers of people find themselves unemployed and very vulnerable. But this different analysis suggests a need for a very different menu of responses.

In defence of “localism”

What is particularly unfortunate about this book is not only that they misunderstand the current crisis and have a solution that is unsustainable. It is also unfortunate because they oppose approaches that will help to get us through it – particularly localism. Throughout the book their grand vision is counterposed to what they perceive as a failing style of activism which the authors name “folk politics”. Yet many of the features of so-called “folk politics” were and are efforts to forestall or prepare local communities for a crisis of sustainability.

It is true that in the 1980s and 1990s some people took the idea of “local economy” and developed it in universities, as well as in local authority economic development departments – and it became about how to make local areas attractive to “inward investment” and friendly to big corporations. A strand of localist thinking was co-opted into mainstream local authority politics. It is also true that there are many who view political activity and organisation focused at the national or international scales as futile, or as futile at this point in time. Many have the view, with some justice, that trying to intervene in national or international politics, even if apparently successful at first, leads to leaders being seduced to processes of co-option into the circles of the well connected and well to do – so that political integrity entails not being drawn into the games of powerful people.

Yet there are also approaches to localism which see the value for a focus on local action as combined with a need to network across wider scales and requiring complementary political activity and organisation at national and international levels. Their approach is not either/or. There are movements like permaculture and the transition movement organised transnationally and with a strong internationalism about them – even though their primary rationale is about preparing localities for a future beyond the limits to economic growth. The point here is that they have attempting to promote the re-development of localities as a necessary response to a coming systemic crisis of unsustainability. They have been about saving energy and minimising unnecessary resource use. This has an intrinsically local dimension because it crucially involves the energy efficiency of buildings as well as encouraging walking, cycling and shared public transport.

The authors are rather contemptuous of these kind of activities. They write

“A folk political sentiment has manifested itself in both horizontalist and more moderate localist movements, yet similar intuitions underpin a broad range of the contemporary left. Across these groups, a series of judgements are widely accepted: small is beautiful, the local is ethical, simpler is better, permanence is oppressive, progress is over. These kind of ideas are favoured  over a counter hegemonic project – a politics that might contend with capitalist power at the largest scales. At its heart, much of the contemporary folk politics therefore expresses a ‘deep pessimism: it assumes we can’t make large-scale collective social change’. This defeatist attitude runs amok on the left – and perhaps with good reason, considering the continued failures of the past thirty years.” (page 46)

As will be observed the authors’ ideas of “folk politics” contains many core ideas and ideals from green politics where the “pessimism” is not mainly about “seizing power” but about the very possibility of continued growth.

Firstly, if Srnicek and Williams are going to attack these features of “folk politics” then one is entitled to expect that they try seriously to engage with the origins of those ideas and why they were put forward in the first place. For example, to critique Fritz Schumacher’s Small is Beautiful, or to engage with the ideas of the Transition Movement which puts a strong emphasis on re-developing localities or to go back to the ideas of the “Local Economy” movement that was influential internationally in the 1990s. They might, for example, have gone to the trouble of critiquing Richard Douthwaites Short Circuit which is about local economy. They do not do that and as far as I can tell from reading their book they have put little effort into understanding the roots of the green variant of localism.

I repeat again, I cannot say what the situation is and has been in “the left” –  maybe Srnicek and Williams are describing a real phenomenon there. Maybe too there are people who would describe themselves as green who see no point in national and international politics – or have no time for it anyway. However from my experience of living and working in movements that were powerfully influence by localism the following passage feels overstated:

“Localism, in all its forms, represents an attempt to abjure the problems and politics of scale in large systems such as global economy, politics and the environment. Our problems are increasingly systemic and global, and require an equally systemic response. Action must always, to some extent occur at the local level – and indeed some localist ideas, such as resiliency, can be useful. But localism-as-ideology goes much further rejecting the systemic analysis that might guide and coordinate instances of local action to confront, oppose and potentially supplant oppressive instances of global power or looming planetary threats.” (p43 – emphasis added)

Having been in a network of local community development projects in the 1980s, the local economy movement of the 1990s, the Transition movement and Feasta in the first decade of the century and having helped developed several local projects in and around Nottingham I and my colleagues were always part of larger networks, often international in scope, that were theorising what we were doing in a larger systemic perspective. Many of us came out of the left and were still influenced by left thinking, then picking up the ideas of the green movement. In this entire process there was ALWAYS an understanding that there was a larger systemic context, that there were larger planetary threats. For goodness sake one of the main slogans was “Think Global – Act Local”. We also went to a great deal of trouble to share ideas as far as possible internationally, networking as best we could. (Not always easy before the internet). Such efforts continue to this day. In his book “Blessed Unrest” Paul Hawken describes how perhaps a million organisations (not individuals) exist all over the world, largely at local level, trying to do something about economic, environmental and social issues – but these million organisations are everywhere looking for meta-theories, ideas that will help them to work at a bigger scale and coming together in conferences and organisations to exchange ideas under titles like “Solidarity Economy”, “the Commons Movement”; “Degrowth”; the “Transition Movement”, the Global Social Forum. Many of these networks overlap and share ideas beyond their locality. They look too for ideas about how to network and “federate the change agents” to have bigger punch at national and international levels.

The Viable Systems Model

Some of the approaches to organising coherence between the diverse organisations of overlapping movements are similar to ideas proposed by Srnicek and Williams. When they claims that localism as ideology rejects the systemic analysis that might guide and co-ordinate against global power I wonder who they are referring to. Green local activists that I have worked with for years have been seeking a systemic analysis and methodologies for action for a long time – including, in some cases by applying the viable systems analysis of Stafford Beer.

That is the methodology that underpinned the Cybersyn experiment initiated by the government of Salvador Allende in Chile. Srnicek and Williams describe Cybersyn in “Inventing the Future” as if it was primarily an example of how computer technology can help democratic socialism but that is only a part of the story. The cybernetic principles themselves are of great importance but you will look in vain in their book for a description of the viable system model as way to create coherence out of the diversity in an organisation or system. That is despite the fact that how this can be done successfully is a major theme for them. As I explain in my book Credo:

“The basic principle is to minimise outside interference in each organisation – while at the same time facilitating co-ordination where joint involvement in a wider process makes it appropriate. These forms of co-ordination would be of these types, only to be activated where the bigger picture makes it appropriate: (a) conflict resolution procedures, (b) steps to achieve synergies, (c) developing a common strategic view of what is happening in shared environments and, (d) activities that clarify and develop shared value systems and purposes.

“The diagram sums up the vision graphically and is ‘recursive’ in form. Recursive means nested similar to the way that Russian dolls are nested i.e. with similar arrangements inside wider arrangements. Thus, each ‘operational unit’, – a person, a work team, a whole project, a federation of projects activates a wider system for the conflict resolution, synergy, strategic and share policy co-ordination functions agreed and as needed – while at the same time taking the maximum decisions for their own operation autonomously. Graphically


So localism “in all its forms” does not reject thinking at the largest scales. Localism in some of its forms may reject thinking at the largest scales but many of the forms of green localism give a great deal of thought as to how to fit into larger systems and their dynamics.

The “struggle” perspective and the “development” perspective

It does seem relevant to point out that Srnicek and Williams see the world, as left wing intellectuals and militants, largely in the context of “STRUGGLE”. But one of the most important features of the “folk politics” is that many of its proponents are project developers. People like this see politics through the prism of managing and developing small businesses, co-ops, social enterprises or not for profit projects. In part that is because these are people who have been driven out of employment and have become self-employed or come together in small organisations and businesses to survive. It is their response to the precarity described by Srnicek and Williams. They may have associated themselves with a variety of projects because, when they became unemployed, they found support and a social network by doing so. They are part of an emerging “lifeboat economy” which is there for at least some of the “surplus population”.

In part creating or joining these organisations is also a way in which radicals can experiment and try to express what they believe in. It is where they can respond directly to the crisis that they see coming down the road at humanity. Some people who might have joined left wing parties in the past nowadays prefer to align themelves with NGOs, with not for profit or community organisations.

Whether for reasons of economic survival or for reasons of political belief people have gravitated towards different kinds of organisations. Some of these organisations then struggle to make headway against market competition while they produce or operate in a different way. If they are involved in growing food they will also be struggling to make cultivation work at a particular location – often developing a fascination with the species, the quality of the soil, the landscape, the quality of the food they produce – and then sharing what they have learned, and sharing their struggles, sharing their seeds with others in professional groups.

Let them eat assessments

For these people Srnicek and Williams have this message:

“Goldman Sachs doesn’t care if you raise chickens”.

To which one response is “So what? If you are part of what Srnicek and Williams call the ‘surplus population’, if you are unemployed, then the eggs will help. Of course a universal basic income will help even more if it is large enough but why should chickens and a UBI be considered either/or?”

Srnicek and Williams particularly sneer at slow food and local food movements. On local food they write:

“Without an assessment of how our lives are structured by social, political and economic pressures that make it easier to eat pre-prepared food than embrace the slow food lifestyle, the end result, is a variant or ethical consumerism with hedonic twists.”

Let them eat assessments! If you try to do something practical, that actually involves growing, or preparing local food, and even if you are well aware of the limitations of what you are doing – then Srnicek and Williams appear to be telling you that you are not making a contribution to the grand project of constructing a popular movement with its hegemonic goal. Perhaps not. Yet why is it necessary to be so scornful? It doesn’t seem like a good way of constructing a “popular alliance”.

Meanwhile a preference for eating locally is subject to the charge that it is guilty of “condensing often complex environmental issues into questions of individual ethics. One of the most serious and intrinsically collective crises of our time is thus effectively privatised”.

This is puerile stuff. No one I know who volunteers in a community garden or has an allotment sees this as a complete solution to either their own problems or the problems of society at a whole, let alone the world. No one that I know who joins up to a box scheme to get locally grown vegetables is seeing it as more than a very partial and, on its own, inadequate response to the complexity of global food and environmental politics. It is a caricature of the local food movement to believe that the people in it think that it is a cure all. It is also a caricature to claim that localism “in all its forms” (sic!) “ abjures the problems and politics of scale”. Jeremy Corbyn has an allotment and I am sure he does not regard it as a complete solution to complex environmental issues. Nor has he given up on the politics of scale.

Localism and Green Systemic Analysis

As a matter of fact, there is a systemic analysis underpinning the ideas about local development. It is not a Marxist systemic analysis but it is a systemic analysis and it has been elaborated by green thinkers. It may not have been reflected very much in ideas circulating in “the left” but that’s a different matter. A good place to start describing that alternative systemic analysis is by describing the political stance of indigenous peoples. That’s because the political stance of indigenous peoples is intrinsically localist. Srnicek and Williams do mention indigenous peoples’ struggles but only in passing. Just as Srnicek and Williams have very little idea about the environmental crisis they have very little idea about the struggles of indigenous peoples. They claim that indigenous people would be helped by their style of “post work” policies because indigenous peoples’ lack of “means of subsistence”. But the lack of subsistence is because indigenous people are being robbed of their lands! These are not just any old lands they are the localities in which indigenous people have their collective identity. They are the places where their ancestors are buried and where they want to be buried. They are the places whose ecological system indigenous people understand inside out and for which they see themselves as being responsible as a sacred and religious duty. Because they belong to these places, these localities, because they understand the ecological system based on generations of accumulated knowledge, they are the best people to protect them.

What is involved here are communities of people living in communities of species (an eco-system). The communities of people organise affairs to accommodate and protect through their knowledge of, and respect for, the other species with which they share the local landscapes and waterscapes. Totem identification with other species helps to bring protection of wild animals (non human persons) into the life of the community and its management of living space. Communities like this have an idea of sustainability based on taking decisions about the places that they belong to in which there is a responsibility to consider 7 generations ahead. That’s why, as Noam Chomsky has pointed out, indigenous communities are fighting the hardest of all to protect “the environment” (the impoverished word of western societies). For them nature is “kin”. Their own bodies are part of this environment. They are walking pieces of the earth – and, more specifically, it is the local part of the earth that they belong to.

In short they are “localists” and yet they have often managed to engage with other First Nations in a global struggle for recognition and against a predatory global economy. To really support indigenous peoples and form alliances with them a great deal more is needed than the provision of “means of subsistence”. Alliances must be based on respect for their “localism”.

Consequences of Ricardian Development

There is a different kind of systemic analysis, a green systemic analysis – and one in which ideas like localism and “small is beautiful” are situated. A society based in local economes can be compared to a national or global economy using these diagrams which I have borrowed from work by the late David Fleming presented in a Feasta Lecture.


The two diagrams represent two types of economic systems consisting of four locations with some trade or exchange occuring between them. There are 4 products in both economies – A, B, C and D. In the economy on the diagram on the left each location produces all 4 products whereas on the right hand diagram each location specialises in the production of just one product. This is a vastly simplified representation of what has happened in economic history as the emergence of a global economy has been a movement towards the economic structure represented on the right. For those familiar with the history of economic thought the diagrams may remind them too of the ideas of the classical economist, David Ricardo. He argued that a global economy like that on the right would allow for each nation to specialise in production or services where it has a comparative advantage. This international specialisation, he argued, would lead to increased overall production that could then be shared between the nations according to the terms of trade between them. The Green perception that there is a value in re-localising economies is because of a recognition of what has been lost in the movement from what is represented in the move from the left to the right diagram. There is also a recognition of what may have to be retrieved to survive as the crisis of sustainability really kicks in.

In the left hand diagram trade or exchange may occur between locations (eg when there are problems with local production like crop failure) but it is limited. The economies of each place are largely local and this has many implications that are not at first sight obvious.

One implication is that people in local communities will know or be able to meet in person the suppliers of products A, B, C and D. This matters for individual ethics. When Wall Street sold phoney “AAA” grade financial securities, that they knew were “toxic trash” to pension funds at the other side of the world they would be unlikely to know or ever meet their victims. Srnicek and Williams are do not seem overly impressed by making appeals to individual ethics as a solution to the problems of the world. However ethics is a word derived from “ethos” the common pattern, and behaviour in smaller communities is more likely to work on a “love your neighbour” basis if you actually know your neighbour or meet them on the street. It makes a bit more difficult to cheat them.

Another implication is resilience. A crop failure where there is only one crop, or the collapse of a local industry where there is only one local industry of note, will mean a more vulnerable community. (This is the one point acknowledged by the two authors. I’m unclear why.)

Another implication is energy use and pollution arising from travel, transport and communications. In order for the type of economy illustrated in the right hand diagram to function trade is necessary. It can only work by each of the four locations exporting its one specialist product and importing the other 3 products. Transport is needed not only to deliver farm produce to market, but to bring back soil nutrients and other inputs to the fields to replace the nutrients extracted by the monoculture growing practices. For two hundred years expanding trade volumes have been carried by transport fuel which is fueled by fossil energy, particularly oil. The idea that the future will have plenty of electric cars powered by renewables or biofuels is highly questionable. Srnicek and Williams question food miles as a measure of enviromental impact – and it is true of course that it cannot be counted a sole measure but it is one of several.

Large scale cultivation also de-links fields from the places of consumption and that reduces the chances for returning nutrients to the land. Where there is a tight integration of residential areas and growing areas, food wastes, as well as composted human wastes (faeces) can be returned to the fields relatively easily. The short distance helps to maintain phosphorous and other essential soil nutrients. By contrast, when food sources become separated by distance from food consumption, sewerage ceases to be an easily available resource. The plumbing and sewerage arrangements of urban areas frustrate a circular arrangement with agriculture. Sewerage goes into waste water systems where it is mixed with runoffs from streets and industrial toxins and therefore is contaminated and no longer available as a soil nutrient except at great treatment cost. Since nutrients have to be brought in from afar this leads to a depletion in farm nutrients, particularly phosphorous[10]. All these are dimensions of a local food economy too – ones which Srnicek and Williams appear completely unaware of.

Localism has multiple industrial dimensions too. In the industrial revolution the industries that developed were large scale – exporting their product over a wide area and importing raw materials and essential supplies for their workers from a wide area too. When any production process is scaled up it has consequences for the surrounding eco-system, whether it be an agricultural or an industrial process. All scaled up processes produce large amounts of waste and pollution which are more likely to overwhelm the capacity of local sinks to absorb them.

A further implication of Ricardian development is that the specialisation of labour leads to a specialisation of landscapes. To put in another way, there is a reduction in the biological diversity of landscapes over large areas. If A, B, C and D are living species or crops deriving their sustenance from a landscape the movement from left to right is one of bio-diversity reduction. Yet land is more than a space for injecting inputs and extracting outputs. It is a living community of organisms re-generating life in multiple forms. To be healthy it must be diverse, not specialised, and for ecological health, the most appropriate cultivation is that which supports, uses and works with nature’s diversity.

Contrary to the prescriptions of Ricardo, there are advantages to diversity when it comes to landscapes (instead of monocultural specialisation). Diversity works because particular plants and animals can and do help each other. Their roots might be at different depths and thus, not in competition for nutrients, while some plants attract beneficial insects for pollination and/or attract insects or birds that keep other plant predators at bay. The advantages of non-specialist multi-functionality applies to structures too. A hedge that separates animals and provides fodder for them, can also be a place for wildlife to nest; act as a wind break and sun trap on one side while providing for shade loving plants on the other. There is plenty of specialisation in nature but it only works efficiently at far smaller scales than typically found in market driven specialist monocultures. Of course, if land and structures are designed to be diverse, the labour required to create and maintain them must also be varied i.e. non-specialised. It is not possible to develop such systems from far away in global power centres – they must be developed by knowledgeable people locally. That’s another reason for localism and a local food economy.

Monocultures define everything except one or a narrow range of crops as unwanted, as pests or weeds. Monocultures are, by definition, technological assaults on biodiversity made possible by large quantities of cheap energy, mechanisation and chemicals. These kill the eco-system in favour of the market crop and lead to soil degradation, compaction and erosion, exhaustion of water resources, death of beneficial insects and pollinators, waste of crop residues, no ability to return human and other composted wastes back to the soil. Monocultures thus lead to short run gains followed by long run decline in fertility because life depends on diversity and cycles.  This fossil fuel dependent agriculture is not sustainable in the long run. As a system high tech agriculture “works” at the beginning and is hard to compete with on pure price grounds in markets – but that is when energy is cheap and the damage to the eco-system is not being taken into account. This system cannot be continued indefinitely when the damage costs rise and when energy costs rise too. When this happens the costs of producing food and fibre crops will rise and the problems will have to be worked on at the local leve as well as nationally. But for all the reasons discussed it is likely that the main focus will have to shift back to localities and the political demands at national level should be encouraging and empowering that.

None of these are issues covered by Srnicek and Williams in their rejection of “localism”.

In conclusion – the flaws in left wing reasoning – what they share with right wing thinkers

In conclusion it is necessary to stress once again that the Srnicek and Williams book is aimed at the left. They are arguing for how the left should play a leading role in the transformation of society. From the evidence of this book one I am not reassured that this part of “the left” understand the issues well enough to make such a claim for hegemonic power. True, the left are often strong on championing social justice agendas and supporting vulnerable people. They often have a clear idea within this field of human affairs. Yet their analysis of what is wrong is often outdated. There are many leftists for whom the environmental crisis is seen primarily as just another sign that capitalism is failing. Essentially they see humanity’s problems as a variant of a stock simplified story. This story goes something like this – because it is driven by competition and because it puts profit ahead of other goals capitalism is destroying the environment too. Neo-liberal ideology in particular is our current problem to be resisted. The widely held belief that everything requires a market solution and should be privatised has undermined state protection not only for workers and marginalised social groups but undermined environmental regulation too. These are the things that must be put right.

As their variant of this story Srnicek and Williams propose that by working systematically over time it will be possible to achieve a new ideological hegemony for “post work politics”. This will be to achieve a re-purposing of technology to solve the problems of an increasingly precarious existence in the face of a variety of problems – above all automation. First of all then we must get control over the economy so that it can be repurposed to meet social and environmental needs.

At first sight hard left ideology appears to be radically different from the ideology of neoliberalism in which things are to be left to the market and to control by corporations. Yet on a closer look both left and right ideologies share the western idea of “progress” as something evidenced by, and expressed through, technological change as its key feature. In this book too while Srnicek and Williams want to “re-purpose” technological transformation, the technology itself is an intrinsic part of their big story of human progress. Essentially they see themselves as being in the business of wrestling the idea of progress away from neo-liberalism in order to create a new ideological mainstream and a new big story. “A counter-hegemonic strategy entails a project to overturn the dominant neoliberal common sense and rejuvernate the collective imagination. Fundamentally it is an attempt to install a new common sense – one organised around the crisis of work and its effects on the proletariat” (pp131-132 ). In their “post capitalist” and “post work” story progress occurs because the machines do the work.

Unfortunately it will be biophysically impossible to complete this technological transformation without wrecking the ecology of the planet. They are trying to construct an alliance behind a future that is neither desirable nor sustainable.

Brian Davey
13th August 2016

Thanks to Caroline Whyte who drew my attention to a wider variety of green viewpoints on localism.



Featured image: Robot apprentice. Author: Stefan Ray. Source:





The Centrality of Externalities to Economic Understanding

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Published on Credo Economics on July 31, 2016

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What economists call “externalities” are not unusual or a special case, they are ubiquitous. They are rooted in private property and the relationships of market society. The way in which non market societies protect bio-diversity through totem arrangements is described.

Private property means that a single owner has the right to do with a resource as s/he sees fit. However, what they decide about these “resources” affect communities of people and communities of species (eco- systems). Very often, the effects are not positive. John Ruskin, a 19th century art critic who also wrote on economics, coined the term “illth” to describe the destructive effects imposed on society and the environment by the economy of his day.

Economists have had to adjust their theories and have come up with the concept of “externalities”, that is, the benefits or costs of an allocation decision that arise for non-owners. In a later chapter I critically examine the idea that these externalities can be managed by those people affected by them coming to a deal with those causing them. This would involve finding “the right price” for the externality and then doing a trade. The purpose of this chapter is to look at the institutional and property relationship contexts in which these “externalities” arise, and thus, to show how and why, in some kinds of society, there are no “externalities”.

The word “externality”, conveys the impression that this is a footnote to economic theory, a sort of additional point. Actually, externalities are ubiquitous. There cannot be any kind of resource allocation decision involving matter or energy without externalities. “The economy” is embodied and embedded in physical and energetic processes in the physical world.

It involves “stuff” processed by energy conversions. This stuff, the matter, can neither be created nor destroyed, though it can change its form. Likewise, energy changes its form when used. It follows from this that what are used as “economic resources” must have come from somewhere originally where these resources had an original function and/or were part of some other system or structure. These resources must also go somewhere after they are embodied in products and/or where they are wholly or partly turned into wastes. Extracting resources from places has consequences and dumping wastes and pollution has consequences. Over several centuries, this extraction and dumping has usually been out of, and back, into the commons.

Tip of the Iceberg --- Image by © Ralph A. Clevenger/CORBIS

Tip of the Iceberg — Image by © Ralph A. Clevenger/CORBIS

The fish on your plate was originally a part of the marine eco-system and, after it is processed by your body, will become sewerage that may go back into the marine eco-system. The heat from the cooker is from gas that was in the ground and getting it out of the ground changed the geological structure of a place. This process might affect underground water flow bringing contaminants to the surface, as it does in the case of fracking. Burning the gas will change the characteristics of the atmosphere.

Because production processes are embedded and embodied in the physical world, nothing of substance happens without “externalities”. Climate change illustrates this clearly. No productive activity takes place without the use of energy. Almost all energy in developed economies, as well as a large amount of energy in “developing” economies, involves generating greenhouse gases. The greenhouse gases arise when producers use oxygen in the atmosphere to burn fuels with and thus, generate CO2. This is an all pervasive process and what is all-pervasive should be integral to production theory, which it isn’t in neoclassical theory. In mainstream economics, climate change economics is a topic for a tiny number of specialists. It is almost as if climate change is some kind of special case.

“Externalities are ad hoc corrections introduced as needed to save appearances, like the epicycles of Ptolemaic astronomy. Externalities do represent a recognition of neglected aspects of concrete experience, but in such a way as to minimize restructuring of basic theory. As long as externalities involve minor details, this is perhaps a reasonable procedure. But when vital issues (e.g. the capacity of the earth to support life) have to be classed as externalities, it is time to restructure basic concepts and start with a different set of abstractions that can embrace what was previously external.” (Daly & Cobb Jr, For the Common Good, 1994)

Protecting bio-diversity through totem arrangements

A crucial question is then whether or not the other people affected by so-called externalities get to have any say in the resource allocation decision – and if so, how much say or influence do they have. Some indigenous peoples “represent” particular species, get to know all about them, and therefore protect them in their totem arrangements. In this way, the “community” becomes more than its human members. “Non-human persons” are represented indirectly too.

The following is an example of how this works. In modern economics we would speak of there being an “externality” if trees are cut down and if this, in turn, results in maggots from those trees getting everywhere. In Australian aboriginal arrangements this is prevented by a specific man’s totem responsibilities, rooted in the aboriginal religious code:

“I am boss for Mpwere [Maggot] Dreaming. My worship is maggots and witchetties and flies… and itchy grubs – those hairy caterpillars that line up- and those angente [sawfly] grubs that attach themselves in a mass to the river red gum trees. Those trees can’t be cut down or there will be lots of maggots- maggots everywhere.” Wenten Rubuntja quoted in (Gammage, 2011, pp. 129-129)

Here are community members who know how their eco-system works and by “representing” other species in their community’s decision-making they prevent particular kinds of “externality” arising.

It would be wrong to over-idealise indigenous societies but it is also important to recognise skills, knowledge and practices which “modern societies” have lost and forgotten. Customary and commons based societies often do not have a problem of “externalities” if the community is functioning properly because everything is internal to the community. If the community is long standing and has a deep knowledge of the local eco-system then environmental impacts on all “people actors” and “other species actors” are taken into account in its decisions.

Buen Vivir or sumak Kawsay – the “Good Life” without externalities

Similar arrangements can be found among other indigenous peoples. In a society where harmony between the people, and between the people and the ecological system, is the desired norm there is an ethic and a belief that emphasises balance rather than “improvement”. This means that all community interests (and all species) are taken into account and accommodated in whatever decisions are made. For example, the first nations living in the Andes region had and have a philosophy of Sumak Kawsay, translated into Spanish as “Buen Vivir” or “Good Life.” (Fatheuer, 2011)

We must beware of understanding this in a non-indigenous, consumerist idea of a “Good Life”. It is only conceivable in the social context in which people live. It involves striving for harmony and balance rather than dominance. This is important because the concept has plurality and a co-existence based on respect – both of human communities and of Nature – integral to it. It is also the opposite of “development” as conventionally understood. Eduardo Gudynas explains that “Buen Vivir rejects the idea of a predetermined historical linearity in which ‘development stages’ must be followed by all nations (imitating industrialised nations) but rather defends the multiplicity of historical processes”. Western ideas are not rejected but seen as one among many options in an approach that has been called ‘interculturality’. (Gudynas 2014).

Its features are:

• Harmony and balance of all and with all
• Complementarity, solidarity and equality
• Collective well-being and the satisfaction of the basic needs of all in harmony with Mother Earth
• Respect for the rights of Mother Earth and for human rights
• Recognition of people for what they are and not for what they own
• Removal of all forms of colonialism, imperialism and interventionism
• Peace between people and with Mother Earth

When people live as members of human communities, in communities of species, decisions about “resources” accommodate multiple users and therefore multiple uses. Externalities don’t arise in so far as this accommodation occurs effectively.

In a commons and other social arrangements, to allocate community resources one would expect that efforts would be made to accommodate all interests so that extreme either/or allocation decisions are not made. However, private property is precisely defined by the power of the property owner to ignore and overrule consideration for other people and species. This has allowed the accumulation of wealth by stealing from the commons in one of two ways described by American author Peter Barnes:

“Enclosure, in which property rights are literally taken or given away, is half the reason for the commons” decline; the other half is a form of trespass called externalizing —that is, shifting costs to the commons. Externalizing is as relentless as enclosure, yet much less noticed, since it requires no active aid from politicians. It occurs quietly continuously as corporations add illth to the commons without permission or payment. The one-two punch of enclosure and externalizing is especially potent. With one hand, corporations take valuable stuff from the commons and privatize it. With the other hand, they dump bad stuff into the commons and pay nothing. The result is profits for corporations but a steady loss of value for the commons.” (Barnes, 2006, pp. 19-20)

Extractivism and the “invisible elbow”

“Externalities” are therefore particularly the result of a breakdown of community management arrangements when private property displaces common property. As we saw earlier, private property arrangements tend to be associated with large scale specialist uses of land and resources which displace the diversity of community and species uses. The resulting resource use practice is sometimes described as “extractivist”. The “Ricardian” specialism imposed on localities by their private owners focuses upon single uses which displace others. This enables large scale production for distant markets while at the same time necessitating further marketisation. In the world as recommended by Ricardo, if your area
is now entirely given over to producing wine everyone living and working in that area has to buy in all their other food and other needs because there are no longer any local sources for other foods, fibre crops and clothing and so on.

The resulting “de-localisation” in this kind of world then also gives rise to pervasive “externalities” because they make it increasingly difficult to see dishonest, cruel and destructive practices which occur during the production of what you buy. When you purchase clothing and other goods produced outside your own area, you cannot possibly know in any detail or with any certainty the conditions under which the purchased in products are created. You can see the product and you can know what its price is, however, the fact that it was produced by child labour, or in a factory that was in danger of collapsing, is likely to be unknown to you.

Smithian economists make much of the “invisible hand”; of the self-organising market in which prices give people the information they need in order to make their buying and selling decisions. What is suggested here is that prices can tell you all that you need to know. But there is a flaw in this argument that economist Michael Jacobs called “the invisible elbow”:

“If consumers had to suffer all the pollution caused by the products they bought, they wouldn’t buy them in such damaging quantities. It is precisely because costs are passed on to third parties that we let them occur. Environmental degradation is a genuine case of passing the muck…environmental problems occur through the combination of millions of individual economic decisions. These decisions are taken privately, without reference to what everyone else is doing, because nobody can know what everyone else is doing. Added together, market forces generate an overall result which no-one can predict. This is the “invisible hand” which the economist Adam Smith argued brought general prosperity. But it can equally be an “invisible elbow” which brings the earth’s precarious ecological balance crashing down like a pile of cans in a supermarket.” (Jacobs, The Price of the Future, 1990)

Economics in Darwinist mode – the competitive struggle for existence

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Published on FEASTA on June 30, 2016

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Nineteenth century economics is described in this chapter as a subject used to train a psychopathic imperial elite – this is illustrated by the policies recommended by economists to manage famines in Ireland and India. The poor had only themselves to blame for their desperate state.

God died in economic thinking sometime in the 19th century, for most theorists anyway. Instead, economics would be contextualised in popular thinking by a philosophical standpoint derived from Darwin. Darwin in turn had been influenced by economist Thomas Malthus, who lectured in economics to at the East India Company training college. The theories developed reflect again the truth of the phrase from Anaïs Nin – “we do not see things as they are, but as we are” and Victorian industrial society was ruthless. As Andreas Weber explains:

“Malthus was obsessed by the idea of scarcity as explanation of social change – there would never be enough resources to feed a population that steadily multiplies. Charles Darwin, the biologist, adapted that piece of theory which had clearly been derived from the observation of Victorian industrial society and applied it to a comprehensive theory of natural change and development.”

“In its wake such concepts as “struggle for existence”, “competition”, “growth” and “optimisation” tacitly became centrepieces of our self-understanding: biological, technological and social progress is brought forth by the sum of individual egoisms. In perennial competition, fit species (powerful corporations) exploit niches (markets) and multiply their survival rates (return margins), whereas weaker (less efficient) ones go extinct (bankrupt). The resulting metaphysics of economy and nature, however, are less an objective picture of the world than society’s opinion about its own premises.” (Weber, 2012)

The claim that the self-organising character of the competitive market would optimise resource allocation in the face of scarcity became the centrepiece of a general ideology. An emerging belief system, which seemed self-evident to powerful men – that the strong were fitter and more competitive. The weak could assume no automatic entitlement to support because that was not nature’s way, it was not efficient. This ideology had expelled considerations of social justice from the economic concept system. “Survival of the fittest” meant those best able to win in a struggle with others – rather than “the survival of those best able to adapt to their immediate environment” which might, alternatively, have meant things like “best able to co-operate for mutual benefit with others and thus, get looked after”.

This was not how the elite of Victorian society operated and the implicit philosophy that prevailed was elaborated by people like Nietzsche:

“To speak of just or unjust in itself is quite senseless; in itself, of course, no injury, assault, exploitation, destruction can be “unjust,” since life operates essentially, that is in its basic functions, through injury, assault, exploitation, destruction and simply cannot be thought of
at all without this character. One must indeed grant something even more unpalatable: that, from the highest biological standpoint, legal conditions can never be other than exceptional conditions, since they constitute a partial restriction of the will of life, which is bent upon power, and are subordinate to its total goal as a single means: namely, as a means of creating greater units of power. A legal order thought of as sovereign and universal, not as a means in the struggle between power complexes but as a means of preventing all struggle in general perhaps after the communistic cliché of Dühring, that every will must consider every other will its equal—would be a principle hostile to life, an agent of the dissolution and destruction of man, an attempt to assassinate the future of man, a sign of weariness, a secret path to nothingness.”
(Nietzsche, 2009)

training for psychopaths – economics and famine management

In case this seems an over the top and an extreme quote, chosen for rhetorical effect, then one has only to examine the political economic policies adopted during the Irish famine of the 1840s and the Indian famines of the mid-1870s. In both cases, a sociopathic political elite held rigidly to policies after crop failure that made the situation infinitely worse than they need to have been. Elite thinking was within the framework taught by teachers like Thomas Malthus, at the East India Company’s Staff training College at Hailsbury, on Hertford Heath.

In Ireland, and then in India, the extreme vulnerability of the population before the famines had been already been created by previous policy. In the case of Ireland, the parasitism of the Anglo-Irish landlord class sucked away resources from agriculture to their high life in London that might have been otherwise used to raise the abilities and conditions of the cultivators. Simultaneously, alternative industries and employment could make no headway against English competition when protective tariffs were removed after a brief period of prosperity at the time of the Napoleonic and American wars.
In India, the famines were prepared by the disintegration of community relationships and obligations under the impact of the market. As Davis states:

“The worsening depression in world trade had been spreading misery and igniting discontent throughout cotton-exporting districts of the Deccan, where in any case forest enclosures and the displacement of gram by cotton had greatly reduced local food security. The traditional system of household and village grain reserves regulated by complex networks of patrimonial obligation had been largely supplanted since the Mutiny by merchant inventories and the cash nexus. Although rice and wheat production in the rest of India (which now included bonanzas of coarse rice from the recently conquered Irrawaddy delta) had been above average… much of the surplus had been exported to England.”(Davis, 2002, p. 26)

According to the free trade evangelists, rising prices in a time of dearth would attract imports of grain and people would consume less. Problem solved.

But the problem was not solved – because of price speculation. What actually happened in the 1870s was described by one of the few members of the elite who was not a free market fundamentalist, Richard Grenville, the Duke of Buckingham and Chandos. The refusal to intervene in the market to bring down the price (by selling grain from places of relative abundance) encouraged an orgy of price speculation
as people with wealth bought up grain to profit from the rising prices and made the situation worse. Commented Grenville:

“The rise [of prices] was so extraordinary, and the available supply, as compared with well-
known requirements, so scanty that merchants and dealers, hopeful of enormous future gains, appeared determined to hold their stocks for some indefinite time and not to part with the article which was becoming of such unwonted value. It was apparent to the Government that facilities for moving grain by the rail were rapidly raising prices everywhere, and that the activity of apparent importation and railway transit, did not indicate any addition to the food stocks of the Presidency… retail trade up-country was almost at standstill. Either prices were asked which were beyond the means of the multitude to pay, or shops remained entirely closed.”
(Davis, 2002, p. 27)

In both Ireland and India, any idea of intervening in the market to hold down prices was rejected since markets were self-correcting. It would involve the state in needless expense that could be better spent on other things. In the case of India, these greater priorities were the preparation for a military adventure in Afghanistan for the glory of the Viceroy, opium addict Lord Lytton. Then there was a week-long feast for 68,000 VIPs during Queen Victoria’s visit to India – during which time an estimated 100,000 people starved to death in Madras and Mysore.

In both Ireland and India, food was exported out of the country in bulk during the famine. As the population fell by 2 million in Ireland, exports of food from Cork in a single day in November 1848 were 147 bales of bacon, 255 barrels of pork, 5 casks of hams, 3,000 sacks and barrels of oats, 300 bags of flour, 300 head of cattle, 239 sheep, 542 boxes of eggs, 9,300 firkins [about one-fourth of a barrel] of butter, and 150 casks of miscellaneous foodstuffs. (Gallagher, 1995)

In both Ireland and India there was utter terror of supporting the poor during times of hardship. It would create a precedent! It would interfere in the market for labour. It would create dependency. The iron laws of political economy forbad it. Public works as a source of relief might favour some business interests rather than others so they were not to be supported either. At the height of the Irish Famine in 1846, Treasury Head, Sir Charles Trevelyan wrote:

“The only way to prevent people from becoming habitually dependent on government, is to bring [relief] operations to a close. The uncertainty about the new crop only makes it more necessary… These things should be stopped now, or you run the risk of paralyzing all private enterprise and having this country on you for an indefinite number of years.”(Gallagher, 1995)

the poor have only themselves to blame

In both cases the elite convinced themselves, using the ideas of Malthus, that the deaths were Nature’s way of dealing with overpopulation by the poor who were incapable of exercising self-control, and who were therefore bringing down the holocaust upon themselves. “[E]very benevolent attempt made to mitigate the effects of famine and defective sanitation serves but to enhance the evils resulting from overpopulation.”

In the same vein, an 1881 report concluded that:

“80% of the famine mortality were drawn from the poorest 20% of the population, and if such deaths were prevented this stratum of the population would still be unable to adopt prudential restraint. Thus, if the government spent more of its revenue on famine relief, an even larger proportion of the population would become penurious.” As in Ireland thirty years before, those with the power to relieve famine convinced themselves that overly heroic exertions against implacable natural laws, whether of market prices or population growth, were worse than no effort at all.” (Davis, 2002, p. 32)

Having thus, degraded fellow human beings as low as they could go through applying “economic principles”, the sociopathic gentlemen then witnessed the resulting wretches and failed to recognise their own handiwork. Accompanying Queen Victoria in Ireland, historian Charles Kingsley commented:

“I am daunted by the human chimpanzees I saw along that 100 miles of horrible country. I don’t believe they are our fault. I believe that there are not only many more of them than of old, but that they are happier, better and more comfortably fed and lodged under our rule than they ever were. But to see white chimpanzees is dreadful; if they were black, one would not feel it so much.” (Gallagher, 1995)

What is called “political economy” then was a set of doctrines that suited a gentleman elite of genocidal sociopaths. The statement is not written to be read as indignant rhetoric, but as strictly factual. I seek to describe the world as it was then, not as I would have liked it to have been. There is plenty of evidence. The art and journalism of the time shows how these men regarded themselves.

the ego size of sociopaths - how the imperialists saw themselves. cecil rhodes announces plans for telegraph between cairo and cape town. cartoon in Punch 1892. creative commons Licence



the ego size of sociopaths – how the imperialists saw themselves. cecil rhodes announces plans for telegraph between cairo and cape town. cartoon in Punch 1892. creative commons Licence

The ego size of sociopaths – how the imperialists saw themselves. Cecil Rhodes announces plans for telegraph between Cairo and Cape Town. Cartoon in Punch 1892. Creative commons Licence


The invisible hand of the market was ideal (and remains ideal) for a sociopathic elite to deny their responsibility to their fellow human beings because it claims to be a way of automatically reconciling self-interested behaviour with optimal economic outcomes. As Kingsley said: “I don’t believe they are our fault”.

It was, and it still is, an argument tailor-made to allow the elite to avoid asking whether appalling suffering and disaster was in any way due to their actions taken in their self-interest. If people starved
it was nothing to do with their rental extraction and systems of land tenure that had destroyed the communal arrangements that preceded them. It was nothing to do with their market arrangements.
It was nothing to do with their speculation driving prices up further. It was nothing to do with their policies which wanted to use tax revenues for status displays or for war adventures to their greater glory. No, one had to obey the invisible hand – and if the inferior people, the little people, the chimpanzees, white or black, starved – then they had called it down on themselves and Nature was now taking them away, as it was bound to. Economics, once a branch of moral philosophy, had become the new theology for money power.

As I have said, economists had constructed a set of arguments that took attention away from the propertied elite. Many economists would have been well aware that prices and the allocation of resources depends on the prior allocation of rights to the different factors of production – but so what? This insight could be consigned to the small print of economics, not the up-front centre of attention. By a process of enclosure, a land market and a labour market were created simultaneously, since people who could no longer draw from the resources of the commons to support themselves had to sell their ability to work on a labour market. But the duress involved in the enclosures, of being forced to work on the terms of the employers, was not something to theorise about. To give deep consideration to issues of justice and duress would have been to stand in the way of improvement and progress. It would be, in the words of Nietzsche, to embark on a path to nothingness. By attacking the poor law for the support of destitute people, and by the expropriation involved in enclosures, the elite ensured that the poor worked on terms that could be dictated by their employers. The path to improvement on the improved lands and through increasing specialisation in the industrial factories was held open. As land and labour became market commodities this could only be regarded as “progress”, because it was a process of completing the creation of a market society which professors of moral philosophy sanctified.

However, neither land nor labour are originally “produced” with the explicit purpose of becoming commodities. There is no sense in which they are “natural commodities” as Polanyi, who documented these processes, pointed out. Land is part of the living natural system of the biosphere and “labour” is the lives of people who have been forced to work on terms dictated by the people who own the land and other resources.

In the ideology of the market, the important idea was that the market produces according to the wishes of the society – but it is true only when those wishes are backed with purchasing power. Here is a theory of what gets produced with available resources – a theory of allocation. The issue of how purchasing power came to be distributed, reflecting the power relationships in the economic and property system, is different by the end of the 19th century. The economists produced more apologetic ideas on this
theme when their rich patrons came under political pressure. It is not, however, a theme to which most economists pay any deep attention. Distribution has been a question that could be mostly ignored because, eventually, with technical progress, everyone would be rich. As we have seen, the original roots of the property system, globally and nationally, lie in power, violence and theft. But a theft justified by the chrematistic religion of economics as “improvement” from which everyone would benefit from… eventually… if they survived.

Jim Ratcliffe, Ineos and the Empire of Trash

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Published on FEASTA on June 11, 2016

Discuss this article at the Economics Table inside the Diner



Brian Davey explores the decision of Ineos, one of the world’s largest chemical companies, to promote fracking. The Ineos majority shareholder, Jim Ratcliffe, claims fracking could regenerate northern Britain despite evidence that the strategy is “a mirage that would lead to a mountain of debt and a mountain of garbage”.

Base Fortune, now I see, that in thy wheel
There is a point, to which when men aspire,
They tumble headlong down..

– Christopher Marlowe – from his play “Edward the Second”

IneosRatcliffeV2 cw edits_html_m5444f6d8Let’s start with the BIG STORY. Any PR or advertising agency will tell their clients that they have to have a story. The story can amuse, stimulate or inspire. The aim of this is to emotionally engage with the public or a market segment. They are invited to identify with the story, to become a part of it, to share in the action.

For example, here’s a story in just two letters and two words: “BP” meaning “Beyond Petroleum”. It explained how that company saw its future. OK, the story went, we are a fossil fuel company – but we are trying to move in the right direction – so fill up at a BP station before we’ve got the solar panels in place. OK?

Then, in 2010, disaster struck the Beyond Petroleum story in the Gulf of Mexico. A vast marine eco-system was trashed by a leaking well drilled from a BP Platform called “Deepwater Horizon”. A huge media storm focused on the shoddy reality behind the slogan “Beyond Petroleum”. BP was now perceived as a reckless and aggressive company that played little heed to safety or environment. In this media storm Tony Hayward, the Chief Executive of BP, made it worse for the company and himself. Someone leaked that in a private meeting he had asked his fellow executives: “What the hell did we do to deserve this?”. He was thereafter repeatedly asked how could he ask such a stupid question.

PR, if based on a flawed story, or on a lie, has a way of turning against those who attempt to make use of it.

The Ineos Saga

So what is the inspiring story for Ineos – the company 2/3 owned by the Beverley Grammar School Boy made good, long distant runner, team leader, international business magnate Jim Ratcliffe? Many people will remember Ratcliffe and his company as the one that moved its HQ to Switzerland to avoid paying UK taxes so it has struggled with its PR – however, nowadays Ratcliffe and Ineos want to be associated with another story and this article is about having a critical look at it. This is the narrative in which, by supporting the fracking of shale, Britain will gain a cheap new energy source that will revive manufacturing, leading to the regeneration of large parts of the north of England and of Scotland. 

By combining £600 million of Ineos money with the fracking expertise that they have bought in from the USA, and adding these together with the ” understanding of extractive industries” that communities in the North of England possess after coal mining… great things can happen. Jobs. Industry. Who knows, perhaps Ineos might pay some tax too…
But what’s really going to happen? Every good story has high stakes and an uncertain ending. There’s no dramatic tension otherwise. As the Hero embarks on the great journey there are challenges and doubts over whether they will succeed. To add tension the tests and challenges, the rewards and risks get bigger. In the Ineos saga it started as an innovating entrepreneur creating a new company. The name of Ineos is derived from Greek words conveying innovation and newness. Now, many years later, the story is whether the company will go bust – or whether it will become the saviour of Northern Britain’s industrial legacy.

There are different kinds of stories. In one kind the apparent hero is found wanting. Some stories are about hubris – about people who overestimate themselves, discover limits that they did not know existed, find themselves in a spot of difficulty, perhaps gambling to escape their predicament – and it all ends unhappily. To be a really good tragedy the chief protagonist does not just make practical and strategic mistakes. The story ends badly because ethical or moral tests are failed too.

The Ineos Gamble

In the Ineos story there is no certainty about the ending either. The desire to frack in the UK is an expensive gamble and it could go wrong in lots of different ways. Here are a few of those ways:

There could be insufficient gas for fracking to be commercially viable. In Poland in 2011 there was an idea that there was about to be a shale gas bonanza. 75 exploratory wells were sunk. 25 were fracked and although gas was found the flow was between 10% and 33% of what would be needed for commercial viability. So the gas exploration companies lost interest. If that were to happen to Ineos in the UK it would be a disaster for them in this country. Instead of Ineos making northern Britain Great Again it could easily go bust like it nearly did shortly after the financial crisis of 2008. Here’s why…

Ineos is a business empire constructed out of the pieces that other petro-chemical companies didn’t want – where the pieces for the construction were paid for by borrowing. That’s why their company propaganda is not only full of stuff about their technological prowess but about their skill at handling their finances . They are proud of their ability to juggle with their debt arrangements. It’s also why they are so desperate to get cheap UK feedstock and cheap energy for their chemical operations at Grangemouth and Runcorn. Cheap gas in the USA extracted by fracking has been useful to them in their operations there. They are trying to survive in a global market and want cheap gas, extracted on the spot, for their UK operations too. They are prepared to gamble money on the hope that this is possible. If they don’t get that cheap gas they not only lose that investment, they are stuck with the problem of how to find cheap energy and ethane as North Sea gas fields decline.

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There is massive overcapacity in the chemicals industry as the chart shows. When there is overcapacity in an industry there is fierce competition. Each company tries to ensure that it is their business rivals that suffer from idle production facilities while they succeed in keeping busy. A glut of products pushes down prices – which, in this case, means a glut of plastics. The name of the game is not expansion – it is survival – so that other companies go out of business and not the one that you are running.

While Ineos are telling us about regeneration, expansion and jobs, in their private business discussions they will probably be talking about what how to deal with an ageing population and stagnant markets for generic products, about how to deal with competitors in other countries producing the same products but with lower energy costs, about Chinese competition and about what to do in a recession. They will also be discussing what to do if, as looks increasingly likely, there is another credit crunch like 2007-2008. Ineos are still dependent on debt finance.

To repeat, Ineos want to frack to reduce their costs of production because they are in a corner. Ratcliffe may want to believe himself the regenerator of the North of Britain – that he will win through against the odds, that he will prove wrong any people who doubted him along the way – but some chemical companies are likely to go out of business. The way it’s going one of them could be his.

Where the Ineos fantasy comes from

The international chemicals industry in general and plastics in particular are in a hyper competitive state. In a hyper competitive state Ineos are disadvantaged by energy prices in Europe that are higher than elsewhere in the world. In 2011 Ineos testified to the House of Commons Environmental Audit Committee that there was a problem with a high carbon price in the European Union’s Emissions Trading Scheme. It would make British and European companies that use a lot of energy uncompetitive with places like China. There was a danger, they argued, that their competitors outside Europe would win. The emissions would occur in China rather than Britain and Europe and they might be driven out of business. We have an important role in “the Green Economy” they claimed, pointing at their development of technological processes to develop fuel and electricity from municipal waste. However there had to be a way of squaring the circle on European climate policy – because all that was happening was that European policy was driving high energy (= high carbon) industrial operations like chemicals and plastics to China where the greenhouse gas emissions of production were even higher than in Britain and Europe. The chemicals, plastics and industrial products were being exported back to Europe and companies like Ineos were losing markets.

That was in 2011 and the story moved on. Ineos companies in the USA were finding their costs lowered by using gas from fracking and Ratcliffe and his management team were looking to import that gas into the UK by building ships especially designed to carry liquified gas. But this was only an imperfect interim solution for the Ineos UK operations. While cheap in America the gas is not so cheap for Ineos over here after paying the toll for liquifying it and the costs of transporting it. A far better solution for the needs of Ineos seemed to be for the UK to develop its own fracking industry seemed to be.. The North Sea as the major UK source for natural gas is in decline but the big idea now was that onshore gas from fracking would not only revive the fortunes of Ineos but of all energy intensive economic sectors. That has been the apparent epiphany – under the leadership of Ratcliffe a grandiose vision of industrial regeneration was born. However, to be missionaries for shale and fracking, you have to brush the problems under a carpet.

According to Ratcliffe, quoted in the Guardian, “a lot of the opposition to fracking is based on hearsay and rumour”. In fact there are now nearly 700 academic articles published between 2009 and the end of 2015 about fracking, public health and the environment. The overwhelming majority of the studies that contain field data show potential or actual contamination of water or air. 31 of the studies assess the dangers to public health – 26 of them indicate public health hazards, elevated risks or adverse health outcomes.

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Decision making under conditions of uncertainty – making up your mind and then sticking to it

It is difficult to be sure without knowing him a lot better how Ratcliffe came to say and apparently believe that opposition to fracking is based on hearsay. It brings to mind the comment of BP’s Tony Hayward mentioned earlier. It raises interesting questions about how aware and self aware are many “captains of industry”. One of the most interesting sides of economic theory which overlaps with human psychology is decision making under conditions of uncertainty. That’s decision making where you know some things, where you think you know some things and where there are a lot of things that you don’t know. Daniel Kahneman, who won what is called the Nobel Prize for Economics, has particularly focused on this. For Kahneman a crucial feature of good decision making is not to overestimate the importance and significance of what you think that you know – while at the same time underestimating what you don’t know. This is very difficult because people construct their interpretation of the world from what they know. Indeed they may feel particularly proud of their specialist and professional knowledge. They may feel that it gives them unique and special insights, have an expertise that other people lack that makes them THE industry experts on a particular matter. In the anti fracking struggle one sees this all the time from some rather arrogant engineers and geologists who feel that they are uniquely qualified to opine on fracking (or indeed other topics too )– not acknowledging that environmental scientists, public health professionals, economists, climate scientists and many others each have professional and scientific angles on the matter that is also worthy of consideration and respect. In Germany there is even a special name for this kind of person – a Fachidiot – where Fach means a specialist subject discipline and idiot means idiot – a greek word for someone who focused exclusively on their private interests and did not take an interest in wider politics and public affairs.

Of course everyone tends to underestimate what they don’t know in favour of what they do know (or think they know). It is not just a problem among frackademics. In his book, Thinking Fast and Slow, Kahneman labels the common fallacy that underpins most of how we interpret and decide about things – he calls it the WYSIATI fallacy – What You See Is All There Is. It is related to “optimism bias” and “planning fallacy” – assuming things will work as we plan them, on time and on budget, because of not realising that there will always be unknown unknowns to drive us off track. This “optimism bias” is a feature too of expectations for health and safety and environmental consequences. Other people call this Murphy’s Law. If things can go wrong then eventually they will. And they sure as hell will for Ineos too.

Of course what we see is not all there is – the German philosopher Heidegger describes our experience of being in the world with the metaphor of being in a clearing in a forest – what we see are what’s in the clearing but beyond that things remain unknown to us. (“Die Lichtung des Seins” in German – where Lichtung means clearing and Sein means ‘being’. It is helpful perhaps to notice that in German the word Lichtung contains the word Licht – light, that which illuminates). Others speak of a “cloud of unknowing”. In different circumstances politicians and military types speak of the “fog of war”. To get a proper sense of where we are really, it helps to realise that we are lost. Yet there are some kinds of people who have to give the appearance of knowing just where they are, and exactly what they are doing all the time, otherwise these wizards would freak the markets and scare away the people who follow their leadership and lend them money. Then there is a certain kind of stupid economist who claims that, while each individual only has a partial view, all market actors together have the complete view and thus hypothesize the existence of perfect markets. And in perfect markets clever entrepreneurs like Jim Ratcliffe collectively make the right decisions. Everything is for the best in the best of all possible worlds in this world view – earlier mocked by Voltaire’s in the philosophy of his character Dr Pangloss. The problem with this view is that when you give people the idea that they could be infallible then, after a run of luck, they start overesstimating themselves, ignore their critics and set themselves and other people up for some disastrous mistakes. This is the hubris story by the way – the ones that the leaders of BP set themselves up for.

Groupthink – why corporate leaders and politicans ignore evidence once they have made up their minds

Managers spend their time trying to work out how to develop their business, and how to survive in a competitive market, are of course aware that they must devote some of their attention to health and safety and environmental issues. What a shame then that devoting attention to such matters competes for their time with many other things to be resolved and strategies that need to be worked on. Of course business strategies must embrace as much information as possible – but once you are embarked on a strategy, and above all, once you have made the public declarations and started to raise and commit millions in investment, then you cannot easily change your mind. You cannot keep chopping and changing. This is even more the case if you have borrowed a lot of money to advance your strategy. For your own psychological peace of mind too it will not do to start doubting decisions that involve a lot of money, a lot of creditors. These decisions also underpin your relationships with your management team who are pursuing the same plan, not to mention your relationships with the rest of the workforce.

Academics, activists can chop and change and try to get to the bottom of things – but for the captains of industry there are powerful pressures to retain their focus even if real life reveals a host of issues that they did not know at first – indeed that could not know at first. That’s why, as they plough ahead with their business strategies, the temptation must sometimes be to pull down blinkers. The more that you have at stake and already committed the greater the psychological pressure to refuse to acknowledge inconvenient new information that is telling you a mistake has been made.

In this regard one of the psychological insights of Kahneman is that decision makers who are trapped start gambling. When all options seembad the attempt to escape seems to justify taking great risks that would otherwise not be taken. In current circumstances Ineos operations in Europe are trapped by high energy and feedstock costs and the shale gas “solution” to their problems is a big commitment of resources that is a gamble to try to break themselves free and restore their ability to compete internationally. The relevant insight from this is that they are likely to want to play this all the way through, despite the low chances of success because there are no other options. In this situation, their willingness of accepting any new information about health and environment risks to anyone else might be reduced.

The ability to sustain gambles like this will be buttressed when supported by a wider network of interests. A vested interest coalition is involved too. The larger group has also refused to review its earlier decisions and to admit that they were wrong too or to take in new information. The prospect of losing credibility and making a humiliating U turn is very offputting. Politicians, many engineering and geologist academics, as well as specialist officials often have long standing collegiate relationships. It is not surprising that this wider circle are still trotting out the message from the Royal Society and Royal Academy of Engineering. Ineos PR use the Royal Academy and RAE’s report as well as a very partial report by Public Health England on the limited topic of “fracking emissions”. However these were written very early and before most of the peer reviewed academic articles about public health, environmental and climate concerns started flooding out of other departments of the universities. The later studies have not matched up with the earlier group think that geologists and engineers had said about safety. However these earlier reports by specialist academics writing partly out of their subject areas have given the cover thatis still cited as evidence for the faith that holds the frackers together. These reports still “prove” safety and they are clearly too complacent. They are still too focused on what geologists assume might be the problems – deep underground, underplaying a host of problems on the surface, issues of scale and wider gas field development, in addition to a long standing problem of well integrity. This has made it necessary for anti fracking campaigners to fight an arrogant group think that is now very dangerous.

It is thus interesting to compare what is happening with what happened earlier in the organisation that embraced the empty rhetoric of “Beyond Petroleum” under the leadership of CEO John Browne and then of Tony Hayward. According to Johan Sachs

“As John Browne rose to the zenith of his global esteem, groupthink descended upon BP’s core leadership team like a thick fog. Red flags about safety concerns flew everywhere in the form of external and internal investigations and even massive government fines. Browne and his men, including Hawyard, optimistically responded with superficial fixes, believing their measures could address deeper safety issues while keeping oil flowing at maximum rates. Whistleblowers tried desperately to get executives to maintain safety equipment and top talent resigned in protest when they did. When Hayward took over, the leadership team spent countless hours discussing plans to reorient its approach to safety even as they increased the riskiness of the projects that they undertook. From the inside, it all looked perfectly normal.” (Johan Sachs “Winning the Story Wars” Harvard Business Review Press, 2012 p221 )

Cohesive groups with a strong leader will often ignore or punish dissenting opinions. They can do it too because they have the backing of government and are given cover by frackademics and are able to play fast and loose with reality. In fact in the media and in their PR they create a fantasy world for everyone else that suits them. There are psychological mechanisms available to keep the deeper and threatening reality out of the centre of their consciousness. Freud called it “Verdraengung” which means pushing an idea or truth away, not bringing it into the centre of conscioussness to get an appropriate amount of attention. (Verdraengung is usually wrongly translated as “repressing” in psychoanalytical literature). Yet when Ratcliffe tells a major national newspaper that the opposition to fracking is based on hearsay there is probably some dim level at which he is uneasily aware that what he is saying can be challenged. Is he unaware that the US company with which he has a 15 year contract for the supply shale gas, Range Resource, has been accused of causing a number of environmental incidents? It seems implausible that he does not know that Range Resource have paid nearly $15 million in pollution fines in recent years. This included an $8.9 million fine which was the biggest ever for a shale gas drilling related environmental violation in Pennsylvania as well as a $4.15 million fine for violations at 6 waste water impoundments[1].

So what is going on in the mind of Ratcliffe when he claims that opposition to fracking is based on hearsay? Is he not aware that one reason that more information and evidence against fracking does not exist are the gagging orders imposed on victims after financial settlements? In August 2013 this included a gagging order on 2 children by his partner Range Resource – the children were banned from talking about fracking for the rest of their lives.

Is Ratcliffe really unaware of these things? He ought to be sensitised to issues of children’s health because in Ohio in 2009 his company was obliged to share a $1.3 million fine for multiple violations at the Ineos chemical facility at Addyston. It was a case associated with hazardous air pollutants like acrylontrile, butadiene and styrene and an elementary school had to be relocated because of the air pollution risk to school children.

Instrumentalising children’s health to pursue a corporate agenda that will damage children’s health

At the time of writing Ratcliffe is sponsoring long distance running by schoolchildren in a Go Run for Fun initiative. Ratcliffe is a keen long distance runner but if he and his company were keen on public health they would not be accusing opponents of fracking of basing themselves on hearsay. The dangers are well documented. It is not rumour or hearsay that 40 of 46 peer reviewed scientific studies between 2009 and 2015 show actual or potential negative effects to air quality. It is unlikely to help children’s health to run through an Ineos gasfield.

The effect of fracking derived air pollution on the health of pregnant women and their babies should give him cause for concern too. In June of 2015 a peer reviewed University of Pittsburgh study linked fracking to low birthweight in three heavily drilled Pennsylvania counties. The more wells, and the closer the wells to where the pregnant mother lived, the greater the risk. The study did not investigate mechanisms but is authors thought air pollution was the likely route of exposure – as evidenced by another West Pennsylvania study.[2]

So what kind of person and company is it that appears to champion the health of children while simultaneously making partnerships with companies that gag children and while promoting an industry that is a threat to their health? What kind of corporate ethics are we dealing with that denies the evidence, claims opposition is based on hearsay and spends a vast amount on corporate propaganda?

Plastic Pollution – ethical bankrupcy is worse than financial bankrupcy

It is not only that if Ineos goes ahead it will impose a host of public health and environmental risks on local communities and on the climate system. It is also that the products that they intend to make with the ethane and methane that they want to extract would be disastrous too. For example they want to make plastic with it. As they are in the plastic business they must know that plastic is not the innocent stuff that most people unwittingly think of it as being.

Far worse than bankruptcy would be to go down in history as having produced a stream of toxins that play a significant role in destroying the global ecological system. It is one of the boasts of Ineos that it is the third largest player among the global chemicals companies. This being does it not have the third largest responsibility for what is currently an unfolding ecological catastrophe whose source is oil and gas and the many chemicals and plastics made from them? True, the Ineos Bio subsidiary is developing ways of recycling municipal waste into fuel and electricity. That can be testified in their defence. However alone the stream of plastics produced by Ineos is an ecological catastrophe.

There are plenty of people who will remember a world where plastics had far fewer uses. In the living memory of millions of people it was not routinely used for wrapping food; for containers; for beverage and mineral water bottles; for shopping and other bags; for lids; for disposable cups, plates, knives forks and spoons; for straws, stirrers, balloons, party inflatables. Somehow humanity managed to survive day to day with old fashioned glass bottles, ceramics and objects that were designed to be used over and again, rather than to be thrown away. Somehow people did not notice what they were missing before technology progressed, plastic was mass produced and business empires like Ineos were developed in order produce a stream of trash. As if climate change were not bad enough we now have in plastic pollution another slowly evolving disaster. That’s because plastic may break up in the environment into smaller and smaller bits, but it mostly does not break down, it does not bio-degrade. Without major logistical efforts backed by tight environmental standards it has accumulated in the environment in larger quantities and in smaller and smaller pieces. According to one recent estimate there are more than 5 trillion plastic pieces weighing over 250,000 tons afloat at sea.

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This is not hearsay either.

The amount of plastic waste entering the oceans from land each year exceeds 4.8 million tons (Mt), and the figure may be as high as 12.7 Mt . This is nearly one to three orders of magnitude greater than the reported mass of plastic in high-concentration ocean gyres which are slowly turning marine collection points for garbage the size of western europe. The amount is growing rapidly – with the potential to be 250 Mt by 2025.

Impacts by plastic debris on more than 660 species have been documented, including from entanglement and ingestion. Species impacted range from the smallest of zooplankton to the largest whales, including fish destined to the seafood market. Plastics can concentrate toxic chemicals from seawater up to 1 million fold. Ingestion of these contaminated plastic particles may deliver these chemicals to the ocean animals which eat them, potentially resulting in negative effects on their health and survival.

The problem is not just in the oceans – but also the atmosphere. It was recently reported in a House of Commons Committee how, when plastics go through sewerage treatment works, much of the smaller pieces end in sludge that goes onto fields. When it dries out it is swept up by the windinto the atmosphere. At that point we breathe it in – in addition to eating it in foodstuffs like fish.

This prompts the question: how do Ineos and Ratcliffe see progress? How is this ecological disaster compatible with it? He wants economic growth and more of this. When he offers the regeneration of the north of Britain if only he can get another fix of cheap energy and more ethane feedstock what he is effectively wanting is to hang onto a share of the plastic market. He wants to be a boss of a corporation that wants to remain a global player in the production of this torrent of production. But is it not also a torrent of poisonous garbage?
Of course, we cannot know what is in the mind of a man like this, or the minds of his managers and partners. We can only speculate that he will be thinking mainly in market and money terms. “The market for plastic” is economics-think, in which a product and a value stream is what is being thought about. The focus is on how to make a product that people want and thus to be fully entitled to make money as a reward for entreprenerial zeal and risking money. In the perception of the corporate bosses all this stuff is packaging and containers and the plastic is created to be embedded in products that people are prepared to pay for – or to package these products. This is what usually gets their attention. This is what happens between their ears. This is the thing that they know about. The products have monetary value, people are prepared to pay, and this is their business.

But how much do such captains of industry think about what happens when the stuff that they produce is thrown away? Yes, there is clearly thought given to the topic of what money can be made out of processing garbage. We know this because of the Ineos development of waste to energy and electricity technologies. However, what about the rest of the stream of garbage? Is this not also their problem? It is certainly a problem for everyone else, and it is a problem that will not now go away for hundreds of years. In these hundreds of years those who live long enough to learn about what happened to their world will know may become aware of the name of Mr Ratcliffe as one of the people who organised the huge stream of plastic. One of the business moguls whose products led to the eco-cide of the oceans.

Championing the ‘Green Economy’ – to head off the real solutions that would make your company lose

A lot of people don’t notice – but when corporations respond to environmental problems with which they are associated they often fund or support “solutions” which direct the action for dealing with it away from themselves. Someone else become the people or institutions that are responsible and these others have to deal with it. “Beyond Petroleum”, BP, gives another example of this. When it was clear that something was going to have to be done about climate change and carbon emissions then companies like BP under Lord Browne moved to co-opt the policy design process. For a long time, the major fossil fuel suppliers had resisted any restraint on emissions but, at the end of the 1990s, some of them changed tack.

BP first experimented with an internal emissions trading scheme which was started in 1999. In 2002, the BP model was scaled up with the support of the UK government’s Department of the Environment and 34 other voluntarily participating companies. This UK scheme, in turn, became a model for the European Union’s Emissions Trading Scheme. So far so predictable. But what was the defining characteristic of the BP scheme? If it had been a serious attempt to throttle back the supply and burning of fossil fuels it would have attempted to keep the carbon in the ground. It would have been directed at the suppliers themselves. Instead the scheme was designed around the demand. It was focused on uses and users of fossil fuels and those who bought them. It very successfully batted the solutions away from the fossil companies who were originating the problem. When the European Emissions Trading Scheme was introduced it was large companies that bought and used fossil fuels and emitted CO2 during their operations, that were expected to buy permits. It was not the companies producing the coal, oil and gas who were expected to buy permits to sell fossil fuels in the first place. If it had been the latter it could have covered all fossil fuel based emissions. But that was something that neither BP nor the other suppliers wanted to see. They designed the scheme and wrecked it.

Now Ineos Bio is seeking to find a market by reusing plastics and waste. But the Ineos group is not seeking to restrain its production in the first place. From a profit making point of view an ideal solution is to produce a stream of trash and then make money by the need to deal with part of that same trash stream. Of course, if Ineos were promoting a system where no new plastics were allowed to be produced but only existing plastics could be re-used to make them then it would be commendable. But that’s not what they are proposing and recycling alone, without further measures to throttle the flow, at source will not adequately cope with the pollution stream. Like all corporate juggernauts Ineos wants to “grow” its markets and its production. That’s why the solution to plastic pollution may indeed involve some recyling and re-use but it has to be set in the context of reducing production. As one policy group have argued:

“The reality is that the only sound strategies to stop plastic pollution are ones that prevent it in the first place. To use the bathtub analogy, in order to stop the tub from over-flowing, we can either try to make the tub drain faster, or we can just shut off the tap.”

That means a raft of policies – and a good place to start is to fight the further development of shale gas in the UK in order to stop it being used as feedstock for plastics and as a fuel source.

In conclusion – the myth of cheap energy and revived industrialism

Let’s return to the story that Jim Ratcliffe would like to believe and wants us to believe. This is that cheap energy will return northern Britain to its industrial heritage. It will resurrect former mining communities and other industries too. It will help us develop the new industries of the future based on science – like plastics.

To many people this will seem a curiously antiquated view of the scientific and industrial future – it only rings true if you stubbornly refuse to look at a lot of evidence that the world has long ago evolved in another direction. Is Ratcliffe still thinking like an ambitious 1960s Grammar School boy who has just completed his science A levels? Does he still believe in “the white heat of the technological revolution”, which is how Harold Wilson, the Labour Prime Minister of the 1960s and early 1970s hyped the times he lived in?
Unfortunately there is now a mountain of evidence that fracking is deeply destructive to health and the environment. Ratcliffe wants to see that as “hearsay”.

There is also a mountain of evidence that says that the products of his company and of the petro-chemical industry in general, products like plastics, are a profound threat and must be dramatically reduced at source. Ratcliffe sees this situation when there’s a business opportunity in it for him – by selling the ability to recycling some of the tide of trash as a recycled energy source. But is he aware that much more is needed to cope with it?

There is now too a mountain of evidence that the trend to rising extraction costs for fossil fuels is inevitable. Fracking is a more expensive way of extracting oil and gas than from conventional wells because you have to do a lot more engineering activity to release it from an impervious geological strata. It is true that there is currently a very low oil and gas price because a debt laden economy, an economy still dominated by ageing baby boomers, cannot afford to pay for expensive oil and gas or for the products made from this expensively produced oil and gas. This contradiction is creating yawning holes in the profit and loss accounts and balance sheets of the oil and gas companies, as well as in the accounts of the financiers that have lent to them. Yet Ratcliffe, like the political elite schooled at Eton and Oxford, appears to be unable to see the writing on the wall.

At the core of the Ratcliffe message is the idea of fracking giving us cheap energy. But fracking does not give cheap energy. It is not cheap to the people whose health it damages. It is not financially cheap either. That’s why Ratcliffe is selling what appears to be a fantasy. Sure, unconventional gas extracted in the UK would not carry the same size of burden of having to pay for the military and security expenses, as well as the lavish corruption, of a variety of oil despotisms – the places where some conventional sources of oil and gas are extracted. But the extraction costs of fracked unconventional wells are higher than extraction costs for conventional wells. That’s why, to break even, unconventionally sourced gas has to be sold at a higher price too. For the Ineos gamble to pay off it is necessary that shale in the UK would be as cheap as in the very best Pennsylvania sweet spots. There is no guarantee for this and it is likely to be wishful thinking.

There is, in fact, a Catch 22 in the heart of the Ineos regeneration fairy tale. The economic system has been built on cheap energy but it is now faced with ever rising costs of energy extraction which require higher prices for the energy companies to break even. In order to pay their rising energy bills people and companies have to economise somewhere else. They struggle to service their debts too. Rising energy prices crash the economy. They destabilise the finance sector. This puts a ceiling on how high energy prices can be and the break even point for the oil and gas companies is above that ceiling.

Fracking has not solved this dilemma and neither will Ratcliffe or Ineos. There is virtually nowhere in the world where fracking has ever made a profit over the longer term. If it comes off at all the cheap energy that Ratcliffe champions would lead, in a just a few years, to an indebted and then bankrupt exploration and production sector. The fracking road show has kept going in the USA for as long as it has only because central banks have kept interest rates down to virtually zero. There have been few other opportunities to invest in the production economy and, as the financial papers describe it, those who “hunt for yield” have gambled their money by investing in shale. Now that mountain of debt accumulated by the fracking industry can no longer be serviced and repaid, Ponzi-style, with more borrowing. It’s the end of the road.

This is a Catch 22 Ratcliffe and the other petrochemical companies will not be able to solve. The cheap energy and re-industrialisation idea that Ratcliffe is promoting is a mirage, a fantasy, that would lead to a mountain of debt and a mountain of garbage. It will inevitably collapse. We can already see the signs of a global deflationary crisis as a result of crippling debts and sagging markets. The direction of the future is solving the problem of how to make do with less. Instead of growing the economy will have to mature – or it will collapse. You do people a favour not by producing more of anything, and certainly not more plastic wastes to poison the environment – but by setting up institutions to help them save energy, materials and money. Such institutions will help people to share more, make do, mend and get their satisfactions and pleasures without the aid of ecocidal empires built on trash.


1. See a long list:……

2. Shaina, L. S., Brink, L. L, Larkin, J.D., Sadovsky, Y, Goldstein, B.C., Pitt, B.R., & Talbott, E.O. (2015).
Perinatal outcomes and unconventional natural gas operations in southwest Pennsylvania. PLoS One,10,
e0126425. doi:10.1371/journal.pone.0126425278 and
Preidt, R. (2015, June 3). ‘Fracking’ linked to low birth weight babies, WebMD. Retrieved from

Featured image: Commencing industrialisation – a 19th century town in Lancashire. Source: by, CC BY 4.0,

Edit, June 18 2016: it has been brought to our attention that Jim Ratcliffe went to Beverley Grammar School rather than Manchester Grammar School, as the original text stated. The text has been edited accordingly.
























Consumerism, Collective Psychopathology, Waste

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Published on FEASTA on May 29, 2016

Discuss this article at the Psychology Table inside the Diner

This chapter about the power elite on display and the economics of Thorsten Veblen covers topics like conspicuous consumption and the consumer society, branding and the manufacture of wants. The role of advertisers is explored as well as the way that attention grabbing has become an economic sector that affects the quality of life radically and for the worse.

The Power Elite on Display – the economics of Thorsten Veblen

In 1899 the maverick economist Thorsten Veblen portrayed the power elite of his day in The Theory of the Leisure Class. What he described were extrinsic motivations at work. Success for the business elite was demonstrated through conspicuous consumption, by which he meant display to achieve social status, power and authority:

This growth of punctilious discrimination as to qualitative excellence in eating, drinking, etc. presently affects not only the manner of life, but also the training and intellectual activity of the gentleman of leisure. He is no longer simply the successful, aggressive male — the man of strength, resource, and intrepidity. In order to avoid stultification he must also cultivate his tastes, for it now becomes incumbent on him to discriminate with some nicety between the noble and the ignoble in consumable goods. He becomes a connoisseur in creditable viands of various degrees of merit, in manly beverages and trinkets, in seemly apparel and architecture, in weapons, games, dancers, and the narcotics.

This cultivation of aesthetic faculty requires time and application, and the demands made upon the gentleman in this direction therefore tend to change his life of leisure into a more or less arduous application to the business of learning how to live a life of ostensible leisure in a becoming way. Closely related to the requirement that the gentleman must consume freely and of the right kind of goods, there is the requirement that he must know how to consume them in a seemly manner. His life of leisure must be conducted in due form. Hence arise good manners in the way pointed out in an earlier chapter. High-bred manners and ways of living are items of conformity to the norm of conspicuous leisure and conspicuous consumption.
(Veblen, 1899)

Plus ca change… Contemporary narcissism of this type is visible in the “How to Spend it” weekend supplements of the London Financial Times. Students of narcissism will find the column “Diary of a Somebody” particularly educational. This celebrates people with the message that you will not be a nobody if you have lots of money to spend and are thus able to hang out with other wealthy (and therefore beautiful) people.

If we are to believe economic theory, these “somebodies” are “maximising their utility”. However the word “utility” is an empty concept – it is not information rich in the sense that it does not explain why people of this sort get utility by showing off and profiling themselves in front of all the nobodies. This was a point that Thorsten Veblen made in an essay written in 1909. The idea of marginal utility simply does not tell you very much that can help us understand people like this. (Veblen, The Limitations of Marginal Utility, 1909)

In his essay, Veblen argued that marginal utility theory did have an element of truth in its explanation of people’s actions but that “It deals with this conduct only in so far as it may be construed in rationalistic, teleological terms of calculation and choice.” In their analysis the marginal utility theorists took the institutional framework in which people’s calculations and choices for granted, when it was the very emergence and evolution of the institutional framework, the context, that was the interesting thing. Marginal utility theorists like J. B. Clark were shutting down their exploration and theorisation at the very point at which it scientific inquiry should begin.

It shuts off the inquiry at the point where the modern scientific interest sets in. The institutions in question are no doubt good for their purpose as institutions, but they are not good as premises for a scientific inquiry into the nature, origin, growth, and effects of these institutions and of the mutations which they undergo and which they bring to pass in the community’s scheme of life. (Veblen, 1909)

Marginal utility theory is no help at all if we want to understand where the institutions and practices of a consumer society have come from, how and why they have come into existence and what their consequences are. On the other hand, Veblen’s ideas are helpful, at least as a starting point. This is because he had resources that most economists, in his own time and subsequently, did not and still do not have. Firstly, he was an outsider and no sycophant so was able to view the behaviour of rich and powerful people (and of the poor when they were emulating them) from a standpoint that was uncompromised. Secondly, he had read sufficiently in other social scientific fields. He resorted to sociology, anthropology and psychology without artificially hiving off the subject matter of “economics”. That made him able to recognise that although a market society had its own features that shaped the form in which various social practices took place, many of the features of that society were not fundamentally different from what occurred in supposedly “more primitive” societies. Thus:

Presents and feasts had probably another origin than that of naïve ostentation, but they acquired their utility for this purpose very early, and they have retained that character to the present; so that their utility in this respect has now long been the substantial ground on which these usages rest. Costly entertainments, such as the potlatch or the ball, are peculiarly adapted to serve this end. The competitor with whom the entertainer wishes to institute a comparison is, by this method, made to serve as a means to the end. He consumes vicariously for his host at the same time that he is a witness to the consumption of that excess of good things which his host is unable to dispose of singlehanded, and he is also made to witness his host’s facility in etiquette. (Veblen, The Theory of the Leisure Class, 1899)

Conspicuous consumption and the consumer society

Thus it is that Veblen’s theory of “conspicuous leisure” and of “conspicuous consumption”, whose purpose is to make a status display, provide us with a possible starting point for our understanding. It gives us ideas with which we can start to make sense of the motivations and behaviours apparently underpinning a lot of the actions in a “consumer society”. In a consumer society not only the rich but other strata of society are using consumption goods to profile and project themselves. As in the diary of a somebody, jewels, hair, make-up, i Pad, purple couture dresses and the names in one’s impressive choice of stylists or the beautiful people in one’s guest collection are all a means to an extrinsic end.

To a large extent the end in question is to make a status display – status conscious people are pursuing the acquisition of what are called “positional goods”. These goods signal one’s position in society and depend on relative income. It is the fact that the rich can afford them and others cannot that is on display. If and when poorer people were able to afford a Ferrari then a Ferrari would lose its value for the rich people who first bought them. In that case rich people would pursue another status display. ( Kallis G 2014)

In his article Kallis argues that “..positional consumption is not a personal vice. It is a structural social phenomena to which individuals conform to remain part of the mainstream…..” For Kallis there are risks for those who try to exit the rat race especially if they are from less privileged backgrounds in which case there will be loss of respectability and economic insecurity. What’s more “the system can co-opt its dissidents: even back to the land and “eco-life style choices” by privileged educated and artistical groups can become types of new positional goods”.

Perhaps – but is this too “either-or”? Explaining peoples’ actions through ‘structures’ can be revealing but after a point too much emphasis on the structures within which people act implies this explanation for people’s actions: “The system made me do it”. It removes the idea that individuals make choices. It can tend to the view that regards people as automatons without freedom. As Erich Fromm pointed out, and other psychologists have since confirmed, a market society creates particular personality types, marketing personalities – people who put great store on marketing themselves. However, individuals can come to recognise the features of their own habitual responses – that’s a point of therapy after all. Individuals can and do change and not only in the context of broader “system changes” – one of the tasks at hand is to identify when and under what conditions.

The Helbig society

It must be admitted however that things have moved on from Veblen’s day to make marketing far more prominent – particularly the all-pervasive presence of “brands” which work together with advertising to create what I describe as a “Helbig Society”. That is, a society of technicolour appearance and empty narratives designed to manipulate.

To explain: the term “Potemkin Village” is sometimes used to describe a manufactured appearance, designed to impress, which is a deceptive facade. The phrase refers to a tour of the Crimea and the Ukraine in 1787 by Catherine II of Russia in which it was alleged that her former lover, Prince Grigory Aleksandrovich Potemkin, created pasteboard villages along the bank of the Dnieper River which the monarch was travelling down, with the aim of making an illusory show of prosperity. Recent historical research has shown that this story was largely a slander created by the Saxon envoy to Catherine’s court, Georg von Helbig. The villages therefore ought, with more justice, to be called Helbig Villages.

If the Potemkin Villages of 1787 were a slander, Helbig Villages have existed at other times in history. A number of places designed to deceive are mentioned in the Wikipedia description of “Potemkin Villages”. For example, the Nazi Theresienstadt concentration camp called “the Paradise Ghetto” in World War II was designed as a concentration camp that could be shown to the Red Cross. Apparently attractive, but deceptive and ultimately lethal, with high death rates from malnutrition and contagious diseases, it ultimately served as a way-station to Auschwitz. As is well known, people who arrived at Concentration Camps were sometimes greeted by orchestras playing classical music. An analogous management tool is used today in slaughterhouses. Animals are calmed after a stressful journey before they are put through a process that stimulates their curiosity about what is going to happen just before they are sedated and then slaughtered. If they got upset, the stress hormones would spoil the meat. Or, to put it the other way around – the meat tastes nice to the customers because the animals have been deceived.

Less gruesome, and more like the Helbig Village example, was the PR job done on the town of Enniskillen in Northern Ireland for the G8 Summit in June 2013. Large photographs were put up in the windows of closed shops in the town so as to give the appearance of thriving businesses for visitors driving past them. This has now become a common practice for property companies to cover messy re- development or dereliction. (Wikipedia, Potemkin Village, 2013)


Deception is ubiquitous in a modern market economy. We might even call a consumer society a Helbig Society. To get a proper sense of the gulf between the illusion and the reality in this kind of economic system we have to delve into the evolution of advertising and of “brands”. In her book No Logo Naomi Klein shows how the economy has moved a long way from when it was about people selling products to other people in markets that were regulated to ensure that prices were fair. By the end of the 19th century and the early 20th century, adverts were about selling innovations. New kinds of products like cars, telephones and electric lights which producers needed to convince people to use. The advertisements were, as Klein explains, rather like product news bulletins. This was to change as a process began of building an image around a particular brand name. Generic goods like sugar, flour, soap and cereal had hitherto been scooped out of barrels by local shopkeepers. These now had names
bestowed on them, particularly with a view to evoking a feeling of folksiness and familiarity. Henceforth it was the product brand names – artificial images of imagined personalities – that interfaced between consumer and producer rather than the shopkeeper – Uncle Ben, Dr Brown, the Quaker Oats man…

There were those in the industry who understood that advertising wasn’t just scientific; it was also spiritual. Brands could conjure a feeling – think of Aunt Jemima’s comforting presence – but not only that, entire corporations could themselves embody a meaning of their own. In the early twenties legendary adman Bruce Barton turned General Motors into a metaphor for the American family, “something, personal, warm and human”, while GE was not so much the name of the faceless General Electric Company as, in Barton’s words, “the initials of a friend”. In 1923 Barton said the role of advertising was to help corporations find their soul. The son of a preacher, he drew on his religious upbringing for uplifting messages: “I like to think of advertising as something big, something splendid, something which goes deep down into an institution and gets hold of the soul of it… Institutions have souls, just as men and nations have souls.” he told GM president Pierre du Pont. General Motors ads began to tell stories about the people who drove its cars – the preacher, the pharmacist or the country doctor who, thanks to his trusty GM, arrived “at the bedside of a dying child” just in time “to bring it back to life”. (Klein, 2000, pp. 6-7)

As advertisers evolved their techniques of psychological manipulation, they delved into psychology, anthropology and culture while coming to see themselves as the “philosopher kings” of commercial culture. “It took a while for people managing companies to finally get it. They were not in business to produce stuff, they were in business to sell brands. This meant continuous and increasingly intrusive advertising – the problem being, as one senior ad executive explained, that consumers “are like roaches – you spray them and they get immune after a while”.’ (Klein, 2000, p. 9)

The manufacture of wants – the role of advertisers

One of the few economists to take this on board was John Kenneth Galbraith, whose book The Affluent Society, first published in 1958, argued that, for much of the modern economy, production preceded wants rather than, as economic theory assumes, the other way round.

The even more direct link between production and wants is provided by the institution of modern advertising and salesmanship. These cannot be reconciled with the notion of independently determined desires, for their central function is to create desires – to bring into being wants that previously did not exist. A broad empirical relationship exists between what is spent on the production of consumer goods and what is spent on synthesizing the desires for it. (Galbraith, 2001, p. 34)

Perhaps economists rarely venture into these fields because we can see that advertising, marketing and public relations employ methodologies which are all about shaping preferences and the “methodological individualists” are not interested in how preferences are formed. They are content to assume that people have given preferences and then act rationally on the basis of these preferences in the face of prices and a certain amount of purchasing power. To find out what happens in aggregate the economists simply add together the individual market behaviours.

Such an approach obviously devotes no attention to the way that people influence each other. The very existence of a fashion industry shows that, as well as the efforts that marketing departments work to create collective consumption trends. These marketing approaches actively foster disutility because they “work” by creating dissatisfaction. They seek to put in people’s minds the idea that their intended purchasers cannot live without some new product. They are also intended to be disruptive of relationships because they are based on fostering rival status display.

Sales departments, advertisers and public relations companies do not take people’s preferences as given. They are a big part of the economy and mostly, economists ignore them. The sales departments and the marketers do not use ideas from “utility theory”. They take ideas from group psychological dynamics, crowd psychology and approaches from psychotherapy theory which explores the interplay between human emotion and cognition. We need to do this too in order to understand advertising and PR on its own terms – and hence its usefulness to the people who pay for it, and its ability to influence the political process.

Well-being and marketing

Money is made when people “have to have” products and stay on the treadmill of work, spending and debt. Society functions by advertisers ensuring that people feel uncomfortable, inadequate and bereft unless they have the latest product designed for their peer group which is also an identifiable market segment. That said, if buying a product were to make you satisfied for too long you would not keep on buying it…

So how do the advertisers do this? Often it is by an astute manipulation which forms motivations through the use of stories, rituals, ceremonies and culture. The moral of the stories told by the advertisers is that the audience is lacking in something that possession of the brand will give them. For example, to be attractive, to be in tune with the American grand narrative of rugged individualism, personified by the cowboy, one needs to buy Marlboro cigarettes and participate in the social ritual of smoking them. In contrast with identity in an indigenous society, where people have totem identification with a creature, or a plant, based on deep knowledge and loyalty to part of the natural world, individuals in the consumer society define themselves partly through brand loyalty. The consumer “totems” are the designer labels that fashionistas wear – a sign of their discrimination, knowledge and affluence as consumers.

The implications for psychological well-being are profound. The message of the advertising stories is to convey how products will make us a better and more desirable person – mother, father and lover – which means that we are not good enough as we are now. The insights of Sigmund Freud that people think in emotionally associative ways (cf his therapeutic technique of free association) is hijacked to design the advertising message. Metaphorical allusion portrayed in vivid colour in high definition and on the biggest possible screens attempt to create emotional links between brands and desirable episodes or scenes in personal life stories. Fizzy drinks with sugar in them, are associated with adolescent sexuality in blue jeans. Getting the boy, getting the girl, getting the job, your forthcoming celebrity status, the perfect mum, dependable dad, the happy family – all are associated with a product – perfume or gravy granules… Messages of this type bombard us all with attention-grabbing messages from street billboards, newspapers, magazines, television and cinema commercials, on the internet, on the radio. Over and over again, visual and narrative connections are made between sex, glamour, wealth, power, speed, desirability, happy families, and shiny new products magnified and flashing in front of our eyes, dynamically displayed with clever graphical effects.

Attention grabbing as economic sector

Correspondingly a large part of the economy – its institutions, its technical infrastructure – exists solely for the purpose of grabbing our attention. When we are awake we can only focus on so much during a 24 hour day, a third of which we are asleep and a lot of which we are drilled to attend to employment tasks. At other times advertising agencies, market research companies, public relations companies, publishing companies, theatres, cinemas, television companies, newspapers, internet organisations are all trying to ensure that at every available opportunity, every available surface, every available screen, every available shop window, every available stage, and every broadcast, carries something about their product and/or their message. This is not to mention 9 out of every 10 phone calls on telephone landlines when a complete stranger assumes that they have the right to interrupt whatever you are doing with what they call a “courtesy call” – despite “a service” run by the marketing industry which is supposed to prevent this happening if you don’t want it. (Franck, 1998)

Naturally the more power specific people and specific institutions have, the more this “economy of attention” is skewed in their favour. Rather as the passage of light is bent by powerful gravitational fields, so the “information space” used by a society is buckled to massively magnify the concerns and priorities of the super-rich elite and their hangers on. At the same time rendering virtually invisible and unintelligible the suffering, concerns and needs of the large part of the world’s population. In the information space these people are driven to the edges and almost literally do become “nobodies”.

The nobodies are then only noticed in the crowded messages being transmitted in the information space when they get in the way of elite agendas and/or require expenditure and management because they have become a problem. (For example, because “attention seeking” turns into what is characterised as a mental health issue – mania and depression being opposite emotional reactions to experiencing oneself to be a nobody and being unable to cope with that – excitement at the idea that one is about to become a star as a result of one’s brilliant work and thus, attain celebrity status oscillating with depression as one remains in the wilderness).

These are all properly a subject for economics because there are multiple senses in which the attention seeking assault from the marketing sector impacts negatively on well-being now and in the future. We have already mentioned the way that this vast pantomime is about making its audience feel inadequate. But more than this – there is another economic consequence that Veblen realised over a hundred years ago. A part of his argument was that what the Leisure Class consumed as status displays – and also the way in which many members of the poor tried to emulate them – led to a waste of resources. It is stuff that never needed to be produced and is a waste of the time of the producers, a waste of material and natural resources and a waste of energy. And what Veblen could not have known is that the huge pile of garbage which is still being produced today drains depleting fossil fuel and material resources while exhausting carbon and other kinds of sinks. For no good cause other than the need of the “celebrity class” to be noticed, the planet appears to be locked on the road to destruction.

The Facade

Another way of expressing this is to describe “the economy” as operating with a vast deceptive facade.

I have used the example of Potemkin/Helbig Villages to describe the resulting culture that we live in – a way in which mass psychology is manipulated by a culture of appearances that hide an underlying reality that is much more shoddy. We look at a mass of separate products on the supermarket shelves and see a bright dazzling multi-colour array of images and styles – on the boxes and tins. Yet when it comes down to it, most of them are produced by just ten different business groups. The variety is an illusion – at least when it comes to who owns and produces them. The conservative reassuring man on the Quaker oats packet is owned by Pepsico. Yves Sant Laurent, Diesel (that celebration of fossil fuel) and Giorgio Armani are owned by Nestle, Uncle Ben’s Rice is owned by Mars. (See attached graphic) (Bradford, 2012)
Source: convergence alimentaire, 2012, with permission. Click to access original image

There are many other things hidden by the facade. Why else is such a high proportion of world trade and world finance routed through tax havens and secrecy jurisdiction? Behind the gloss, the cute sentimental products on sale at your local supermarket, there are factories producing the stuff staffed by child and slave labour in unsafe conditions; there are oil spills and air and water contamination; there are greenhouse gas emissions; there is military intimidation of workers and there are mountains and mountains of toxic throw away trash.

In her book Klein describes how the American NBC network aired an investigation into Mattell and Disney just days before Christmas 1996. “With the help of hidden cameras, the reporter showed that children in Indonesia and China were working in virtual slavery “so that children in America can put frilly dresses on America’s favourite doll”. (Klein, 2000, p. 326)

Many other examples can be given between the appearance and the brutal reality. However, if you mock and take on these cuddly friendly folksy corporations you see what they are really like. Like the MacDonald Corporation who tried to ruin activists who took them on with critical leaflets which led to a long running court action in the UK.

Although there is nothing at all glossy and high definition about economics, although it is often tedious and dull, economics is a part of this facade. Too often the descriptions of what is happening stay on the surface. The descriptions of markets are about products not about brands. The fact that branding and advertising are about creating product differentiation makes nonsense of the default assumption in the textbooks that most production is from competitive firms producing homogenous products. Textbooks are still describing a world in which shopkeepers scoop flour, sugar and cereals out of a barrel. Into this barrel the shopkeepers have put the identical products of a large number of producers all of whom were obliged to sell at a going market price. But of course if you go to buy some kind of computer, or a car, or an appliance of some kind there are a bewildering variety of non-comparable products and a barrage of adverts as to the advantages of each. While price plays a role in the choice of a product it is often a minor one.

As regards the huge growth and economic importance of marketing, the textbook writers have little to say. Certainly they do not appear to recognise that the rise and rise of the marketing industry demonstrates that the chief constraints on what companies supply are not production conditions, leading to rising internal costs as companies try to expand. Rather the constraints on firms are external market limits if they try to sell more of their brand beyond their market niche. Pierro Sraffa understood this from as early as the 1920s and wrote a paper to explain his alternative viewpoint. This will be described later. Suffice it to say here, that although Sraffa, and a few others, like Joan Robinson, tried to keep up to date, most economists did not. You don’t update the Holy Scriptures – scriptures are true for all time.

Unconventional Gas Field Development & Optimism Bias

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Published on FEASTA on March 29, 2016

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Unconventional gas field development and optimism bias: submission by Brian Davey to the UK Environment Agency

Brian Davey recently made a submission on fracking to the UK Environment Agency, in response to the UK-based company IGas’s application to drill two wells in North Nottinghamshire as part of its shale gas exploration efforts. You can access the documents which Brian is responding to here.

In his submission, Brian stresses that there is a need for both anticipatory and retrospective experience-based risk assessments, and also argues that there are specific risks in this case that need to be addressed. In conclusion, he writes, “there are now over 550+ peer reviewed academic studies relating unconventional gas field development to public health and the environment – there is an ethical and scientific obligation to connect risk assessment and risk management in order to make it consistent with the findings of this literature.”

Read the submission



Shale Euphoria

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Published on FEASTA on March 23, 2016

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The Boom and Bust of Sub Prime Oil and Natural Gas

Those whom the gods wish to destroy they first send mad


The aim of this article is to show that the shale industry, whether extracting oil or gas, has never been financially sustainable. All around the world it has consistently disappointed profit expectations. Even though it has produced considerable quantities of oil and gas, and enough to influence oil and gas prices, the industry has mostly been unprofitable and has only been able to continue by running up more and more debt. How could this be? It seems paradoxical and defies ordinary economic logic. The answer is to be found in the way that the shale gas sector has been funded. It is part of a bubble economy inflated by monetary policy that has kept down interest rates. This has made investors “hunt for yield”. These investors believed that they had found a paying investment in shale companies – but they were really proving that they were susceptible to wishful thinking, vulnerable to hype and highly unethical practices that enabled Wall Street and other bankers to do very nicely. Those who invested in fracking are going to lose a lot of money.

A Global Picture of disappointed expectations

Around the world big expectations for fracking have not been realised. One example is Argentina where shale oil reserves were thought to rival those in the USA. It is a country where there has been local opposition while central government pushed the industry in alliance with multinational companies and its own company YPC. However profitability has been elusive. To have any hope of profitability shale development has to be done at scale to rapidly bring down costs enough to make a profit. That requires a lot of capital and companies will not make this capital available without being sure that they are going to make a lot of money – but they cannot be sure until they have done tests for up to two years.

“It’s a sort of chicken and egg dilemma. Without profits, the estimated $20 billion a year needed to develop the play won’t come. And without this investment in drilling tens of thousands of wells, the economies of scale won’t be reached on the fields to cut costs.

“A reason not to rush into production — only 400 wells have been drilled — is that wells must be tested for up to two years to gauge the potential of the shale rock before a company will commit billions of dollars. This is especially the case now that low global oil prices have slimmed investment budgets for frontier plays.” (Charles Newbury, “Struggles to cut cost delay oil production in Argentina” Platts Oilgram News. August 17th 2015 at )

The situation in Argentina highlights the underlying problem for the economics of shale oil and shale gas. Unconventional oil and gas fields have much higher costs than conventional ones. Tapping “conventional” oil and gas from permeable geological strata is cheaper in that the oil and gas flows underground and can be pumped out with less engineering. In contrast an “unconventional gas field” has to release the gas from impermable rock and therefore needs up to 100 more wells for the same amount of gas (or oil). A field must achieve economies of scale to have any chance of making a profit. It needs more activity underground to fracture the rock and it needs more activity on the surface to facilitate that. That is why it is more dangerous to the environment and public health – and also why it is more financially expensive. It requires more ongoing capital equipment too. Without a high gas (or oil ) price all of these activities cannot be made profitable.

Looked at in this way “unconventional oil and gas” is not the magical answer for peak oil (or later for peak natural gas) that it might have once seemed to be. To be long term viable the fracking sector requires three things: favourable geology, high oil and gas prices and easy and cheap credit. All three have proven elusive, making for disappointing results in all of the locations around the world where it has been tried. Unconventional gas is struggling to get off the ground outside of the USA and Australia. And in the USA, where it started, although it managed to get the credit to pay for the capital expenditure there are now grave doubts that a mountain of credit will ever be paid pack.

But let’s look outside of the USA too. Take Europe for example. In 2011 the international oil and gas industry and the Polish government thought Poland was going to be a major source of shale gas. 75 exploratory wells were drilled up to 2015 and 25 were fracked. The amount of gas recovered was one tenth to one third of what was needed for the wells to be commercially viable. Besides retreating from Poland, the industry has pulled out of nascent shale drilling efforts in Romania, Lithuania and Denmark, usually citing disappointing yields.

In the UK and Ireland too fracking is still stuck at the pre-exploratory stage, largely because of the rapid and powerful development of a movement of opposition. Although not definitive, a moratorium in Scotland and a “presumption against” fracking by planners in Northern Ireland, are political set backs for the industry. Yet even if the public and political opposition was not there, there would be reasons to doubt that fracking is viable in the UK. The doubt starts with the geology. While the British Geological Survey has produced maps of shale layers, and while it has been suggested that the carbon content might be there, the data is lacking for other key parameters, for example for rock porosity. In addition the shale in the UK has more folds and faults when compared to US fields. This might to lead to more earthquakes which would damage the wells – plus leading to a potential failure to achieve the pressure needed for fracturing if fracking fluid leaks into small faults when pushed underground.

Oil and Gas Prices

Now there are further doubts because of low and falling oil and gas prices. Here the issues are a little different for oil compared to natural gas on the one hand and for the situation in the USA as compared to other producing zones in the world on the other. That said, what all exploration and production companies are facing, whether in oil or gas production or whether in the USA or elsewhere, is that prices that are too low. It is proving difficult or impossible for most producers to make a profit given the costs of extracting and distribution. That has been especially noticeable for shale gas. Let us however first look at oil prices.

During the crash of 2007-2008 global oil prices crashed from a high peak but then recovered again. Between November 2010 and September 2014 there were 47 months in which oil prices were over $90 a barrel. This period of high oil prices can be described as being broadly reflective of supply and demand. On the demand side the global economy recovered, to a large degree stimulated by a massive credit-fuelled residential and infrastructure boom in China. This pumped up demand. On the supply side production from Libya and Iran was kept out of the world market because of the turmoil in Libya and sanctions against Iran. Thus, while there was some production increase from Saudi Arabia and, eventually, even more from Iraq, these increases were largely cancelled by Iran and Libya. Demand exceeded supply and prices remained high but the situation began to change in the autumn of 2014.

On the demand side the Chinese economy stalled while on the supply side production increased. OPEC as a whole was not the main source of that increasing production, and nor was Russia – the main source of increasing oil production was the boom in US shale oil. For reasons to be explored, production from the USA continued to soar even though prices fell and after a price rally early in 2015 prices continued to fall into 2016.

A similar downward trend has occurred around the world in natural gas prices – though in the USA they have been lower far longer – and certainly too low to allow for profitability.

In regard to gas the issues are somewhat different from oil because the market for natural gas is less globally networked. Natural gas markets are based on global regions and different gas prices in different parts of the world. Thus there is a north american gas market, a european gas market and a market in the far east. There are multiple long distance gas pipelines that are important economically and geopolitically. Wars and rivalries are fought over pipeline routes – this is a component in the Syrian conflict. However natural gas could not be transported so easily between continents – until recently, because now there is an infrastructure for sea transported liquified natural gas under development (LNG). Sea transported LNG begins to change things because it makes the market for natural gas more globally competitive.

At a risk of simplifying a varied picture natural gas prices in various areas have been stable at a low level or drifting downwards over the last two years and insufficient for profitability in a gas fracking sector. In both the USA and Europe natural gas prices are a half of what they were in 2014. In the USA this has been because of overproduction of gas, conventional and unconventional, with conventional production declining and being replaced and overtaken by unconventional production – as of late in 2015 however shale gas production too began to fall. For years production has been unprofitable in all but the best areas and in decline. Now it is in decline generally.

In Europe production decline because of depleting conventional gas fields has not prevented a fall in the gas price because demand has been falling too and this is likely to remain the case. Thus a recent report published by the Natural Gas Programme of the Oxford Institute for Energy Studies, concludes that European gas demand will not recover its 2010 level until about 2025. The decline in demand has been due to warmer winters but also due to low demand because of the low growth in manufacturing which has shifted to Asia, because of low population growth and because of energy saving measures too. At the time of writing it is being suggested that the competitive threat from the development of an LNG infrastructure will encourage Gazprom to change its pricing strategy to try to fight off future competition from sea transported supplies. In summary, it is highly likely that the gas price in Europe will remain low for a long time. If so, this completely undermines any remaining case for fracking for natural gas in europe, and particularly Britain.

At current gas prices all the exploration and production companies active in the UK and Ireland would struggle to make a profit. There are 4 studies of extraction costs of natural gas by fracking in the UK – by Ernst and Young, Bloomberg, Oxford Institute of Energy Studies and Centrica. All have maximum and minimum extraction costs. Current gas prices per therm are less than the minimum extraction cost in the lowest study. So for the industry to continue at all it has to assume that gas prices will rise in the future.

shale costs

Low Gas price vs high extraction costs: Zachery Davis Boren, Greenpeace Energy Desk; August 2015

So what is the future for oil and gas prices? Of course the future is inherently uncertain – a President Trump might provoke any number of wars making America great again – it is difficult to see how Muslims could be banned from entry into the USA without that affecting oil and gas imports from Muslim countries. Or again heightened conflict between Iran and Saudi Arabia might escalate with massive consequences, and not just for the oil and gas price. In these and other conceivable situations, the more chaos the less companies will want to invest anyway. Whether prices are high, or low, if there is too much turmoil conditions will not favour new investment. But leaving aside extreme geo-political scenarios will prices go up or will they go down? If oil and gas prices rise will this be sufficiently and for long enough for unconventional gas to be developed sustainably in the narrow financial or business sense?

The rising price scenario

It is important to grasp the idea that a rising prices scenario is only credible in conditions where a proportion of the industry has been driven out of the business – which is the hope of the Saudi oil industry. What the Saudis would like to see is not only the US fracking companies driven to bankruptcy but the banks that fund them with badly burned fingers and unwilling to finance the industry any more. That said the Saudis too have limited pockets. Their current aggressive foreign policy has to be funded from somewhere and it is conceivable that they could lose the capacity to push the anti-shale agenda through to the bitter end.

If the oil price does bounce back the beneficiaries would be the survivors. There is a view then that the current low prices will eventually lead, not only to falling production in the future but to bankruptcies and capital expenditure cut backs both in the conventional and unconventional sectors. It would speed the decline of oil fields like those in the North Sea where investment is now being slashed. With declining supply, inventories will be sold off, the market will move back into balance…. and then further the other way – so that eventually demand again exceeds supply. Higher prices, possibly spiking, will encourage new investment and the fracking companies will surge back at the other side of the crisis.

What must however be assumed for this to happen is that at some point “growth will resume” because, over the last two hundred years, it always has. If growth resumes the demand for energy will revive in order to feed it – making more material production and consumption possible. Some economists argue that one factor encouraging a revival in demand ought to be the low energy prices themselves. Higher energy prices act as a drag on the economy so low energy prices should do the opposite – i.e. stimulate it. In a recent speech the chair of the US Federal Reserve, Janet Yellen, said that falling energy prices had, on average put an extra $1,000 in the pockets of each US citizen. It is assumed that this would encourage extra spending and thus extra income.

The falling or stagnant prices scenario

An alternative view is more sceptical about the revival of the global economy and of demand because of the high level of debt. In an economy where indebtness is low, falling energy prices probably would act as a stimulus for energy consumers. But will there be any or enough stimulus where the debt to income ratio is high? In an indebted economy windfall gains from reduced energy prices are likely to be partly used to pay off debts rather than being spent. A further issue is what will happen because of the way in which the finance sector has made itself vulnerable? It has channelled substantial credit to the energy sector – to exploration and development companies that now have difficulties paying this credit off? It certainly will not help in finding investment money to get fracking off the ground in the UK and elsewhere if it all ends in tears in the USA.

In the pessimistic scenario if the economy does not revive then there can be some scepticism that energy prices will revive too. This is the scenario in which deflationary conditions continue and even deepen. On this view the global economy is entering a long period of stagnation, decline and chaos. Some economists are describing how growth has slowed using descriptive phrases like “secular stagnation”. The fate of the Japanese economy from the early 1990s onwards gives grounds for comparison and concern. After a quarter of a century Japan has not escaped prolonged recessionary conditions. Because the global economy is highly indebted central banks have driven down interest rates to zero and now even below that. This has led to a bubble in asset markets but it has done little to spur generalised economic growth.

There could be a vicious circle here – without demand arising in a sustained growth process pushing up energy prices the profitability of the unconventional sector will never be sufficient to make future investment in that sector pay. In these circumstances future oil and gas production will not rise. Production will fall in the USA, especially as more of the identified sweet spots in the best plays are exhausted. In textbook supply and demand theory falling supply should eventually lead, ceteris paribus, to a rise in prices that justifies more investment and therefore more production. However “ceteris paribus” (other things remaining unchanged) does not apply in a stagnating or a declining economy. A declining economy is not one where private economic actors invest money in the hope of a future return because the necessary confidence and conviction about the future is not there. Purchasing power is hoarded, purchases are deferred where possible, debts are paid off where possible. These actions tend to intensify the deflation. If this is what happens, and it seems likely, it will make the problems of the shale gas sector even worse.

The Fracking Companies and the Finance Sector

Before the current difficulties Wall Street made a fortune in fees arranging debt finance for the US shale sector. Investors who were “looking for yield” instead of the ultra low interest rates payable on government debt thought the way to find that yield was to pile their money into junk finance to fund the frackers. Despite the economic reality Wall Street encouraged the misinvestment. Now the wall of energy sector junk finance repayable in the future is huge. The further forward one goes the higher it is. How much of this debt will ever be repaid? And what will happen to those who lent it if it is not? Given what has already been said the long run ability of the sector to repay its debt seems highly questionable. How did it come to this?

debt wall


For several years prior to the crash of 2007-2008 the finance sector in the USA were knowingly giving loans to people with no income, no jobs and no assets. The people who organised this were doing so because they were earning fees on each loan arranged. What did they care about the virtual certainty that the loans would never be paid back? The crash was the inevitable result – the consequence of an ethical catastrophe. The banks had packaged the loans up into mortgage backed securities and sold them on so that someone else other than the originating bank carried the risk. Ratings agencies played their role in this crooked system and got fees rating securities that others called “toxic trash” as AAA. Meanwhile derivates contracts against defaults on these rotten securities were also sold even though it was not possible to pay up when the defaults happened – without being bailed out by the monetary authorities, as happened with AIG.

The Shale Bubble – toxic water, toxic air and toxic finance too

For several years after 2007-2008 shale was the next big money spinner – and the next ethical catastrophe for Wall Street. Just as it was blindingly obvious for years that sub prime would crash, but it was a nice money spinner at the time, so Wall Street has made a lot of money pumping up the shale bubble. All the evidence about health and environment costs have been ignored and the information about them suppressed. The information about the economics was ignored too. Of course, someone has to lose eventually but “while the music has played” there has been plenty of money for all sorts of players – petroleum engineers and geologists, PR companies, corrupt politicians, the companies supplying the pipelines, rigs and fracking gear. They had their snouts in the money trough and in many cases abandoned their ethics and their critical faculties while they were feeding.

Nor were investors looking closely enough at where they were going or at what they were funding. Even before the current price crash, many US fracking companies, just like those in Argentina and Poland, were struggling to make real profits yet vast quantities of money were channelled to them. Honest and astute observers who could see that the shale boom was a Wall Street induced bubble were ignored. One example was a report written by Deborah Rogers in early 2013 in which she drew attention to the difference between the reality and the message put out by the PR machine.

According to Rogers “Industry admits that 80% of shale wells ‘can easily be uneconomic.’ Massive write-downs have recently occurred which call into question the financial viability of shale assets and possibly even shale companies. In one case, assets were written off for more than 50% of the purchase price within a matter of months……publicly traded oil and gas companies have essentially two sets of economics. There is what may be called field economics, which addresses the basic day to day operations of the company and what is actually occurring out in the field with regard to well costs, production history, etc.; the other set is Wall Street or “Street” economics. This entails keeping a company attractive to financial analysts and investors so that the share price moves up and access to the capital markets is assured. “Street” economics has more to do with the frenzy we have seen in shales than does actual well performance in the field. With the help of Wall Street analysts acting as primary proponents for shale gas and oil, the markets were frothed into a frenzy. Boom cycles have the inherent characteristic of optimism. If left unchecked, such optimism can metamorphose into a mania such as we saw several years ago in the lead up to the mortgage crisis. (Deborah Rogers, “Shale and Wall Street” Energy Policy Forum 2013

Long before the price slide beginning late in 2014 the much hyped boom was not what it seemed. Roger’s article shows many parallels between the crazy and unethical excesses of Wall Street prior to the 2007 crash and what has been happening in the shale boom. As had happened with sub prime mortgages which were bundled up to become part of mortgage backed securities and then sold on – new kinds of financial assets were invented and sold to allow the unwary to invest their money in order as to “get a part of the action” and participate in the shale bonanza too. One bank instrumental in all of this was Barclay’s Capital, working together with a company called Chesapeake Energy. To help Chesapeake the Barclay’s financial wizards invented a structure called a Volumetric Production Payment (VPP). Rogers quotes a finance industry magazine, Risk, from March 2012.

“The main challenges in putting together the Chesapeake VPP deal were getting the structure right and guiding the rating agencies and institutional investors—who did not necessarily have deep familiarity with the energy business—through the complexities of natural gas production.”

The resulting financial assets were highly complex, off balance sheet, and as Barclay’s admitted the rating agencies had to be “guided” so that they could understand the complexities of the deal. (So much for the competence and independence of the resulting “rating”. ).

Production taking precedence over profitability (and over economic rationality)

The result was that current profitability took second place to an industry PR narrative about what was supposedly going to happen in the future as the shale companies grew and grew. Prior to the crash of 2007 bank employees were under pressure and being incentivised by bonuses to make as many loans as possible – even though many loans were unsound. Now the fracking company managers were being incentivised to produce as much product as possible even though they were losing money. The measure of the future dream was production growth rather than what it ought to have been – profitable production growth. The latter depended on whether that production growth was actually covering costs of production and it was not. It should be stressed again that this was happening before the current price slide. For example an analyst Arthur Berman looked at the financial figures for Exploration and Development Companies representing 40% of the US shale industry for 2013 and 2014 and found them to be powerfully in the negative. There was a $14 billion negative cash flow in 2014. (


Nevertheless the good news headlines about the production growth kept the share prices rising and the managers were on bonuses to make that production growth happen. Apart from the sceptics and the communities whose environments and health were under attack, the industry, the government, some naïve academics and Wall Street, all played their part in pumping up the dramatic narrative of the resurgent American Oil and Gas Dream. Eventually the USA would rival Saudi Arabia and more…becoming great again no doubt. As a more recent article in the Wall Street Journal explained:

“Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.

It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” (Ryan Dezember, Nicole Friedman and Erin Aillworth. “Key Formula for Executives Pay: Drill Baby Drill”

The Euphoric Economy at Work – how to rip off manic investors

All of this raises the question of how, with profitability so low, this reckless show has managed to stay on the road for so long and still continues. A cynical answer would be to say that the function of Wall Street is to connect the greedy and stupid with people and institutions without scruples who will spend their money for them. For this to happen optimism must be generated at all times whether this optimism has any foundation or not. The study of bubbles is all about people who are able to swim in an ethical sewer oblivious to their environment. They are too “euphoric” or high on the prospect of making a lot of money to calmly calculate what is happening. Another word for this is mania. It helps to consider this as a period of collective madness like a mania – a period of collective excitement in which the capacity for ethical and other judgements are impaired.

In this collective insanity one can think of the money making calculations like this – if you buy the right to drill and are able to identify the geologically favourable “sweet spots” then at first the results are likely to be good. Instead of then drilling the less favourable locations and seeing your profits fall away you tell beautiful stories to another company with deep pockets enticed by the good news of the early success. So it is possible to sell the less favourable areas. Or maybe you sell the company, merging it with another. In this Wall Street (or the City of London no doubt) will come to your aid because it makes nice fees from mergers and acquisitions. The new owners then makes the loss. It is the buying company that then has to write down its balance sheet when it subsequently discovers that it was sold a mirage.

The stories about being duped are never told as loudly and plainly as the stories of the wonderful shining future that sell the fraud in the first place. That’s because managers do not like to speak loudly about their incompetence to avoid the embarrassment of admitting they were duped. It is usually possible to deny that it would have been possible for them to know what was happening and, after all, why should these managers care when it was other people’s money that they were losing? (The money of shareholders or bond holders).

But if the faith in the industry can be maintained then these kind of deals can at some time make the banksters and crooked production company bosses much more money than merely by drilling and fracking for shale gas or oil. Thus buying and selling drilling leases (bundled up together just like sub prime mortgages were) was a great money spinner for companies like Chesapeake. The greater the euphoria generated, the more money to be made. This is Deborah Rogers again:

“Aubrey McClendon, CEO of Chesapeake Energy, stated unequivocally in a financial analyst call in 2008: ‘I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 mcf.’”

Eight years later Aubrey McClendon was dead. He had been charged on a federal indictment of bid rigging from late 2007 to 2012 and drove his car at high speed into a bridge. There was a strong suspicion that he had killed himself.

The madness of shale goes on. Wall Street and the shale companies are still managing to play the same game of passing the risk parcel to the bigger fools who will take the loss. If people can be persuaded to buy into the companies just before they go bust then the smarter and bigger players can get out. At the time of writing (March 2016) there are suspicions that the banks are orchestrating a rise in the price of oil in order to help the shale companies raise capital which will enable them to pay off the banks while letting “the suckers” take the fall. This led one analyst to describe the glut, not just of oil, but of stupidity.

“Even the experts are stunned by this unprecedented glut in stupidity of managers of other people’s money: “Billions of dollars of dilutive equity continue to roll in with seemingly no end in sight,” Houston-based oil investment bank Tudor, Pickering, Holt & Co. said in a research note.” (

Ethical or Financial Bankruptcy – which is more fundamental?

It is common in economics to refer to markets becoming frothy at times like this. Commentators seek to find the fundamentals underlying the “froth” (perhaps better described as scum). But what are “the fundamentals” in this story? The really fundamental thing is not that this sector is financially bankrupt – it is that it is ethically bankrupt too. An ethically bankrupt sector is definitely not sustainable. Any economic sector that destroys the environment including the climate, assaults public health and then enlists government in a corrupting endeavour to write and use the regulations in such a way as to undermine the very possibility of resistance is corrupt to the core. An industry that destroys people’s health and environment and then settles in court on condition that people are bound to secrecy about what has happened to them, as is common practice in the USA, cannot be trusted to tell the truth. It does not surprise in the least therefore that the unethical business methods of this sector, as well as the unethical methods of its allies in finance, also rely on trickery and defrauding anyone stupid enough to invest their money in it.

What will happen in the USA will no doubt have a big impact for the future credibility of the fracking industry in the UK and elsewhere in the world. That story is not yet in its final chapter but what has happened in the USA is already a cautionary tale and we would be stupid to ignore it. Local authorities in the UK should be careful that they are not caught out picking up the environmental costs of a collapsing industry. It has already happened in the USA and Canada – the advantage of limited liability to an industry without ethics is that it enables it to pass the cost of clearing up to communities after bankruptcies.

“CBC News reported that falling gas and oil prices have prompted many smaller companies to abandon their operations in Alberta, Canada, leaving the provincial government to close down and dismantle their wells. In the past year alone, the number of orphaned wells in Alberta increased from 162 to 702. At the current rate of work,
deconstructing the inventory of wells abandoned just in the past year alone will be a 20-year task.” (Source: Johnson, T. (2015, May 11). Alberta sees huge spike in abandoned oil and gas wells. CBC News. )

In conclusion – a mountain of debt that will never be repaid?

People might ask, if the future of fracking is so much in doubt then why bother to build a movement of opposition to oppose it? The answer can be expressed by adapting a famous quote by John Maynard Keynes. In the original Keynes says “the market can remain irrational longer than you can remain solvent”. The market can also remain irrational long enough to do a lot of damage. What this article has barely done at all is refer to what are called, in economics-speak, the “external costs” of fracking – the damages to climate, to local environments and to public health. Nor has this article examined the claimed benefits to employment and to local economies which are usually grossly overstated. There is now plenty of evidence about these things. What I have tried to do instead is to show that even in the narrowest of meanings of “economic” fracking does not make sense. A lot of damage is being done and there will be little positive to show for it. The ability to continue this destructive path is due to the legacy of political influence of the fossil fuel lobby in government and in the finance sector. The legacy influence has been strong enough to ignore and crush the opposition despite the damage. In the USA it can be argued that the fracking boom has been an irrational, unethical and ultimately unprofitable attempt to extend the lifetime of fossil fuels in order to keep the oil and gas industry in work, aided and abetted by Wall Street. It is an industry trying to secure a future for an influential network of professional and business interests that should, in truth, be being wound down – including the engineers, the university departments of petroleum geology, the regulators to name a few. A mountain of debt has been accumulated to perpetuate the illusion that these people have a future in which they can go on much as before – a mountain of financial debt that will never be repaid.

Stupidity has a knack of getting its way – Albert Camus

Sources and further reading:

On geological uncertainties: Mason Inman “Can Fracking Power Europe?”, March 2016 at

Charles Newbury, “Struggles to cut cost delay oil production in Argentina” Platts Oilgram News. August 17th 2015 at

Low Gas price vs high extraction costs: Zachery Davis Boren, Greenpeace Energy Desk; August 2015

European natural gas supply and demand: and

Oil Majors as a source of investment capital /

Deborah Rogers, “Shale and Wall Street” Energy Policy Forum 2013)

Fragility of UK explorer’s finances:

Crisis in US Shale Sector:

Arthur Berman “The Miracle of Shale Gas and Tight Oil is Easy Money”

Ryan Dezember, Nicole Friedman and Erin Aillworth. “Key Formula for Executives Pay: Drill Baby Drill”

“Energy in the economy”: Brian Davey Credo. Economic Beliefs in a World in Crisis Feasta books 2015. Chapters 32 and 33.

The psycho-dynamics of the financial market

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Published on FEASTA on February 19,2016

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Mental health problems and debt finance are strongly linked. People in debt have a higher incidence of psychiatric problems, and there is a higher rate of psychiatric symptoms among the people working in the finance sector too. During a bubble, egos are pumped up with asset values – and, when the bubble bursts, reputational collapse occurs with corresponding psychological effects.

When we look at the financial markets from an emotional and mental health angle, we don’t find optimal equilibrium states and rational people adapting to them. Instead, we come across a large number of unhappy, dysfunctional and disorientated people. Let’s look first at the debtor – creditor relationship from a mental health point of view.

Mental Health and Debt

For a start, there is a striking correlation between mental ill health and debt – on both sides – lenders as well as borrowers. Among other things, it is now well documented that self-reported anxiety increases with the ratio of credit card debt to personal income; that the onset of mortgage debt has a negative impact on mental health on males; that of people receiving debt advice, a high proportion (62% in a UK study) reported that their debt led to stress, anxiety and depression which they are likely to consult their doctor about; that there is a relationship between debt and post natal depression; that debt is the strongest predictor of depression; that difficulties in repaying debts are strongly connected with suicidal ideation and self-harm; that debt is associated with feelings of shame, social embarrassment, a sense of personal failure, negative self-identities and is implicated in isolation, social exclusion and strained relationships. (Fitch, Chaplin, Trend, & Collard, 2007)

Now let is turn to look at the situation on the other side, among the people who lend money, or at least those who manage and direct the credit markets. Mental health problems can be severe in the heat of financial competition. Drugs and alcohol are commonplace on Wall Street.

In a study of 26 men ages 22 to 32, all prestigious Wall Street brokers, researchers at Florida’s Nova South-eastern University examined how work stress affects brokers” physical and mental health. Led by John Lewis, Ph.D., a psychology professor at NSU, the study found that a broker’s average workday was 10 to 12 hours long, and that those earning the most also slept the least. The participants rarely missed work, calling in sick an average of twice a year but suffering from the flu or a virus at least twice as often. And despite being wealthy, the brokers were unhappy. Thirty- eight percent met the criteria for subclinical major depression, while 23 percent were clinically
diagnosed with major depression—shocking, considering only 7 percent of men are currently depressed in the U.S., according to the National Institutes of Mental Health. (Gorrell, 2001 update 2009)

A few years ago, during the financial crisis of 2007-2008, New York newspapers revelled in stories about stressed-out traders reaching breaking point. One broker, Christopher Carter, was charged with assault for throwing a hedge fund manager, complete with an exercise bike, at a wall in an Upper East Side gym. The hedgie’s offence? He grunted and shouted, “You go, girl!” too loudly during a spin class.

In London, a hedge fund manager, Bertrand des Pallières, made news during the time of the financial crisis because he was so busy shorting stocks that he didn’t notice for three months that his £80,000 Maserati had been towed away.

Jim Cramer, a hedge fund manager turned television stock picker, told the New York Times that drugs tended to reinforce traders’ inability to spot a looming downturn: “Prozac and all those other drugs banish the ‘this is the end of the world’ thoughts. Which means you are not as anxious as you should be about an obvious downside.” (Clark, 2008)

During the panic, therapists reported that there was an epidemic of psychological illnesses in the finance sector, while some of the managers used some of the oldest of psychological strategies for coping – avoidance, denial, switching off mentally in the heat of the crisis. An example was James Cayne, chief executive officer of the Bear Stearns bank.

The German news magazine Der Spiegel described Cayne’s work style thus:

“Even in times of the greatest crisis the boss of investment bank Bear Stearns did not let himself be distracted from his hobbies. Last July, as one of his Hedge Funds broke down, the head of the board travelled undisturbed to a several day long bridge tournament in Nashville, Tennessee. While his troops fought for survival Cayne was not contactable. He had turned his mobile phone off. Its ring could have disturbed the many times American bridge champion.” (Die Bank Raeuber, 2008)” – translator author.

Even a cursory glance reveals therefore that, from the point of view of community mental health, the credit system is highly dysfunctional. Of course mental health workers meet desperately unhappy
people living absurd lives all the time. Meeting people trapped in belief systems that, from the outside, seem crazy goes with the job. Normally, to be unlucky enough to qualify for a mental illness diagnosis, the apparently strange belief system that you have, and your strange way of making sense of the world must be unique to you. It will be seen as part of your inability to communicate with others. Then a psychiatrist can damn you with a variety of diagnostic labels like “thought disorder” which are said to be the symptoms of something deeper.

Over the last couple of decades, it has become clear that a lot of these strange thoughts are actually interpretable with a bit of effort. Psychologists, therapists and counsellors who become good at this quickly note emotional response patterns in society at large – the common cultural assumptions that help form collective emotional responses made by whole groups of people. There is nothing new in this. Freud applied his ideas out of the consulting room in observations about the wider world and his ideas were picked up by the advertising industry in the manner already described.

Using what we know about group emotions, it seems to me that it ought to be possible, and would indeed be valuable, to integrate the knowledge of group psycho-dynamics into our understanding of the way that markets evolve, including financial markets.

As explained in the previous chapter, using borrowed money during a boom phase, as long as asset values continue to inflate, it is easy to make money using borrowed money. This is called leverage and the point about leverage on the way up is that it can get out of control. Betting that asset values will go up with borrowed money creates a further pressure pushing those values up even more in a self-fulfilling prophecy. Such self-fulfilling prophecies are common in mental health – confidence leads to success and builds confidence even more. However, where there are no limits to mood enhancement, it leads into mania – and that includes on the financial markets…

Egos get pumped up at the same time as assets values

In the circumstances of a leveraged boom it is not only asset values that get pumped up but egos. Ordinary mortals who, in other circumstances would see themselves as no more or less important than anyone else, suddenly become very rich and acquire the symbols of social success that are so important to “marketing characters”. It is, thus, not only bank balances that swell in size when bonuses are announced.

Trading rooms are fiercely competitive places and the action is fast and furious. In finance, just as in any other branch of life, the more one devotes one attention to the matter at hand, the better one will do. The broader and deeper one’s knowledge is, the more edge one will have over everyone else. However, this has some resemblance to addictive behaviour. In an addiction, everything and everyone takes second place to the addiction. The guru who understands the markets better than anyone else probably understands the other things in life less well – and certainly gives them lower priority. For the finance experts, it will probably seem self-evident, ultimately, that the way out of problems is to buy one’s way out. This will not make for happy relationships. (Kreitzman, 1999, p. 26)

Earlier in the book, I quoted the example of the currency trader whose marriage was wrecked because of the way that he tried to keep track of the 24 hour currency market and woke every 2 hours to keep track as markets on the other side of the world opened. This is the kind of thing that a manic person will do. The fact that other people in the financial markets are living in the same crazy way is likely to mean that it is not interpreted as mania, but it does not change its essential character. The euphoria of mania is like the excitement of a small child the day before its birthday. This child cannot sleep because the next day will bring a pile of presents, a party and lots of attention. The manic person cannot find a way to switch their feelings off and is constantly on an adrenalin high. Often enough, in these circumstances more and more commitments are taken on. What is missing is the idea of a personal limit to one’s practical and work capacities.

In the life of a person who is not wealthy, these practicalities and the urgent adrenalin-charged character of their relationships will eventually mean that they come unstuck. Making ever more commitments means that they over-reach. Complications are not foreseen. Other people do not play ball with grandiose designs. If one does too much one doesn’t have time to wash one’s clothes and do the washing up. Life, practicalities, projects and relationships fall apart as one goes past one’s limits.

A rich person may not have some of the complications of ordinary life which would floor a manic person. Their money can buy servants and, with enough wealth, sex (though not love) is no problem either. Many of the practical problems in life can be solved with money or a credit card – until the crash.

The whole history of the market economy tells us that a crash comes eventually. Euphoria impairs judgement. The overconfidence of rich and powerful people, because it cannot be held in check by the countervailing power of those who are not as strong economically or politically, nevertheless, reaches a point beyond which it cannot go further. As I once argued in a psychotherapy journal:

“The ancient Greeks already knew how to describe situations like this. This was a job for the Goddess Nemesis whose role it was to maintain equilibrium on earth “rebalancing” happiness from time to time. In fulfilment of her role, Nemesis had a tricky relationship with the goddess Tyche – who was irresponsible in handing out Luck and Fortune, indiscriminately heaping her horn of plenty, or depriving others of what they had. In particular Nemesis would wreak havoc on those favoured by Tyche if they failed to give proper dues to the gods, become too full of themselves, boasted of their abundant riches or refused to improve the lot of their fellow humans by sharing their luck.” (Davey, What Future?, 2007)

People who become too full of themselves eventually believe that they can get away with anything in the pursuit of their addiction. In the literature about the financial crisis of a few years ago we could read over and again that the banks did not trust each other. When trust breaks down, we have a very specific kind of psycho-dynamic occurring between people.

A Professor of Organisational Ethics at the Cass Business School, Roger Steare, undertook integrity tests on more than 700 financial services executives in several major firms and 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 these tests indicate that, as a group, they scored lower than average in honesty, loyalty and self-discipline. Steare compared traders to “mercenary hired guns”, who regularly switched firms to maximise earnings. (Hunt, 2008)

Reputational collapse

Behind the technical language of “liquidity”, is a language that distances us from the deeper reality.
The truth about the credit crunch was that it was a reputational collapse of the participants of an entire economic sector – the people running this sector overreached themselves. The really damaging thing has been that most of them have been able to get away with it because governments feel that they must bail them out. This means that the whole charade will happen again… and again… until society organises a fundamental root and branch reform of this sector.

The road that has brought humanity to this crazy point has been one where there have been, and still are, plenty of illusions. These are little different from the illusions that a manic person would create. Cassandras who try to express the folly of pushing beyond the limits are ignored.

In the case of the financial markets, because the manic process is a collective one, the illusions are repeatedly embodied in institutions and are dignified with words like “financial innovation”.

Rather as a mad person will split off the part of their personality that does not fit their cosy self-image, that is, the murderously angry and hateful self, so the financial institutions split off the financial junk that earns them fees making predatory loans to people who cannot afford to pay them back or are in other ways dubious ethically and financially. The splitting hives securities off balance sheets into “special purpose institutions”. Rather as the mad person will wishfully believe what they want to believe rather than hard realities, the banks have paid other organisations to give AAA ratings to the worthless pieces of paper that they issue so that everyone, including themselves, can believe that everything will be OK.

Such strategies have their parallels in mental mechanisms of avoidance – the pathologies unravelled by clinical psychology. But then, to use the terminology of Freudian analysis, the repressed truth, the reality that has been held at bay, returns. The worthless assets have to be taken back onto the books. Reality bursts through the illusion.

To conclude, it would be valuable to integrate into our theorisation of what happens in the course of the credit and other economic cycles and events, the emotional changes of the people involved as they act and live through these events. Very often, people live with their emotions but barely notice them. They have no language or concept systems to describe their emotional responses and we may describe them as emotionally illiterate. Not having reflected deeply on their own emotional responses and those of others, they may act in ways which are unconscious, lacking in self-awareness. As explored in other chapters, this kind of person lives through what the therapist Erich Fromm called a “marketing personality”.







Putting moral philosophy back into economics

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Published on FEASTA on January 22,2016

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In his Encyclical about the environment and climate change Pope Francis writes of the need to find other ways “to understand the economy and progress”. A worthy aim indeed – but to do this properly will require a challenge to the more powerful religion of the contemporary world – fundamentalist economics. This is a belief system that equates technological achievement with progress and it is a faith that is set to fail now that the economic system is crashing against ecological limits. Unfortunately the many crises that this is likely to produce will be seen as new opportunities for those sociopathic types of “rational economic man” who inhabit many senior positions in corporations (and government) who are quick to exploit the vulnerabilities of others.

In my recently published book Credo: Economics Beliefs in a World in Crisis I show that it is possible to go back hundreds of years and trace the rise of this quasi religion of economics as the world view of a particular kind of person – the business man with money to invest. When the problem facing humanity is described as “scarcity”, it follows that a sort of “salvation” is to be found in production increase. If production increase is achieved by entrepreneurs being prepared to risk their money investing in their businesses it follows that everything should be done to ensure that nothing gets in the way of these very important people pursuing their “self love” guided by markets. It seems obvious.

A branch of moral philosophy that went astray

But let us retrace our steps to consider what a lot of people are unaware of – economics was originally considered to be a branch of moral philosophy. The famous Adam Smith was a professor of moral philosophy. Thomas Malthus was the Reverend Thomas Malthus. The ideas underpinning mainstream micro-economics are those of a moral philosophy called utilitarianism worked out by Jeremy Bentham and then adapted by later thinkers. If we go back even earlier then we find that Saint Thomas Aquinas and St Augustine also thought and wrote about economics as a part of moral philosophy and partly derived their ideas from Aristotle.

Today if you read most of the textbooks of “Positive Economics” you will read in them a little homily that it is not the job of economists to describe the world as it should be but rather to describe it as it is. A distinction is made between facts and values – a distinction taken from the philosopher David Hume. Because of this little homily in the textbooks it looks as if all the moral philosophy has been taken out of the subject. All the neutral economist can do is to say that individuals have preferences – including ethical preferences – and these guide what people do. What people do is essentially to calculate what will maximise their sense of satisfaction and/or minimise their experience of pain in the light of their preferences. However it is not the job of the economist to pass ethical judgement on these preferences and these choices. The economist is there to describe what rational individuals do – which is to calculate how to maximise their individual level of satisfaction given the strength of their preferences, including their ethical preferences. In this regard the strength of people’s preferences, including their ethical ones, are indicated by how much they will pay for them, or how much they must be paid to relinquish them.

Racism as a ‘preference choice’

You can see this point of view at its most pronounced with economists like Gary Becker. For Becker racism is a preference choice about which people you want to live near or whom an employer might want to employ. Becker does not endorse or condemn he merely draws out the consequences.

However economics does not stop being a moral philosophy by this conceptual sleight of hand. Describing things as “preferences” does not stop them being moral choices – indeed describing them as ‘preferences’ reflects a particular point of view in moral philosophy. So economics never stopped being a moral philosophy – or an immoral philosophy – even if it is not recognised as such.

Example – external costs imposed on communities are (un)ethical choices

To illustrate what I mean take the idea of what economists call “externalities”. When a company takes decisions that affect the environment and the wider society negatively, which are called, in the jargon ‘external costs’ like pollution, then the owners and managers of that company are taking what are essentially ethical decisions. If they are damaging the community and/or the environment then that is an inherently ethical matter. Now you can argue that there will be circumstances where the ‘external costs’ are justified because they are outweighed by private benefits (or by external benefits). You can argue too that compensation can be paid to make up for any harms. However my point here is that the use of words like “externalities”, “costs” and “benefits” , as well as calculating them using money as a measure, are a particular way of thinking and dealing with ethical decisions.

These occur in situations where harms are done to some people (and species) while benefits accrue to others. In a market society ethical decisions are thought of as calculations in which economists claim a special expertise because they are supposed to know how to frame the data gathering exercise which leads to the calculations being made possible: the cost and benefit comparisons.

Now, for economists, this is the rational and only way to take decisions like this – and if people don’t think like this then they are not rational. Thus there have been experiments when a sample of people have been asked by economists to indicate the strength of their preferences by saying how much they are prepared to pay – for example to keep a threatened species alive in the face of economic activity. In such experiments people who objected to this way of thinking about the ethical issues and who refused to give a figure of how much they would pay were judged not to be rational. This actually said as much about the economists conducting the experiment as about the people in their sample. In order to qualify as “rational” some economists appear to believe that you must the philosophical outlook of a “preference utilitarian”.

When one group become the experts in how to make ethical decisions they have become a quasi priesthood. According to these priests it is a fundamental belief that costs and benefits can be expressed by what people are prepared to pay or to accept in compensation for harms and money can be used as a measuring rod. Economics never stopped being about moral philosophy. It is long overdue for a critique.

The changing attitude to “duress” in economics

This is especially noteworthy when you take into account that the foundational ideas of medieval economics included an element of social justice – for example the idea of a “just price”. The key idea of a “just price” was that market exchange should be organised so that people could get their essential needs without being put under duress. Thus it was morally wrong to exploit the desperation of starving people by speculating with food stocks in a time of poor harvests. So markets should be operated according to criteria of social justice.

However what happened over a number of centuries leading up to what Adam Smith called the “Age of Commerce” was “duress” on a massive scale particularly in Europe and in Britain. For example in the British Isles the elite used the power of the state to rob communities of their access to the land and its resources in the process called the “enclosure of the commons” while abroad colonialism, slavery and genocide occurred – and economics became the ideological doctrine to justify this murder and theft. According to John Locke God had given the land to humanity in common but he reasoned that God must have intended that the land would be used by those who were “rational and industrious” because their rational industry would improve it. This idea that certain people were entitled to take the land for themselves because they were rational and industrious is the same idea that has now been around for centuries to justify land theft and expropriation. (Locke was also a major investor in the slave trade through the Royal African Company).

The Physiocrats who wrote about the economy of France and gave a central place to its agricultural production were also concerned to downplay the social justice agenda . They did not want the state interfering in markets to protect the poor by keeping food prices down– that would get in the way of the process of agricultural improvement.

Adam Smith too was quite explicit on such matters. It was true that ‘primitive societies’ were more egalitarian than societies back home in Britain. However the potential for production increase and technological change was far more important and would be the way that all would eventually become better off. Greater equality and security had to be sacrificed to open up the way for markets to stimulate production.

It was not until world war two and after that governments began national income accounting and became focused on measures of growth. However for several centuries the idea of improvement -meaning production increase – has been the core narrative, the ultimate rationale for national and imperial policy and has justified all sorts of injustice and “duress”.

“Improvement” = technological efficiency and production increase and trumps security

At the core of economics is the idea that production increase equals improvement and is more important than economic security for the poor. Insecurity for the poor is what you need to discipline them. Not only were the poor to be separated from the commons so that they had to enter the labour market – a certain number of the poor were ideally kept unemployed. Hayek explained why – because unemployment was an alternative to corporal punishment and necessary for disciplining the labour force.

This exercise in keeping people deliberately insecure is particularly significant when you consider the findings of psychologists Daniel Kahneman and the late Amos Tversky- which they summed up in what they called “Prospect Theory”. They found that most people are “loss averse”. In weighing up their options when they make economic decisions the prospect of loss weighs more heavily in the way people act than the prospect of gains. Most people do not like taking gambles most of the time – although they may gamble when all their options seem bad – which helps to explain why betting shops do well in areas of poverty. These are things that will surprise no poor person.

So what kind of people are they that recommend the imposition of insecurity on whole classes of people? At the time the new ideas of economics were being formulated by people like Adam Smith, Immanuel Kant in Koenigsburg was arguing that, for people to be treated with respect, they should never be treated as merely means to other peoples ends. People were ends to themselves. However the slave traders, the slave masters in the plantations and the new industrial masters saw ordinary people as no better than work animals, or fragments of human beings – as factory “hands”.

Implicit in mainstream economics is a model of what humans are like – and they are like sociopaths
The implicit assumption of economic textbooks is that there is one kind of person, “rational economic man”, a calculating, competitive individualist who is first and foremost concerned to look after him or herself. Perhaps one can say that this is a reasonable description of the people who have ruled for centuries – like the well connected families that used their influence in the state to steal the common lands from ordinary people. However a single kind of “economic man” is a myth. There have always been more than one kind of person. There have been many different kinds of people, multiple kinds of personalities and multiple kinds of complex patterns of motivation.

It makes economics much closer to life to describe decision making in the light of different kinds of people and the different kinds of circumstances that they live in. I have sought to do this in my book. I have sought to describe different kinds of relationships between people in society and different sustaining ecological systems. I have also sought to describe different personalities and motivations for entrepreneurial activity in market societies. For example I distinguish between entrepreneurs who are motivated by social and environmental goals and people who principally concerned to look after themselves, indeed people who are too often criminals. Similarly in my chapter on employment I try to describe what happens in many employment circumstances in terms of psycho-dynamics and interpersonal relations. There never is and never was one type of economic actor – there are many.

If you think about it, if you lived and worked in a commons community and your everyday relationships were based on commoning, on collective decisions about common resources, then you would have a very different kind of personality from if you were the Mr Big in a Gangster hierarchy engaged in periodic deadly struggles with other gangster bosses. (A monarch in the medieval political system).

Another kind of economic actor are all those people who have wanted to organise economic activity through explicitly co-operative arrangements. They have sometimes had a hard time of it. In the interwar period in Italy, Mussolini seized the assets of 8000 Italian co-ops, killed leaders and burned shops. In Russia, Lenin repressed them but allowed them to revive before Stalin destroyed agricultural cooperatives (providing 65% of food provisions) in favour of forced collectivisation. Urban co-ops were then closed in 1935. In Germany, Hitler seized their assets and nationalised 1100 consumer co-ops, 21,000 credit unions, 4000 co-op savings banks and 7000 agricultural co-ops. In Austria, where one out of every 3 three households had been members of consumer co-operatives, Hitler’s invasion led to the leaders of the co-ops being replaced by fascists while their assets were seized and handed over to private business owners. In Spain, Franco arrested and killed many co-op leaders while many others took exile in Latin America.

At the present time, at least one billion people on the planet are members of co-operatives, though you would never know that from mainstream economic textbooks. In over 800 pages, Mankiw and Taylor’s economic textbooks never discuss co-operatives at all. What Mankiw and Taylor describe is the economy of the sociopaths.

Sociopaths in business and their allies in government

This is a definition of “high functioning sociopaths” from a medical website:

“High functioning sociopath is a term used to describe people with sociopath traits that also happen to have a very high intelligence quotient. They are likely to be highly successful in the field they endeavor (politics, business, etc.). They plan very meticulously and the presence of sociopathic traits like lack of empathy, lack of remorse, deceptiveness, shallow emotions, etc. makes it very difficult for “normal” people to compete with them.”

Whereas Kahneman describes most people as loss averse and not inclined to take risks there are people who are the very opposite. Indeed the personality of sociopaths and psychopaths does rather fit the textbook descriptions of “economic man” . Not only do they calculate their self interest and lack empathy for others but they are much more focused on personal reward and this attention for rewards blots out considerations of caution and of how others might get hurt.

As already suggested psychopaths tend to be regarded as people who are characterised by lack of fear, empathy and interpersonal skills. However, research at Vanderbilt University changes the way of interpreting this:

“Previous research on psychopathy has focused on what these individuals lack—fear, empathy and interpersonal skills. The new research, however, examines what they have in abundance—impulsivity, heightened attraction to rewards and risk taking. Importantly, it is these latter traits that are most closely linked with the violent and criminal aspects of psychopathology.”


Celebrating sociopaths – ‘Creative Destruction’

Now risk taking focused on rewards is exactly what is celebrated by economists as a crucial aspect of the heroic entrepreneur and what some economists like Schumpeter lauded as “creative destruction”. The fact that this “creative destruction” imposes loss on others whose lives are destabilised brings forth little sympathy from most economists. The profit makers are celebrities but too bad for the losers.

Competition, technological change, innovation are the hurrah concepts that are self evidently good. The entrepreneurial genius is the hero whose championing of technological change impels society on the path of progress. Indeed it is these supermen whose innovations are needed as the solutions for the ecological and climate crisis. (In fact technology can sometimes be developed co-operatively and be what Ivan Illich referred to as “convivial”. I will not dwell on these questions here. I want instead to return to the ethical issues and those of the personality types that drive the ceaseless process of destabilisation and insecurity that typifies our society.)

Indigenous people, non indigenous people and genocide

In particular I want to contrast this process with the ethics of the Australian aboriginal people before the colonialists arrived in Australia. Their belief system and ethics was 180 degrees opposite to our own. They saw it as their responsibility to maintain the ecological system from which they lived as unchanging. They did not celebrate ceaseless innovation but exactly the opposite and in fact they had successfully managed the ecological system in Australia essentially unchanged for at least 8,000 years and perhaps 15,000 years. This landscape and species management – through the controlled use of fire and water – was based on a deep knowledge of their ecological system and an intimate identification of the plant and animals that lived in it. Totem animals and more generally nature were regarded as kin. The detailed knowledge and respect for nature, species and landscape is what allowed them to live so well – working perhaps 3 hours a day.

In the terms of John Locke the Aboriginal people ought to have qualified as industrious and rational but were not recognised as such by settlers convinced of their own superiority. In Australia the colonialists found an ideal environment for grazing animals because the aboriginal people had created the landscape for this purpose with controlled burning. The eco-system that they managed allowed them to take animals and the foods when they wanted with ease. After the colonial take over and genocide the eco-system that they had managed was degraded. Between 1824 and 1908 in Australia as many as 10,000 Aboriginal people were murdered in Queensland alone. The original inhabitants were regarded as vermin and in some cases hunted for sport.

What happened in Australia happened repeatedly all over the world – economic development was a process in which the colonising developers acted as criminal psychopaths with the support of colonial states…. and degraded the eco-systems even while they imagined that they were “improving” it.

Indigenous and non indigenous economics

An indigenous community is one where people belong to a place – a non indigenous community is one where places can be bought and sold on the land market so that places belong to people (and corporations). This has a fundamental effect on motivations, cultures and ways of life. When people belong to places they are members of communities who have had a long term relationship to each other and to a specific landscape and its eco-system. The experience of commoning is pro-social and pre-ecological and brings ecological knowledge with it. The people understand and identify themselves with the local ecological features. They work to protect those features and take a long term view. This gives rise to a particular kind of personality too –and unlike the psychopathic personality it is one that cautiously takes a long term perspective. It is common for such societies to regard themselves as having responsibilities both to preserve what they inherited intact from ancestors who are held in great respect in order that that can hand over their landscape as an intact inheritance to future generations. Fundamental decisions should take into account the effects on 7 generations in the future.

Land grabbing and the development of a land market broke this up. It involved the quite literally “dis-located” and “dis-placed” people. It ripped apart the relationship of communities to each other and to places. The enclosure of commons broke up communities with shared relationships and share d responsibilities to a place and degraded both the people and the places which became objects to be bought and sold in markets and made available for limited ends.

By definition people who come as conquerors are not locals and when merchants become not only traders in goods but in people, in slaves and in plunder, then huge damage was done. A stabilised land market did not improve things when it developed extractive and plantation economies. From Ricardo onwards economists have celebrated the idea of an international division of labour with trade relationships as a way of increasing production. However an international division of labour meant dislocated communities in more specialised landscapes – monocultures which destroyed the pre-existing eco-systems, a break-down of community and ecological resilience and biodiversity collapse.

Ricardian development

David Ricardo’s international division of labour so beloved by economists was imposed by imperialism and had an ecological dimension. The European colonialists transformed territories into images of what they had left behind – importing plants, animals, crops and building methods, turning colonies into new places with new diseases, new environmental imbalances and trauma for dislocated populations. Political economy, taught by people like Malthus in places like the East India Companies staff training college at Hailsbury on Hertford Heath, then termed this destructive process “development” and proclaimed it to be an improvement. They celebrated themselves for imposing it – this was the white man’s burden, his civilising mission. The unrestrained market and the iron laws of political economy were inevitable and the elite with an economics education were doing a favour by bringing them about. During the Irish famine in 1846 Treasury head Sir Charles Trevelyan – a true predecessor for George Osbourne – wrote

“The only way to prevent people from becoming habitually dependent on government, is to bring
[relief] operations to a close. The uncertainty about the new crop only makes it more necessary…
These things should be stopped now, or you run the risk of paralyzing all private enterprise and
having this country on you for an indefinite number of years.”

As the population fell by 2 million in Ireland, exports of food from Cork in a single day in November 1848 were 147 bales of bacon, 255 barrels of pork, 5 casks of hams, 3,000 sacks and barrels of oats, 300 bags of flour, 300 head of cattle, 239 sheep, 542 boxes of eggs, 9,300 firkins [about one-fourth of a barrel] of butter, and150 casks of miscellaneous foodstuffs.

Accompanying Queen Victoria in Ireland, historian Charles Kingsley commented:

“I am daunted by the human chimpanzees I saw along that 100 miles of horrible country. I don’t
believe they are our fault. I believe that there are not only many more of them than of old, but
that they are happier, better and more comfortably fed and lodged under our rule than they ever
were. But to see white chimpanzees is dreadful; if they were black, one would not feel it so much.”

Elite Moral Sentiments

What we are looking at here are the “moral sentiments” of the elite after a schooling in political economy. In his other book, “The Theory of Moral Sentiments”, Adam Smith argued that ethics is based on empathy and identification. Action in support of others is easier with people that one knows well, living in circumstances that one can understand. Action in support of one’s neighbours occurs when one sees things happening to people that one could imagine happening to oneself. But how do you identify what people feel when they use a different language, live in radically different circumstances, in a different kind of environment, in a different society with different customs? To develop a full empathy and sympathy one would have to take the uncertain and apparently risky path of “going native” and while a few people did that most took the easier and apparently safer option – they pre-judged these strange people who were living strange lives and judged them as self evidently inferior. Either they were in need of new rulers or better still wiped out or driven away. Political economy provided the justification for this attitude because the civilisers had already arrived in what Adam Smith called the “Age of Commerce” which was the highest stage of historical development. History progressed like this – societies of hunter gatherers, followed by pastoralists, agriculturists and then came the Age of Commerce. It followed that the natives must therefore be primitives who were to be dragged into the modern world – perhaps by being set to work in the slave plantations.

The wealth of nations was provided far more in these plantations and the mines supported by the slave trade than in the small town exchanges between butchers, bakers and brewers. This attitude still prevails today – development in Africa and elsewhere will be helped by global corporations if they can access the land and resources of Africa. The flood of people trying to get into Europe is then not seen for what it is – the result of the actions of these corporations continuing the process of expropriation in their own interest.

The Invisible Hand and the Invisible Elbow

Of course at the heart of market fundamentalism is the core idea, that Adam Smith developed from Bernard Mandeville. This is that the pursuit of private interest (or self love) is transformed into a public good for the benefit of others through the market. The prospect of a reward drives the provision of what other people want (if they can pay). Price signals steer self interested activity and a social good occurs when others can buy what they want from the market.

Yet there is also an ‘invisible elbow’ as Michael Jacobs called it. ‘Self love’ can also be said to discourage the payment necessary in order to prevent or to clean up pollution. Where economic activity is purely self interested and ignores the wider social and environmental context it encourages taking risks at other people’s expense, it encourages fraud and various kinds of criminal activity, including, as we have seen already, genocide and land theft. As a matter of fact what makes the market work, to the extent that it does, in the allocation of resources, is only the agreement of all market players to pay according to common rules – like the laws of contract. Pure self love focused on individual reward, as the Vanderbilt University studies show can drive out consideration for other people. Greed is not good, as is claimed, because it encourages an environmentally destructive waste of resources, it encourages climate change and resource depletion. It encourages recklessness too. Indeed greed can leads to behaviours that preclude the minimum of trust and trustworthiness necessary for people to have business dealings with each other at all.

Crime epidemics , the financial sewer and the state

But isn’t all this a description more relevant to the 19th century or earlier than to the present day? Have things not improved since then? Well, let us consider what a professor of law and economics in the USA, William K Black, calculated for the few years before the sub prime collapse in the USA. No fewer than a half a million felonies were committed by people working in the financial sector in that country. When they were lending money to people with no assets and no income and then packaging those loans up and knowingly selling this financial “toxic trash” across the world they were involved in criminal fraud on a massive scale.It was this epidemic of criminality that largely led to the crash. (High energy prices played a part too!)It is noteworthy however that there have been almost no prosecutions and the finance sector got bailed out while its victims were ruined.

This tells us something about the ‘political’ in ‘political economy’ – the topic of political power asymmetry is not dwelt on in most textbooks even though it is central to how resources are distributed and allocated. In a supposedly democratic society we all have one vote equally. However we do not have equal amounts of influence. We do not all have an equal ability to use the state to pursue our business agendas or to rescue us if we come unstuck. This is because we do not have equal access to money to buy political influence, we do not have equal amounts of “well connectedness”, we do not have equal access to the mass media and to the services of public relations agencies, we do not have equal access to fancy lawyers, we do not have equal access to the information we need to pursue our agendas. We also have unequal access to health, education and protection. Of course if one group has access to the state and get bailed out when the economy comes unstuck because they are “too big to fail” while others are ruined then it automatically follows that inequality will increase and those who are responsible will be able to benefit from the mayhem that they create for everyone else with impunity. This process is actually called “moral hazard” but no one is doing anything of substance about it and that is why the power of the financial markets have, if anything, grown further after the 2007 crash.

The ecological crisis , climate change and the limits to growth

It is in this context that we must see official strategies to deal with the ecological crisis, climate change and the limits to economic growth. The justification of the people who govern us has always been that industrial development, technology and ecological development has delivered longer lives and greater material well being in “developed countries”. We have seen how the costs of this kind of progress have never been properly counted but can we really doubt the evidence of so much “technological progress” ?
One way of answering this question is to judge the economist’s idea of improvement against the 7 generation idea of indigenous people. It is said that when Mao Tse Tung was asked the significance of the French Revolution of 1796 he said that it was still too early to say. Well, a similar reply can be made of the significance of the Industrial Revolution – including the industrial revolution that has subsequently occurred in China itself.

If a generation is 30 years then 7 generations after the industrial revolution in Britain is round about now. Round about now we have the makings of a serious climate crisis, global biodiversity collapse, major depletion of fossil energy supplies, materials and fresh water. All of these are consequences of economic and industrial “improvement” . What “economic improvement” there has been is not only based on centuries of injustice, genocide, environmental degradation, and inequality – it now looks distinctively non-sustainable.

Yet the economists in the United Nations Environment Programme think we can “save nature”. This can be done, they tell us, by giving nature’s attributes a market value so that they can then be traded. Then we can plug ‘nature’ as a set of tradeable assets into the ethical sewer of the financial markets!
The flaw in this line of reasoning can be demonstrated by examining what has happened to the European Emissions Trading System (ETS) and many other aspects of the Kyoto Protocol. The carbon markets have never worked in the sense of significant reductions of emissions because the players in the carbon markets have consistently gamed the system and rendered carbon markets ineffectual.

No surprise here then. This is a matter of ends and means. In a market economy, and in particular in the financial markets, the end of the exercise is to make as much money as possible. What is supposed to happen is that the carbon markets incentivise technologies that make for environmentally benign activity. You keep the sociopaths sweet by financially rewarding low carbon and ecologically friendly activity. Note here that the environmentally benign activity is the means and being rewarded with more money is the end. However, since we are dealing with sociopaths what we typically find is that the largest quantities of money can be made by fraud or gaming the not so cleverly constructed system. Thus the ETS has had to be suspended at times because it was riddled with VAT fraud. For most of the time high emitting companies involved in the ETS have gamed the system so that more permits were issued to them than they needed and the carbon price has been close to zero.

A large part of the problem has also been with the so called “Clean Development Mechanism” for so called “developing countries” to get a share of the action in carbon markets in a way that would encourage low carbon development . But the Clean Development Mechanism has also been riddled with fraud. So called “Certificates of Emissions Reduction” have been awarded repeatedly for activities that were going to happen anyway. These fraudulently acquired permits could then be sold into the ETS. In brief carbon markets have never worked. But why should this surprise us? The ETS was designed by BP when it had friends in the Labour Government and it was known not to work right from the start. The system that was devised has then been infested by crooks. The invisible hand of the carbon markets has done a lot of damage, as usual delaying real action on climate change….

The fact is that the last thing one wants to do to protect the ecological system of the planet is to marketise Nature and put it up for sale. Nature has to be taken out of the market and put under the collective protection of communities with a living knowledge of their ecological systems and with an ethic of looking after it, and each other, in a long term relationship. It must be put under the responsibility of institutions whose purpose is to protect and share in the interests of all, preferably with a historical track record – not to buy and sell among the criminal classes (by which I mean the financial and business elite).

Taking centuries of PR spin out of economics

In conclusion – if we are going to try to reclaim economics as a branch of moral philosophy and if we are really going to describe the world as it is, rather than as we would like it to be, then we have to acknowledge what happened in the historical process that paralleled the “development” of the economy and the development of economics as a subject. Put bluntly the people who were fraudsters, thieves, gangsters, thugs and murderers have had a predominant influence across much of that history and have ruled in what are now “developed” societies for centuries. They have conquered most of the rest of the world, stole resources and terrorised it – and economists helped them by supplying a narrative that justified what was happening as a source of improvement and technological progress.

Actually it has been a history of violence, duress and crime and it still is. There is an estimated $ 21 trillion to $ 32 trillion in wealth hidden in financial secrecy jurisdictions which are places that facilitate fraud, tax evasion and aggressive tax avoidance. These places facilitate escape from financial regulations, embezzlement, insider dealing, bribery and money laundering. In Britain the continued prominence of the City of London and its network of tax havens was originally based on an Empire imposed by violence and then continued by providing a place to evade tax, regulations and the law. If economics is supposed to describe the world as it really is, how come that the analysis of these kind of facts are not what economic textbooks are about?

The first step to putting ethics back into economics is to take centuries of PR spin out of it and describe the world as it is, not the comfortable ideas that we would prefer to believe.

Featured image: A scene in South Australia, 1950. Author: Alexander Schramm Source:

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About the author

Brian Davey trained as an economist but, aside from a brief spell working in eastern Germany showing how to do community development work, has spent most of his life working in the community and voluntary sector in Nottingham particularly in health promotion, mental health and environmental fields. He helped form Ecoworks a community garden and environmental project for people with mental health problems. He is a member of Feasta Climate Working Group and co-ordinates the Cap and Share Campaign. He is editor of the Feasta book Sharing for Survival: Restoring the Climate, the Commons and Society.












Concepts for a Fenced Off World

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Published on FEASTA on December 10, 2015

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Chapter 18: Concepts for a fenced off world

commons-fencePrivate property in land means enclosure and exclusion. Economists typically assume that economic choices involve inevitable trade-offs. However, it is not true that alternatives must always be forgone. There is often a potential for sharing and mutual accommodation that is being ignored. Not all choices are rivalrous.

It is not merely “resources” that are taken away when land is expropriated, fenced off and subject to “improvement”. It is a way of life.

Why is this so?

The answer is because the fenced off world described by Adam Smith and David Ricardo is a world of specialisation and that means a radical reduction in diversity of users and diversity of uses at each place, in each unique eco-system. Dragged into the global market, the eco-system in each place became “dis- located” and the community of people who belonged there were “dis-placed”.

Managing land and places to maintain diversity has an entirely different logic to managing for specialism and private use. Ultimately managing places for specialist uses, while excluding other people and species, requires that property owners need to back up their rights by access to violence. This is the role for the state in market societies. As Adam Smith recognised:

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all. (Smith A., The Wealth of Nations, 1776)

Private property in land means enclosure and exclusion

A private property regime in land means that “resource use” decisions are private decisions. “Resource use” is not subject to deliberation by multiple people in a community where different interests need to be accommodated in order to maintain social harmony. In the form of private property, the resource owner has “dominion” over resource use. It is his or her choice how they are used and not the business of anyone else. “Alternative resource uses” are therefore more likely “to be forgone”, at the expense of others, when resources are owned as private property.

For this state of affairs to come about the single users must be able to exclude other people from being able to use the resource. If the resource was previously available to a community, but is now only available to an individual, there must have been a process of “enclosure”.

The word “enclosure” expresses a historical process in which institutions for exclusion have been set up. This means not only fences and hedges – but laws, courts and law enforcement arrangements. If they cannot exclude other people using them e.g. taking fish on the high seas, then resource appropriators do not really have dominion or private property in the resources and we call this an “open access regime”.

In this situation, multiple owners and multiple uses that accommodate everyone’s needs, are more likely. In other words, issues of what resources are used for (allocation decisions) are usually entangled with issues of who is the beneficiary of the resource use (distribution decisions). The creation of private property means a reduction in the variety of resource users and a reduction of the variety of resource uses at the same time. Private property is associated with more specialisation and greater inequality at the same time.

Given single owners with the power to exclude others, it is more likely that single uses will prevail. In a study of the historical process of enclosure in the UK Simon Fairlie describes how powerful interests drove the land grabbing, typically declaring that the areas that they took over were worthless – but that when they owned this land they would be able to “improve” it. This was usually a lie:

An acre of gorse — derided as worthless scrub by advocates of improved pasture — was worth 45s 6d as fuel for bakers or lime kilns at a time when labourers’ wages were a shilling a day. On top of that, the scrub or marsh yielded innumerable other goods, including reed for thatch, rushes for light, firewood, peat, sand, plastering material, herbs, medicines, nuts, berries, an adventure playground for kids and more besides. No wonder the commoners were “idle” and unwilling to take on paid employment. (Fairlie, 2009)

And Fairlie quotes a contemporary, William Cobbett:

“Those who are so eager for the new inclosure,” William Cobbett wrote, “seem to argue as if the wasteland in its present state produced nothing at all. But is this the fact? Can anyone point out
a single inch of it which does not produce something and the produce of which is made use of? It goes to the feeding of sheep, of cows of all descriptions… and it helps to rear, in health and vigour, numerous families of the children of the labourers, which children, were it not for these wastes, must be crammed into the stinking suburbs of towns?”
(Fairlie, 2009)

More decisions took on “either/or” characteristics under the enclosing regime of exclusion because decisions were no longer being made by communities seeking to share use between people and between uses. As an infrastructure for trade developed, like better means of transport, the new private owners started to use the land, not to provide for any local needs at all, but to produce for lucrative distant markets. The process of exclusion and fencing off was accentuated and accompanied by an accelerated collapse of sharing.

Are trade-offs inevitable, must alternatives always be forgone?

This brings us to THE standard economic concept – that of “opportunity cost”. This is the assumption that whenever a resources is put to use it always inevitably entails a forgone alternative – that there is always a trade-off. Thus, for most economists it seems to be utterly self-evident that the environmental crisis can be formulated this way: either nature or economy is an inevitable choice. If we want pristine nature then we will be left with fewer resources for economic activity. If we want more resources for economic activity the alternative forgone is less pristine nature.

But it is not, and was not, always an inevitable choice. We should be wary of allowing economists to foist their assumptions on us. (This is the idea that the cost of using a resource one way is the best alternative forgone).

If we start with the assumption that choices about the use of resources have an “either/or” character and “have to be made” in this way, then the inevitable consequence is a lost opportunity for another possible use. However, before we leap to the conclusion that this is inevitable we might first consider whether, in many situations, a more economical solution would be for some way to be found to avoid the choice altogether. Can some way be found to accommodate two or more options?

In an essay which challenges the assumption that economic choices are inevitably trade-offs, philosopher Alan Holland, writes:

Perhaps the situation can be recast to avoid the choice altogether… People have learned to be wary, for example, of the choice that is sometimes presented between jobs and wildlife, and are suspicious of the ideology that informs such a “choice”. Failing that, there are different pathways through. Here it is not, or not only, a matter of minimising losses and residues, but a matter of doing justice to the various claims, where considerations of appropriateness are to the fore… (Holland, 2002, p. 31)

The potential for sharing – subtractable, rivalrous and dividable choices

There are, however, influences that incline economists to pose the either/or question implied in
the concept of opportunity cost. There are resources whose characteristics Elinor Ostrom called “subtractability”. Use by one person limits the opportunities for others to use the something but not necessarily in an all or nothing sense. In most economics texts such goods are termed “rivalrous” and the word implies people have to compete for their use and that one person’s gain is the other person’s loss. This is in the sense that if I drink a glass of water then you cannot drink it. If I eat the whole of an apple then you cannot eat it. However, drinking water and apples can be described using another word, “divisibility”, which suggests a different way of reacting to the nature of the resource and the nature of the relationships associated with the good. I can drink half a glass of water and you the other half. I can eat half the apple and you the other half. Rivalrous goods can often also be shared – albeit in a subtractive way.

The potential for sharing will vary according to the nature of the resource, the intensity with which it is used as well as the ingenuity and preparedness to co-operate of those sharing it. For example, an area of land zoned for building can be shared by more people by constructing additional stories upward. Again, sharing what is impossible at any one point in time may be possible by allocating time slots. An individual book can only be read by one person at any one time, but can be borrowed and used by many different people at different times. That’s what libraries are for. Not all resources can be shared, of course. In the act of production some resources change their form and become embodied or converted during production or subsequently through consumption. Land can be shared in various ways because it is durable but flour used in baking disappears into the product.

For the dynamics of a community the potential for sharing is crucial. In medieval times, lands were shared in different kinds of ways, including land for arable crops. These were periodically re-assigned to different individuals in the community. When land is owned by a community but, in practice, best cultivated by individuals it made sense that people took it in turns to work with the better and the worse patches. Otherwise, the privileges of having the best plot would undermine the community. You could always compensate people for improvements when they left.

Sharing resources fosters supportive human relationships based on reciprocity. It helps to develop trust and thus, well-being. If people go to a therapist it will not be to consult about how to be happier by having more but how to improve or repair emotional relationships. Families share the use of resources and so do communities. If you believe some economists then human well-being is to be found in the possession and consumption of goods and services. Relationships are “reciprocal services” where people are spared the cost of keeping accounts about what each person has provided the other (Becker has this view). For most people sharing is a crucial dimension in their integration in a network of relationships.

Non-rivalrous resources

There are also resources that can be shared in a non-subtractive way. They are non-rivalrous and you don’t have to “divide them” – indeed it would not make sense to do so. This is true of knowledge and information. We don’t reduce information by using it, the reverse is the case. By using knowledge, we increase its availability. Sharing knowledge is generative. By refining, amending, checking, developing, adapting and sharing with others, non-subtractively, we increase knowledge. There is no “alternative forgone” when the resource is used.






Approaching a Deflationary Crisis?

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Published on the FEASTA on August 15, 2015

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Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis. It is obvious that Chinese growth is falling. The prices for energy and the raw materials that feed the growth economy keep falling. The demand for Chinese exports is down too. Stock Markets in Asia are falling, despite attempts to prop them up. Countries are being tempted to export their problems abroad – for example by competitive devaluation. In Europe its obvious that a “solution” is being cobbled together for the Euro and Greek crisis even though no one at all believes that it will work. At the same time the policy response of “quantitative easing” which has kept interest rates down very low has reached the end of the road. With interest rates at or near to zero the scope for addressing the crisis through monetary policy (low interest rates) is exhausted. Many pundits believe that low interest rates have not encouraged productive investment but speculative bubbles – the creation of capacity in fields that in the long run will not pay, or fuelled a casino style speculation, a giant bubble of bets that could soon collapse, bringing the global economy down with it.

So what is going on? How do we explain the situation? In this paper I am going to argue that there are a number of ways of understanding and addressing what is developing into a global crisis. The desire to make the crisis understandable can convert into a temptation to make it seem simpler than it is. At its most banal we have the explanations that neo liberal German politicians are prone to – like the idea that the crisis is because of a lack of confidence and trust and that this can be resolved (in Europe) purely and simply by countries following the Eurozone rules. If the confidence and trust are restored then all will be well and the market will restore prosperity.

A more adequate story is needed than this – and it is one that needs to focus on global trends not just in Europe but in the USA, the so-called developing world and above all in China. This story has a number of different plots and sub plots, not one. We need to understand how the sub plots interweave. The story is one of debt, competitive imbalances and an energy crisis and all need to be told. To make the story even more complicated we need to keep in mind too that an even more important story, that of climate change, has to be held in our minds too. If and when humanity has any chance of resolving these crises it will have to resolve that one at the same time. Will this be possible? I don’t know – what I do know is that there is a theory, by archeologist Joseph Tainter, that humanities’ problem solving capacities are limited by complexity. A friend is currently trying to get me to use twitter. However I am daunted by reducing complex situations to short simple messages. Understanding the global economy is like entering a labyrinth. As I get older I notice that some people become famous because of the clarity in the way that they write. What may not be noticed is that the apparent clarity in a political economic message is often the result of simplification. The popularity of neo-liberal economcs is like that.
So lets look at the ways of describing the crisis. In summary this can be described as the interrelationship between 4 processes.

(1) Structural policy stupidity – policy governance cannot cope with the complexity of the crisis. Politicians cannot cope with communicating complex messages to their peoples nor find the mechanisms to cope with the complexity of the issues.
(2) Problems are also caused by uneven development between countries and sectors which cannot be sustained without methods for recycling purchasing power from the more competitive countries to the less competitive ones. These imbalances become most problematic when capital export from surplus to deficit countries slows which happens when growth slows in the deficit countries.
(3) The crisis is both cause and effect of a rising amount of debt – personal, corporate, state and financial sector – which has acted as a drag on growth. As growth falls all kinds of debt become more difficult to service so the monetary authorities have tried to push interest rates down. Nevertheless the finance sector has tended to become both more speculative and more predatory as there is a “hunt for yield”. Interest rates rise when risk premiums are imposed on distressed borrowers (including states), money making occurs through financing arrangements based on “passing the risk parcel” exploiting the naivety of lenders about complex financial arrangements and by the promotion of asset price bubbles. The bigger players are rescued during crises but the smaller players (including tax payers and those who lose their state benefits) are made to pay.
(4) The crisis is the result of reaching “the limits of economic growth” and, in particular, because of resource depletion in the energy sector. This is less obvious because of currently low and falling energy and commodity prices but we need to study the experience of the energy sector over last few years, not just the immediate situation. The immediate fall in commodity and energy prices is a result of the onset of the crisis – a crisis which very high and rising energy prices up until recently helped bring on. The high energy prices have been compatible with a high level of debt only because interest rates have been so low and because there has been a “hunt for yield”, something that would pay more than leaving money on deposit paying very little.

Depletion of resources in the energy and mining sector means that it is taking more energy than before to extract energy (and other mined resources) and this has pushed up the costs of extraction of energy and other minerals. High energy costs act as a drag on the growth of the economy as a whole – because energy costs, like interest rates, enter into the production of virtually everything else. This is particularly acute problem in the energy sector itself as the energy sector is such a huge user of energy. The energy companies need a high price for energy otherwise they cannot actually make a profit. However, if energy prices are high for too long the economy wilts.

The development of unconventional oil and gas has been possible because quantitative easing has made a large amount of money to Wall Street at a low interest rate and they have been “searching for yield” – looking for somewhere to put this money to earn a high rate of interest. This funded the voracious capital expenditure needs of the industry with its high drilling intensity. However it pre-supposed that prices would remain high enough for long enough to cover costs and this has not happened. The problem is set to get a lot worse as depletion speeds up.

So, to repeat, the best way to tell the story of this crisis needs to relate ALL of these elements together – policy failure, debt, imbalances, energy. Each element is causatively connected to the others but sometimes in a time lagged way which obscures the relationships. Together these elements are bringing about what some observers are calling “secular stagnation”.

“Stanley Fischer, vice-chairman of the US Federal Reserve, has laid out the predicament that forecasters face. Half way through each year, economists have had to explain why their global growth forecasts were too optimistic, he said, and this has happened “year after year”. While growth rates have been falling across the world, it’s not yet clear whether this is all a hangover from the 2008 crash or something more fundamental.”[1]

In my view it is “something more fundamental”. It is related to reaching the limits to growth – and this has to do with fossil fuel and materials depletion and the end of cheap energy. However, this does not exclude a partial truth in the other narratives that economists are using to explain low growth.

In the reminder of this article I run through each of these themes in more depth.

Explanation number one: “structural policy stupidity”

First of all structural policy stupidity – all politics must be sold in one way or another to the governed. Even autocrats strive to govern with ideas as well as through simple fear. The rhetoric of politicians must to some degree match the way people think about things – that means one ingredient for successful politics is where politicians succeed in appealing to popular illusions embodied in “common sense”. One such popular illusion is that states have to arrange their finances using the same principles that ordinary households use to run their personal finances. Never mind that this is not true – the politicians who pursue policies and use a rhetoric that appeals to the “person in the street” viewpoint have a head start. As a number of economists have noted these politicians work with an ultra simple (and wrong) model of economic reality – that if governments follow rules and don’t borrow excessively this will inspire confidence and trust and economies will grow, spurred on by competition. It does not matter that this idea may actually be self defeating when an economy is slipping into recession – the important point is that collective illusions persist when they fulfil a collective purpose for those that hold them. In this case a key collective purpose of “the balanced budget illusion” is that it makes communicating with electorates so much easier. It enables a message of “we cannot afford” and “being cruel to be kind” to be directed against vulnerable groups who can be more easily scapegoated.

Complex messages are not popular and don’t sell well even if they more accurately reflect reality. Please note here that I am saying something more than politicians are mistaken – my argument is that ideas like the balanced budget illusion is more than “a mistake”. It is an illusion that has a structural function in the political process. It is not an accident that this particular theme repeats itself in history again and again. There is no reason to believe that once an idea has been rejected by one generation after a bitter learning experience, that a subsequent generation that have not been through the same learning experience will not have to learn it the hard way all over again.

One of the sayings of the management theorist Stafford Beer was that “the purpose of a system is what it does”. I really like this because it cuts through all the rhetorical justifications and excuses. If a system like the Eurozone is ruining its less competitive members in favour of the more competitive ones then this is the purpose of the system. Were it not the purpose of the system most powerful players in it would change it.

In this regard the very structure of the Eurozone has proved ideal for putting the banking and financial elite of Europe out of reach of democratic political processes. The currency is managed at a level out of the reach of any one state with the finances of each state disciplined by a set of rules that enforces close to a balanced budget. Given the inevitable crises each government that becomes vulnerable then has to cede more and more economic policy to financial interests who are free to impose neo-liberal policies like privatisation quasi automatically. The “coup” against Greece was a design feature of the Euro and delivers the primacy of finance over any pretence of democratic politics.

Given the complexity of eurozone governance, in which every state is supposed to have a say and decisions must be passed back to all of these governments, it seems as if governance requires a set of rules that governments adhere to, otherwise there would be endless re-negotiations for each new situation, and for each state, that would go on forever. In an interview in the New Statesman Yanis Varoufakis explained this when he described the viewpoint of Wolfgang Schaueble.

“Schäuble was consistent throughout. His view was ‘I’m not discussing the programme – this was accepted by the previous government and we can’t possibly allow an election to change anything. Because we have elections all the time, there are 19 of us, if every time there was an election and something changed, the contracts between us wouldn’t mean anything.’”

If you think about it this is not only a recipe for the negation of democracy it is the negation of any kind of economic policy discussion or policy variability. A common currency zone cannot work in these circumstances because it is paralysed by its complexity into ever being unable to adapt its economic policy. The default is then to a neo-liberal assumption of a balanced budget (or budget surplus, free market rules and privatisation). All it can do is to follow a set of pre-determined rules. In this case the policy that destroys economies like that of Greece appears as the price paid to avoid endless renegotiations.
The problem for the Eurozone and the global economy is that this is leading to a massive deflation….or maybe from an elite viewpoint this is not so negative. Maybe this is not “policy stupidity” but a cunning plan???

In a massive crisis in which only the super elite are rescued and everyone else ruined there would be a further massive concentration of wealth and power. Perhaps members of the super elite – the 1% of the 1% – think in this way. Or maybe I am paranoid.

Explanation number two – too much debt

Global stock of debt outstanding

Some economists think that that somehow debt doesn’t matter since, supposedly, debt transfers purchasing power from debtors to creditors who will spent it instead so debt is not supposed to affect “aggregate demand”. Alas this misunderstands the mechanisms of bank credit creation. In order for money creation and demand expansion to occur in the current system there is a requirement that more bank credit creation – i.e. more borrowing from banks – takes place. If individuals and companies are maxed out (“peak debt”) and if they are reluctant to take on more debt then aggregate demand cannot be increased. In fact, even if the central bank pumps out more money through “quantitative easing” this will do little or nothing to increase demand. The central bank will create money to buy bonds from banks but the money created and paid over will remain unused by the banks and the velocity of circulation will fall. The single demand expansion influence is that interest rates are lower and this is supposed to encourage investment – something that does not happen if the conditions for expansion do not otherwise exist. What happens instead is that money goes into speculation.

Meanwhile if companies and individuals are maxed out they will be making an effort to pay back their debts to the banks. When this happens money is destroyed and goes out of circulation. More particularly chain reactions from defaults and collapsing confidence destroys the trust and confidence on which the financial system works and leads to massive deflation. Now this situation of collapsing purchasing power in the private economy could in theory be balanced out by government spending leading to the governments running deficits – but that’s against the eurozone rules.

Explanation number three – global imbalances/failing mechanisms to recycle purchasing power

Another explanation for current stagnation is the breakdown of mechanisms for dealing with international trade and financial imbalances. In his book The Global Minotaur Yanis Varoufakis, describes the history of the post war economy by focusing on the story of how trade and financial imbalances were managed – particularly the imbalances between the USA and the rest of the world, but also imbalances in the Eurozone. As he explains, unless there is a mechanism for recycling surpluses from countries in trade surplus back to countries in trade deficit then purchasing power drains away from the deficit countries who are put in a deflationary squeeze as is happening to Greece currently. In the initial period after world war two the USA was dominant in the global economy and was in trade surplus to the rest of the world. It used the financial flows into America that were generated by its surplus of exports over imports by investing back into the rebuilding of countries like Germany and Japan and more generally into the American design for the postwar economy as bulwark against communism. The recycling of surpluses back into deficit countries kept the boom going. But you won’t catch Germany recycling its surpluses back into Greece now.

The answer to an export surplus in one country which occurs over and against import surpluses in other countries is for the countries with the export surplus to use the money that they earn in capital export back to the deficit countries. They invest in those countries. However, that implies that there is something in the deficit countries that is an attractive focus for investment. It implies that those countries are growing – which brings the argument round full circle. For decades the USA was the largest economy in the world and a growing economy. This meant that when the US first went into what was to be a long running trade deficit it was still worth Germans, Japanese or Chinese parking their dollar earnings as deposits into Wall Street banks or using them to lend to the US government. The dollars earned by Germany, Japan and later by China could be invested in the US economy or they could be used to buy oil. This was also because, by agreement with countries like Saudi Arabia, oil had to be purchased in dollars. This arrangement partly broke down however when Wall Street crashed in 2007 – in large part because it was operating a criminal business model. Loans were made to people who it was known would never be able to pay them back and packaged up with other assets and then sold on across the world to pension funds and other financial institutions who picked up the risk parcel, misled by ratings agencies. The ratings agencies were paid to say that the “toxic trash” was AAA grade.

Turning the finance explanation upside down

So, to come back to the story – yes the current problems are due to too much debt. Yes, mechanisms for recycling global financial flows arising out of trade imbalances no longer work so well after Wall Street and other banksters in London and Frankfurt are seen to be run by crooks….but one can argue that these two phenomena are also the result of the failure to grow, as much as the cause. You can turn at least a part of the argument on its head.

What I mean by that is that a rising amount of debt in general and troubled debt in particular is not just a cause of faltering growth – the faltering growth is a cause of the increasing amount of troubled debt.

Debt is not usually seen to be a problem for companies and individuals where their income is rising and sufficiently secure for people to pay the interest. It is when people find that their real income is stagnating or falling that more debt becomes distressed debt and distressed debt becomes the lender business model. Prudential lending pays in a growing economy with growing investment opportunities – but the temptation to resort to predatory lending occurs when there is an awareness of, even a decision to exploit, the desperation of people in trouble. This becomes part of the model. What happens when a country, or a company, or an individual, cannot pay? The answer is that the interest rate that they are supposed to pay for any new credit rises dramatically because they are now supposed to pay the lender “a risk premium”. This is the last stage of a process of debt accumulation. When a debt pyramid comes crashing down it does so because, just before it crashes, debt servicing costs get dramatically worse as “risk premiums” are loaded onto borrowers.

This “risk premium” might lead one to suppose that lenders actually are tolerating a higher level of risk for which they must be compensated – however this is only partly true for the biggest players. When the biggest players are deemed “too big to fail” they get backed by politicians so the “risk” is taken off – that is, after all, what happened to the German and French banks that lent to Greece. The deal stitched up by the IMF and the ECB meant that they got bailed out and the debt loaded onto the Greek people. So while risk premiums allow banks to increase their take the real risks do not rise commensurately.

The temptation to borrow under increasingly unfavourable conditions is not like borrowing to invest or to buy an asset with the secure expectation of a rising income. As debt increases the business model for lenders becomes more and more making money with distressed debt, vulture funds, passing the risk parcel and toxic trash. It occurs because borrowing states, institutions and individuals resort to what becomes a kind of gambling considered as a last resort, as an attempt at a way out of a desperate situation. That’s one of the ideas of Prospect Theory. Normally people are risk averse, they don’t risk what little they still have if they have anything left – however they do gamble when all of their other options seem hopeless anyway. Underlying all of this is that the rising incomes are no longer there. By way of contrast the institutions lending are not taking real risks because they have friends in very high places.

Turning the imbalance argument around

One can turn the idea about imbalances the other way round too. In one way of looking at the situation it seems that growth falters because the mechanisms to handle imbalances by recycling surpluses break down. No doubt there is truth in this but you can turn that idea round – i.e. it is when growth falters that the mechanisms to handle imbalances by recycling surpluses dry up. As we have argued the way to recycle surpluses is through capital export – the purchasing power flows back to the deficit countries not as money to purchase their goods as imports into the surplus countries but rather as money to buy into the industries and economies of the deficit countries, as investment. But who is going to invest into a stagnant or contracting economy?

Look what happened to the German privatisation of East Germany. The institution that was entrusted to sell off East German industry, the Treuehand, made a big loss. How could that be? When the East German economy was merged with the West German economy it was at the rate of one East German mark for one West German mark. This was an early lesson of what would happen in the eurozone except that it all happened inside Germany itself. The East Germans could not compete after reunification, just like the Greeks cannot compete now. So most East German businesses were making huge losses. However, if you want to sell off companies then you have to sell them as going concerns. You have to keep them going before you sell them….which often meant making huge losses. What they got for the sale of these companies never covered these losses.

Wolfgang Schaueble knows this – he was involved. They will not make any money selling Greek assets either. When the Austrian Railways considered a takeover of the Greek railways they said they would only do this if the Greek railways were given away. Unless Greece is growing and prospering there will be very little capital export into Greece to actually buy privatised assets.

So, to summarise the argument so far: slowing growth can be explained by increasing debt reaching its limits and the breakdown of mechanisms to even imbalances by recycling purchasing power from surplus to deficit countries. On the other hand the fact that debt is reaching its limits and surplus recycling limits are breaking down can be explained by slowing growth. Both are true in both directions of causation and what we are seeing here is a “vicious cycle” in operation.

Explanation number four – the energy crisis

Now let’s add the fourth way of looking at the issues. Let us start by making a distinction between growth of production and growth of production capacity. Growth of production can occur if there is spare capacity in an economy in the form of unemployed resources which can be brought back into utilisation – but for growth to be long term there must be a growth of the capacity of an economy.

This depends upon expenditure in capital formation – the creation of buildings, equipment and infrastructure. Capital formation is an energy intensive business because infrastructure, buildings and equipment require energy in their production – plus they require an energy throughput for their utilisation. The point about energy is that it is required for every good or service purchased. Even a haircut requires electric light or warmth in the barbers shop and to run electric clippers. Anything that enters into the production of all goods and services is a cost of production that all share. So if the cost of energy rises so does the cost of producing everything.

The nearest comparable example of a cost that enters into the production of all goods and services is interest rates. Virtually all individuals and companies must borrow so the interest rate enters into the cost of all production and into many everyday living expenses too. You can argue therefore that the real reason that interest rates have been driven down so low by central bankers is that energy costs have been so high. It is has not been possible for the economy to sustain BOTH high interest rates AND the higher energy prices. This is the reason for the stagnation.

Most energy intensive of all is investment in the energy and mining sector. The amount of energy required to tap and process energy is rising as it becomes harder to find, extract, process and transport oil, gas and coal from smaller, deeper, more remote, and harder to tap geological sources.

Slowing growth of global productive capacity is the result of the global economy running up against ecological system limits. This is particularly apparent in the climate crisis and the costs that occur as a result of this but, more immediately too, in the economics of extracting fossil fuels. The long run trend is towards rising energy costs which acts as a drag upon the growth of the productive capacity of the global economic system. The most energy intensive sector of all is the energy sector itself. We can see that if we compare the amount of energy used per hour of human activity in the energy and mining sector compared to the amount of energy used per hour of human activity in other economic sectors. (This is the so called exosomatic metabolic rate). These figures are for Catalonia in 2005 because the academics who have studied this issue are mainly at the University of Barcelona but one can expect comparable figures in other places. The rates are 2,000 Megajoules per hour of human activity devoted to energy and mining. This compares to 2.8 Megajoules per hour outside of paid work in households, 75 Megajoules per hour in services and government, 331 Megajoules per hour in the building and manufacturing sector (not including energy and mining) and 175 MJ/h in agriculture. As a matter of fact 11% of the energy throughput of society was taken by the energy sector itself – even though only 0.0945% of the time of everyone in Catalonia was devoted to energy and mining.

With energy and mining being the most energy intensive sector one would expect the impact of rising energy costs to be felt initially and most powerfully in the energy and mining sector itself. This has indeed been the case. In a presentation by Steve Kopits of the Douglas Westwood Consultancy he shows this graph (CAGR = compound annual growth rate).

Impact of energy costs on mining

As can be seen the capital expenditure required per barrel of oil in the exploration and production sector has increased enormously. To extract oil is requiring greater and greater amounts of investment in exploration and production.

We can see very clearly what is happening if we look at the statistics for fracking for shale oil in the USA. The fact that the US oil and gas industry has had to resort to fracking is a sign that American oil and gas fields are highly depleted and near to exhaustion. As an analyst called Arthur Berman puts it, fracking is the “retirement party” of the oil and gas industry. It is not a new beginning. As a matter of fact the USA, Russia and Saudi Arabia almost produce an identical amount of oil but look at the difference in the way that they produce it:

USA = 11.7 MMBl/d, 35,669 wells, 297 million feet
Russia = 10.9 MMbls/d, 8688 wells, 83 million feet
Saudi Arabia = 11.4 MMBls/d, 399 wells, 3 million feet

In order to extract a roughly equivalent amount of oil the US industry has to drill almost 100 times the footage in wells and drill 90 times the number of wells. It is obvious that that will require an enormous amount of energy to get out an equivalent amount of oil (and gas) and that the cost will be a lot higher. But is this investment actually profitable? The answer is that it is only profitable at higher and higher oil prices. Different oil and gas companies require different prices to break even but, according to Kopits most of the oil companies require an oil price of at least $100 for new investment in conventional oil production to be profitable. High prices are needed in the unconventional sector too and most of the fracking companies in the USA have not been making money for several years. In the last year the price has fallen even lower.

So how come that they are still around? How come they have not gone bust? There are several kinds of reply to this.

Firstly, in economics things happen if people take a view of the future in which they believe that they will be profitable – even if subsequent experience shows this not to be the case. No one can know the future exactly so every investment is to some degree a gamble. A whole economic sector can share the same gamble and invest on the assumption that they will make money even if this turns out not to the case – and indeed they can be encouraged to. An oil sector drilling 90 times the number of wells and 100 times the footage is going to be immensely profitable for the companies selling and/or hiring out the drilling rigs, pipelines, tankers and other equipment. As the saying goes – in a gold rush sell shovels. A coalition can form around illusions that are profitable to some powerful players who make a lot of money even while others lose. A vested interest coalition pursuing a delusion is called a Granfalloon. It is important to realise that it is in the interests of the Granfalloon to keep on hyping their message in order to keep the money flowing. (This does not mean that the members of a Granfalloon are intentionally misleading – it means that there is an element of confirmation bias in the way that they interpret and describe things. We all do this to some degree – it is very difficult not to select and interpret available information in a way that confirms ones existing preconceptions, one’s faiths).

Secondly, at this time with interest rates very low there have been very few places where businesses in the finance sector can make much money. There is a temptation to make money on a gamble and the oil and gas industry has been a place for Wall Street to make another gamble. This is especially the case as the collateral for the industry is in the ground. However, when the sub-prime mortgage boom went bust after 2007 banks were left with a lot of houses. Shifting them was not so easy – finding a use for the assets of insolvent fracking companies is likely to prove even more of a problem. How many banks have the expertise to run fracking companies?

Thirdly in economics things happen with a time lag. Even if companies are making a loss they do not immediately go bust. They and their creditors may take the view that the unfavourable conditions are temporary and more credit may be extended to bridge them over what are assumed to be temporary hard times. If oil and gas prices have fallen they may still be able to sell at a higher price because they have insured themselves by selling their oil and gas already on the futures market. To respond to soon would be to lay off workers, and break up teams that would be difficult to reassemble. The temptation is to hang on, assume that difficulties are temporary and to tell the world that there are no problems, that everything is just fine, that the latest technologies make it possible to produce at a profit at even lower prices. If one looks at the figure however this does not appear to be what is happening. That part of the oil and gas pursuing new development, and particularly in countries where depletion is already advanced, are caught in a dilemma that unconventional oil and gas is expensive oil and gas – and the market cannot be made to pay these high prices over a long enough period to make the development of their part of the industry profitable.

In conclusion

The story thus described is one in which the world economy could be heading into a massive economic meltdown. The authors of the famous Limits to Growth, writing in 1972, thought it likely that unless humanity could adjust to the limits that there would be an overshoot and collapse sometime in the future. The crisis of 2007-2008 gave a preliminary taste of what that kind of collapse might look like. The after shocks in the Eurozone and what has been happening in Greece likewise give us a picture of what the future might be like for all of us.

What this does not mean however is that there will be some general realisation, some mass epiphany or “Aha” moment when everyone realises in a blinding flash of insight that humanity has reached the limits of growth. There are also limits to the extent to which people change their basic faiths about the world. Such flashes of insight about their real situation do sometimes happen when people are thrown into troubled times and circumstances that challenge all that they believe. However, even then most people are reluctant to abandon their faiths as that could leave them even more disorientated and fearful – living in a world that suddenly appears a lot less secure, and facing a future that is a lot less rosy, than they previously believed.

Most mainstream economists and politicians will continue to believe that the task at hand is “get growth going again” and, in the vast tangle of connected events, will privilege those connections and processes for their mental attention that confirm their viewpoint on what is wrong, the other people who are responsible for what has gone wrong – and what must be done to remove these people. To drum up support for themselves elite politicians of this type will no doubt identify favourite scapegoats and enemies to demonise. The worst futures would be where these kind of politicians get a mass following, sponsored financially by the elite, and lead emerging fascist movements. The best of all futures would be where these kind of political leaders drift into irrelevance because a popular majority gravitate to those who have positive community level responses of sharing, mutual aid and re-localisation connected to ecological design – and link this to a new approach to politics that supports the transformation at the base of society. This would go together with a new politics of finance to replace the debt based money system and a new politics of energy that keeps the carbon in the ground. A politics of this type would not be about “getting growth going again”. It would be about creating economic arrangements that create security for communities while conserving resource use. This would involve a revival of the commons and a solidarity economy, making growth unnecessary for a good life.



Shale Gas & Fracking: Science or Propaganda?

Off the keyboard of Brian Davey

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Published on FEASTA on April 9, 2014


Discuss this article at the Energy Table inside the Diner

Shale Gas and Fracking: The science behind the controversy – review by Brian Davey

By Michael Stephenson, Elsevier, 2015. Michael Stephenson is Director of Science and Technology at the British Geological Survey.

Anyone looking for a comprehensive review of the controversies associated with fracking is going to be disappointed by this short book. After having ploughed almost all of its 170 pages I found, near the back, the following sentence:

“I won’t go through all of the contested issues, because the chapters in the book provide a basis to carve out your own analysis looking at some of the main peer reviewed papers”.

So the message is that if you want to make up your mind about shale then go to the peer reviewed literature. The implied message in this, made explicit at times, is that many opponents of the shale gas industry don’t do this and many members of the public rely too heavily on rumour and panicked reports leading to what Michael Stephenson claims is a low quality to the public policy debate. The public policy debate needs to be guided by academic scientists in peer reviewed papers… him.

As he writes, towards the end of this book:

“In this book I hope I have shown how a controversial subject can be tackled with science. There are various definitions of science around. One that I like is “…a systemic endeavour that builds and organises knowledge in the form of testable explanation and predictions about the universe.”

“I like the word endeavour because it implies that a lot of science is slow and may be painstaking. I also like the bit about testable explanations and predictions. Most science is a long journey, which sometimes goes in the wrong direction, but this element of testable explanation, usually means it gets back on the right track….If it is properly funded, if the scientists are listened to and if their results are out there for all to see then the public debate is better, and policy and regulation are better. ” (p 145 )

While reading this particular passage, sitting in the library of the British Geological Survey in Keyworth near Nottingham, I had to suppress the urge to blow a raspberry.

A lot of science is slow and painstaking Stephenson tells us, and it sometimes goes off on the wrong direction but don’t worry, with more time it will get back on track.

Well, how much time do we have, Professor Stephenson? Leaving aside for now which side of the issue he would come down on, would Professor Stephenson not agree that the stakes are incredibly high? The stakes are high because they concern whether people are to have their living environment and their health ruined, or not. They are high because they concern whether shale gas contributes to triggering runaway climate change, overshooting 2 degrees above pre-industrial temperatures, or not. So how much time do we have to solve these problems?

The facts are uncertain and in dispute and there is a lot at stake and Professor Stephenson is telling us that the process must be slow and painstaking. Yet the government had already made up its mind by 2012. It had taken all the important decisions about pushing this industry – with people like Stephenson giving it cover. By January of that year Stephenson had already published an article in New Scientist titled “Frack responsibly and risks and quakes are small.”

So if science is slow and needs time for scientists to debate things based on the evidence from peer reviewed articles – how come Mike Stephenson already knew 3 years ago that “responsible fracking” had low risks? What about all the evidence gathering that was so necessary to come to that conclusion?

As it turns out three quarters of the available studies on the impacts of shale gas development were published in the two years 2013 and 2014. The number of peer reviewed studies doubled between 2011 and 2012 and then doubled again between 2012 and 2013 while in 2014 there were at least 154 peer reviewed studies. The bad news for Mike Stephenson is that almost all reveal problems with fracking. Might it be that Mike Stephenson came to a provisional conclusion 3 years ago and assumed that he did not have to change his mind? Or might it be that he has not been keeping pace with the literature since then?[1]

I don’t know the answer to these questions but it seems fair to me to ask. If you are going to profile yourself as an advocate for scientific research and peer reviewed articles deciding policy, after having “raised the quality of public debate”, then it seems to me you ought to regard yourself as also being under corresponding ethical obligations. These include:

(1) not finally deciding before the evidence is in, or at least taking pains to explain that your opinion is provisional and might be revised with more information;

(2) attempting some coverage of all the major controversial issues rather than just choosing a small sample of issues for your review of the peer reviewed literature and then covering other issues in a less thorough way or not mentioning them at all;

(3) making an effort to take in and accurately presenting points of view that are not your own;

(4) staying up to date on the scientific debates in dispute.

In this review I intend to show that Mike Stephenson has not done these things. As already pointed out he wants to say – you must do your own peer review process of the controversial issues. Well, anyone who wants an in depth understanding will indeed have to but it’s a very convenient approach for the author to deal with some issues and then not to deal with the others. A casual reader with little time could easily read this book, and assume that by doing so they have got the gist of the main arguments, and that they do not need to read further. If they did do this it is my contention that they would be left with an extremely misleading impression. Many problems with fracking that are now emerging in peer reviewed articles would remain unknown – out of sight out of mind. They would be unknown unknowns.

Climate Policy

Nor do I think that Stephenson has done a very good job of presenting alternative viewpoints – particularly in the debate about climate policy. He relies heavily on an approach to climate policy advocated first of all several years ago by S. Pacala and R. Socolow of Princeton University, the so called “stabilisation wedges” approach. This is an approach, in case you did not know it, that is sponsored by BP. It is also NOT about reducing global emissions but is about keeping emissions “flat” over the next 50 years. It is about stopping emissions growing until such time as the world has developed the capacity for carbon capture and underground storage. [2] Such a policy would, of course, be another great job creation scheme for geologists for it is they that would have to identify the safe places for underground storage. At the same time the fossil fuel industry, having played the major role in digging or pumping carbon out of the ground would now be able to make big money pumping the CO2 back into the ground.

The problem with this approach of course is that the world does not have time to stabilise emissions according to the agenda of BP. Emissions have to fall and very fast indeed if the world is to have any chance of not overshooting a 2 degree temperature increase over the pre-industrial. Leading climate scientists like those of in the Tyndall Centre are quite clear on this. Scientists like Kevin Anderson of Manchester University had repeatedly made submissions to parliament making this point drawing on the peer reviewed science that they have done. In a blog that Anderson put on this own website in January of this year he explains [3]:

“Shale gas within 2 degrees C carbon budgets. The development of a UK shale gas industry is incompatible with UK’s equitable share of the IPCC’s carbon budget for a “likely” chance of not exceeding the 2 degrees C obligation. This remains the case even if shale gas can be combined with carbon capture and storage (CCS) technologies. The CO2 emissions from gas CCS are anticipated to be 5 to 15 times greater per kWh of electricity generated than are the emissions from either renewable or nuclear. Add to this the timeframe for developing a mature UK shale gas industry and, even with CCS, shale gas can have no appreciable role in the UK energy mix”.

Fugitive emissions

Now let’s turn to the issue, mentioned in the book, of “fugitive emissions”. As Stephenson acknowledges, the real killer for any argument that natural gas is better for the climate than coal is evidence about so-called “fugitive emissions”. This is a phrase used to describe the leakage of natural gas or methane into the atmosphere during the production and distribution of natural gas. Since natural gas is mainly methane and since methane is a very powerful greenhouse gas, much more powerful that CO2, a high level of leakage would completely undermines the case for shale gas. If fugitive emissions are high then the argument for natural gas is lost – if they are low then there is a case that natural gas is a lower carbon energy source (although whether it is low enough, given the need to rapidly reduce emissions, is another question). So what’s the situation and how does Stephenson describe it in this book?

As Stephenson says there are two ways of trying to measure fugitive emissions – the bottom up method, measuring leakage in and through equipment and the top down method from aircraft, towers and so on. The two methods of measurement give very different results and if the airborne measurements are the more accurate ones then the verdict goes against natural gas on climate grounds. So this is a crucial question – and what concerns me here is how well the author tells this particular story and presents the evidence.

In my judgement – he does not do a very good job. He presents just one study about airborne measurement by Scott Miller et al. which does not fit his preferred view and then tries to dissuade the reader about the top down measurements:

“Are these broad brush atmospheric measurements more reliable than the patchy measurements from actual well operations? Perhaps, but can we be sure that the aircraft measurements are attributing methane to the right sources, after all swamps and municipal waste dumps produce methane – as do cattle. And cattle are common in Texas” (p 117)

Later the reader is again leaned on as to how to interpret the balance of the literature. On page 144 we are told

“Now taking the issue of whether shale gas is lower carbon than coal the conclusion of a balance of peer reviewed articles is that it probably is. Although shale gas does come with fugitive emissions, these probably don’t offset the ‘carbon savings’ that you get by using shale gas rather than coal in a power station. But the conclusion is tentative because it does step from a rather small number of measurements that suggest that fugitive emissions aren’t particularly large and does go against one study (Howarth’s group at Cornell University) that suggests large fugitive emissions”.

Note that by this stage in his book the top down airborne emissions measurements have disappeared from Stephenson’s presentation of the issues. No mention of Scott Miller here. Has Scott Miller been dismissed because he and his team might be measuring cattle burps after all?

Cattle that burp propane…and missing studies that don’t make it into this book

When I read this I went off in search of the Scott Miller article and an academic friend easily dug out a few more articles about the airborne measurement of emissions from the academic literature. Surprise surprise – Scott Miller et al were well aware of cattle, municipal waste dumps and other sources of methane. In fact their paper was not just about oil and gas field sources of methane. It was arguing that there is a general underestimate of methane emissions, including from cattle. It was also about tracking down the different sources and in regard to confusing cattle emissions with gas field ones his article says this:

“Texas and Oklahoma were among the top five natural gas producing states in the country in 2007and aircraft observations of alkanes indicate that the natural gas and/or oil industries play a significant role in regional CH4 emissions. Concentrations of propane (C3H8), a tracer of fossil hydrocarbons, are strongly correlated with CH4 at NOAA/DOE aircraft monitoring locations over Texas and Oklahoma (Fig. 5). Correlations are much weaker at other locations in North America ( to 0.64). “

So what is going on here Professor? Do Texas cattle burp propane?

As I wrote earlier, if you’re going to argue for peer reviewed science settling issues then you really are going to have to do a literature search to see if there are other relevant articles. In this case there are. For example, there is an article by Anna Karrion and team in the Geophysical Reserach Letters in 2013 [5]

Their article is titled “Methane emissions estimate from airborne measurements over
a western United States natural gas field”. It was published in August 2013 so there are no excuses for not finding and citing it. The measurements were taken over the Uintah gas field in Utah in February 2012 where 6.2 to 11.7% of production was found to be leaking. This level of methane leakage is a disaster for the climate – and a disaster for the argument of Professor Stephenson too.

But perhaps this was cattle burping? However the Karrion research team did adjust their measurements for cattle and natural seepage. These adjustments were based on a study of methane emissions from free range cattle combined with census data of cattle for this region, available from the US department of Agriculture. Another study of methane seepage was also taken into account. It is interesting to compare the magnitudes. The research team only shaved 2.5% off their measured gas flux to correct for cattle and natural seepage – with the rest of the measurement being oil and gas field related. The other 97.5% of the gas was from the field.

There was no excuse for not mentioning this. In fact there have since been other studies.
I do not know when Stephenson’s book went to press but 6 months before its recent release there was another study by Schneising et al. that used satellite data for the Bakken and Eagle Ford formations. Scientists from Germany, the United Kingdom and the University of Maryland show 10.1% (plus or minus 7.3%) and 9.1% (plus or minus 6.2%) for the Bakken and Eagle Ford formations respectively.[6]

Flaws in the inventory measurement of methane emission rates

To complete that argument let’s look closer now at the sources that Professor Stephenson bases himself on – the studies by MacKay and Stone and by Allen et al at the University of Texas. Here I am relying heavily on free lance researcher Paul Mobbs because he has done a study a critique of MacKay and Stone, which contains a critique of the Allen paper too. Basically Mobbs argues that the figures that MacKay and Stone use for leakage are too low and the figures that they use for gas production are too high. Thus the percentage of gas production leaking is miscalculated [7]. Let’s walk through this argument.

Firstly, Mobbs points out how the inventory method of measurement of leakage that MacKay and Stone use has been challenged. He cites an article in Nature which refers to the Colorado measurements from airplanes plus a new study in press of the Denver–Julesburg Basin conducted with scientists at Picarro, a gas-analyser manufacturer based in Santa Clara, California. The later study relies on carbon isotopes to differentiate between industrial emissions and methane from cows and feedlots, and the preliminary results line up with the earlier Colorado findings [8].

Mobbs also criticises the Allen paper on leakage referred to by MacKay and Stone and finds it to be flawed. It is a non randomised study of 0.1% of the wells drilled in the USA so cannot be taken as a representative sample. [7] The companies concerned volunteered themselves for measurement and if they did that it is probably because the companies were reasonable confident that measurements for their installations would be low. It is also relevant to point out, as Mobbs does, that the publisher had to correct the Allen article after initial publication, because the authors had not declared conflicts of interest.

Mobbs continues

“On the other side of the equation, the figures Mackay and Stone used for gas production per well are too high. Currently there is a great deal of debate over how much gas and oil unconventional wells actually produce [9]. Recent studies suggest that resource estimates need to be downgraded, now that we have sufficient statistical data of what is actually being produced in the field [10]. There is no specific source for Mackay and Stone’s figures, but their modelling assumes levels of gas production which are roughly twice the value determined by the US Geological Survey [11] and the US Department of Energy [12].

“The easiest way to explain the flaw in Mackay and Stone’s reasoning is this: The method of calculation was correct. However, they took a figure for the emissions from gas production which may be half what it should be. This was divided by a figure for gas production which was twice as big as it should be. The result was that they produced an estimate for emissions which was one quarter of what it should have been.”

How much production, now and in the future?

It will be noticed here that Mobbs makes reference to a debate about how much oil and gas unconventional wells produce. This leads me to another aspect of Stephenson’s book that needs critical appraisal. A reader will not find any inkling of this debate in the pages of the book. Stephenson uncritically takes the viewpoint of the United States Energy Information Agency (EIA), including its projection of future production. He appears to be unaware that, for some time now, a number of authors have been warning that the shale boom in the USA is a bubble that would burst and that it would all end in tears. There has been what has been called a “battle of the forecasts” but Stephenson makes no mention of it.

Straight from pages one and two Stephenson is telling us that shale gas will provide half of US domestic production before long. Increasing volumes will be exported to Mexico and Canada. Not only that – manufacturing is returning to the USA because of cheap fuels and bulk chemicals and primary fuels in particular are booming. It is all a wonderful success….

…or, alternatively, the kind of hype that is typical of an economic bubble.

So what can we learn from academic studies based on peer review? Here’s what Mason Inman says in that Nature article already cited [8]:

“To provide rigorous and transparent forecasts of shale-gas production, a team of a dozen geoscientists, petroleum engineers and economists at the University of Texas at Austin has spent more than three years on a systematic set of studies of the major shale plays. The research was funded by a US$1.5-million grant from the Alfred P. Sloan Foundation in New York City, and has been appearing gradually in academic journals and conference presentations. That work is the “most authoritative” in this area so far…

If natural-gas prices were to follow the scenario that the EIA used in its 2014 annual report, the Texas team forecasts that production from the big four plays would peak in 2020, and decline from then on. By 2030, these plays would be producing only about half as much as in the EIA’s reference case. Even the agency’s most conservative scenarios seem to be higher than the Texas team’s forecasts…..”

Oh dear – there are the peer reviewed forecasts and there are the assertions of Professor Stephenson. Speaking for myself the academic studies that have been appearing in peer reviewed journals seem more thoroughly researched than the forecasts derived uncritically from the EIA. (5 peer reviewed articles are mentioned in the Nature article).

Bubble economics – in a gold rush, sell shovels

Mike Stephenson has written a book about shale gas but has omitted to mention, perhaps because he did not notice, that most of the US shale oil and gas industry has not actually made any money. In fact it has lost a lot of money. Sure it has produced a lot of oil and gas and that has (probably temporarily) arrested the decline of the oil and gas sector in the USA. Sure this has brought oil and gas prices down – and in the last year it produced a glut that has led to a price crash. Sure, it has been a veritable bonanza for oil and gas equipment and logistics companies like Halliburton, Schlumberger and Baker Hughes. As the saying goes, “in a gold rush – sell shovels”. However, the exploration and production companies have been losing money year after year.

In a study presented to a recent industry forum in Heuston and available on YouTube a consultant called Art Berman gives free cash flow figures for a sample of 40% of US exploration and production companies in this sector. He shows negative cash flow of $13.5 billion in 2013 going up to a negative of $14.26 billion (annualised from 3 quarters) in 2014. As a result debt in the sector has risen from nearly $165 billion in 2013 to $172.5 billion in 2014. [13]

Note that most of this is before the recent crash in oil and gas prices – a crash produced by a glut in the market. And where did this glut come from? The answer is not from Saudi Arabia or the other producers, but from the shale sector in the USA. If the sector could not produce a profit last year and in 2013 how is it going to now? A number of authors have been arguing for several years that the shale oil and gas boom was a bubble. Was Professor Stephenson unaware of their work?

The fact is, and this is another thing that Stephenson does not discuss – the shale boom in the USA did not occur in an economic vacuum. Ultra- low interest rates brought about by “quantitative easing” after the economic crash of 2007-2008 meant that banks and institutions in the finance sector were looking for somewhere to put their money that would actually make money. There was a “hunt for yield” and a lot of that money went into junk bonds and capital for shale exploration and production companies which were prepared to borrow money at high rates of interest. This was based on their assumption and expectation that, at some point in the future the rising prices of gas and oil would start paying big time for their expensive to finance exploration and production frenzy.

As in every bubble the confidence that it would pay off, if not now, but eventually, has kept the process going….and kept the merchants of hype turning out the “good news” that people like Stephenson have swallowed uncritically.

All of this matters – for it is key to the Stephenson argument that there is a balance of risk and reward and if the shale gas story is not going to last and is economically unsustainable anyway then the rewards will be small or non-existent for the production companies and for consumers. This is not to deny, of course, that some companies will have made a lot of money. As I have said these are the services companies like Halliburton, Schlumberger and Baker Hughes who have “sold the shovels” in this particular “gold rush”. Such subtleties are not to be found in this book and Stephenson writes about risks and rewards without ever reflecting on the fact that those who get the rewards and those who get the risks loaded onto them are different people.

Professor Stephenson as Goldilocks – looking for just the right amount of regulation

If the shale gas boom is not going to last and is unsustainable then there are problems with another part of the Stephenson book – the bit about regulation. On pages 125-126 he opines:

“This book is about risk and reward in shale gas. The reward is jobs and growth – maybe cheap energy. The risk is damage to the environment and human health. In countries where shale gas is being developed how is this balance between risk and reward being struck? The answer is mainly through regulation. Regulation can’t be too stringent such that it completely stifles the ability for a company or a driller to try different techniques – but at the same time it can’t be too lax, such that that it doesn’t completely protect the public and the environment”

It’s all rather like Goldilocks and the porridge that was too hot, the porridge that was too cold and the porridge that was of just the right temperature. But what is lacking in this banal idea of trade-offs is the possibility that there is no such “just right” balance – that the level of regulation that would effectively protect the public would be so costly that it would stifle the industry – whereas the level of regulation that would enable the industry to operate profitably would be so weak that it would be highly dangerous to public and the environment. What is also lacking in this banal presentation of the issues is the possibility that some of the processes are not amenable to regulation anyway. As a peer reviewed guest editorial in the British Medical Journal, which was critically examining a report by Public Health England, puts it [14]:

“…the report incorrectly assumes that many of the reported problems experienced in the US are the result of a poor regulatory environment. This position ignores many of the inherent risks of the industry that no amount of regulation can sufficiently remedy, such as well casing, cement failures and accidental spillage of waste water.”

So tell us this Professor Stephenson – how does one regulate for traffic accidents and accidental spills? You can re-route heavy goods vehicle traffic – but tell us how you can you re-route the exhaust emissions from the large numbers of heavy vehicles or the other equipment? Also, you can regulate but tell us how you can you guarantee that companies will keep to the regulations? We’ve already had experience in Nottinghamshire, where I live, of one drilling company breaching several planning conditions and it was local people who noticed, not the regulatory authorities because they only have one enforcement officer for ALL planning issues in the whole of Nottinghamshire.

If “no amount of regulation” can sufficiently remedy problems of the industry then the argument that risk and reward can be balanced through regulation is purely and simply wrong. Or if I am wrong then it is up to Professor Stephenson to prove it using peer reviewed evidence. In his book he cites a study of a varying amount of regulation in different US states – but that is not engaging with the core issue. Prove that regulation makes enough difference Professor!

In fact I think Professor Stephenson will find that peer reviewed literature is beginning to suggest the opposite of what he wants us to believe. There is evidence that tighter regulations do not have an impact. A recent study from Colorado shows that even with tighter regulations air pollution that is damaging to health has increased. This was because emissions per well improvements were overwhelmed by the increased number of wells. [15]

What this makes clear is that while Stephenson waves the flag for looking at the scientific evidence in peer research articles there are lots of points in this book where his opinions, for that is what they are, are not backed up by peer reviewed research at all.
The Shale Gas Factory and things “we” must put up and cope with
This is particularly the case in the chapter called “The Shale Gas Factory” where he has his work cut out as an apologist. He is honest enough to acknowledge that a fracked gas field is (in his words) “unpleasant” to live close to, most of all in the drilling phase. He mentions the industrialisation of the countryside, the high volumes of traffic, the enormous size of the trucks, the fragmentation of the countryside into parcels, the tremendous noise, the effect on local wildlife. But his argument that people will have to put up with all of this is not based on peer reviewed science – it is the pleading of a gas industry advocate, pure and simple. For example, he writes:

“But all of these are nuisances that are associated with other industries and oil and gas activities. I don’t mean to minimise them, but they are the sort of things that we can cope with. Trucks can be re-routed; noise can be put up with, land can be reclaimed just like it can after any industrial activity like quarrying.”

I especially liked the “I don’t mean to minimise them, but they are the sort of things we can cope with”. Who is this “we” exactly? His entire book is an exercise in minimising the dangers and unpleasantness.

Note here the assumption that if the problems associated with fracking are the same as problems of the oil and gas industry in general then somehow they don’t matter so much and “we” will just have to be put up with them. All over the world the oil and gas industry works hand in glove with military dictatorships and autocracies and is implicated in human rights abuses because it operates with the assumption that it can enter other people’s space, other environments and the people who live there will have to put up with it. All over the world people are expected to “put up” with damage to their living environment and expected to “cope”.

But people all over the world do not want to put up with the damage done by the oil and gas industry. Which is why, when people start to oppose them the oil and gas companies use their connections in government and the big money that they earn to bribe politicians, hire mercenaries and/or work with military dictators to buy off opposition or repress it violently. For example, when Ken Saro-Wiwa campaigned against environmental devastation caused by Shell and other oil companies in Nigeria he and 8 other leaders of the Ogoni tribe was hanged with the connivance of the oil and gas companies like Shell. Closer to home the Shell to Sea campaign in County Mayo in Ireland shows another community that rejected the assumption that it should just put up with the construction of a natural gas pipeline through its parish. In that case the community formed links with the Ogoni campaigners in Nigeria. [16][17]

The oil and gas sector has a culture of its own – it is used to working against opposition. As the film Gaslands II shows, when people in the US started to campaign against fracking they found themselves dealing with people with expertise in counter-insurgency.
Here’s some more to reassure the reader:

“Will these activities be dangerous? They might be. Trucks might spill chemicals, waste tanks might overflow in a stream. But these are industrial installations that engineers are good at managing and have been managing for a long time. In many ways there is no difference from building sites.”

More nuisances that the Professor “does not mean to minimise”

Once again the professor “does not minimise” the dangers. But don’t worry. We are dealing with engineers. They wear hard hats so they must know what they are doing……

But have you got a peer reviewed article to back that up Professor Stephenson? Because here’s some information from a peer reviewed journal called the American Journal of Industrial Medicine from July of last year which actually compares oil and gas field fatalities to that on building sites. The research was into health and safety needs associated with drilling and fracking and was by researchers from the Colorado School of Public Health and the College of Health Sciences at the University of Wyoming. What they found was high injury and mortality rates among gas and oilfield workers. The occupational fatality rate was 2.5 times higher than the construction industry and seven times higher than that for general industry.[18]

Curiously, while the fatality rate was higher than on building sites the injury rates were lower than those of the construction industry. This suggests that injuries were under reported. Again I do not know the reasons for this but I speculate that it is because it is not so easy to hide a death but I suppose, as Professor Stephenson might say, people in the industry have learned to cope and put up with mere injury. Other problems that the researchers found that the workers coped and put up with were crystalline silica levels above occupational health standards as well as particulate matter, benzene, the noise and radiation.

The point I would wish to make at this point is that corresponding to the things that Mike Stephenson thinks “we” have to put up with there are statistics of accident rates, hospital admission rates, deaths. It is possible to see evidence of trends affecting professions working in fields like industrial medicine, health and safety and public health which eventually leads to informal studies and then to peer revewed studies.

After 2006 when the Shale boom hit the Bakken region in the USA, the Mercy Medical Centre in Williston and the Tioga Medical Centre in neighbouring Williams County saw their ambulance runs increase by more than 200 per cent. Tioga’s hospital saw a staggering leap in trauma patients by 1,125 percent. Mercy had a 173% percent increase.” Drugs (including overdoses of prescription drugs, methamphetamines, and heroin) explain many of the cases, with oilfield related injuries such as “finger crushed or cut off, extremity injuries, burns and pressure burns” accounting for 50% of the cases in one of the region’s hospital emergency rooms. [19]

Why is this such a dangerous and brutalised industry?

Now if you are a Professor Stephenson this is something to be put up with but other people might ask how it comes about that alcoholism, drug addiction, sexually transmitted diseases, violence and accidents suddenly shoot up when the oil and gas industry comes to town?

Might it be that the industry has a largely mobile workforce that arrives and has no attachment and hence no loyalty to the people and the areas that it moves through? Might it be that the workforce puts up with the noise, the fumes, the accidents and so becomes brutalised and indifferent to the people who live in the places that they rip apart and then move away from? Might also be that a highly mobile and partly international workforce who are dislocated like this, permanently transient, are desensitized emotionally and that that is what makes them turn to drugs and alcohol? It might be that this is an industry whose culture desensitises them and then they expect local people to put up with the destruction of the places that they move through? (These are my hypotheses for peer reviewed research with a workforce with undeniably high rates of drug, alcohol and violence problems).

On the other side of this process the people who have to put up with the industry, feel disempowered by the likes of Professor Stephenson, the politicians and his friends. They become understandably stressed and anxious and their mental health suffers – particularly when it is expected that these “are the sort of things that we can cope with”. Speak for yourself Professor.[20]

Some would say “home is where the heart is” but, for Stephenson, a loyal advocate for the industry that always just moving through on route to the next oil and gas field, an industry from which so much money for the BGS comes, it’s all a matter of personal preferences.

Here he is, “not minimising” again:

“As for industrialisation of the landscape and the shale gas factor, there’s no doubt that for a period of time that could last for as much as a year there will be intense industrial activity. After this, during production, activity is less intense and obtrusive and after abandonment there is no activity. Whether you think that the landscape is scarred and tainted with industry at this stage depends on your point of view. It’s true that access roads will still divide up the land after the wells are plugged and clearings in the woods will still be visible for a long time after. Some will say that’s what our landscape looks like already – a particular pattern of past uses of the land. Others will say it’s unacceptable” ( p108)

Well we know what Stephenson would say….unless perhaps if it was about where he lives, I don’t know. What I do know is that this has nothing to do with peer reviewed science. What I also know is if this sort of thing happens it leaves measurable scars on the people and the places that live there and this turns up eventually in statistics and then in peer reviewed articles about health.

As the Concerned Health Professionals of New York state “ public health problems associated with drilling and fracking are becoming increasingly apparent. Documented indicators variously include increased rates of hospitalisation, ambulance calls, emergency room visits, self reported respiratory and skin problems, motor vehicle fatalities, trauma, drug abuse, infant mortality, congenital heart defects and low birth weights”. ([21] [22] [23] [24] [25] [26] [27] [28] [29] [30] [31] [32] [33] [34] [35] [36] )

Note the infant mortality rates. Young children are being killed by this industry.

The case for the precautionary principle – criteria for where ‘enough is enough’

But let’s continue. If you are going to use peer reviewed articles to reveal what the issues are then it assumes that the industry will be able to go ahead anyway because you can only learn about the issues in real life by looking at the retrospective record. This indeed is the assumption of Stephenson’s book. You will not find in it any criteria for deciding that the health or environmental damage has exceeded some threshold level where Professor Stephenson thinks the government should cry “enough – this industry must be closed down as too dangerous to public health and/or too dangerous to local environments and/or too dangerous to the climate system.” Why Professor?

Of course there is a paradox in all of this – you can only gather evidence of whether something is safe or not, or can be made to be safe or not, through the actual doing. We can only say something like this in retrospect. You can only test your explanations and predictions about fracking by doing fracking – and if the doing of fracking shows the explanations and predictions that the risks are low to be wrong then it advances your science all right but, in the meantime, environments may have been damaged, you may have hurt a lot of people and you may have set off runaway climate change. Great for the science – but too late if you have created an industry, invested a lot of capital in it, built the gas fired power stations to burn the gas….and triggered a runaway process.

That, of course, is the case for the precautionary principle. While I read this book I looked out for mention of the precautionary principle and, towards the end looked in the index to check I had not missed it somewhere. It’s not in this book. Why not? Of course the precautionary principle is a damage avoidance strategy to be used to prevent things happening that might be very dangerous before the full evidence is in. It is supposed to be embodied in EU policy but in practice the powers that be and industrial interests never think in these terms because it restricts their freedom of action. Their attitude is – so what if there are risks if the industry and government can make other people and places carry these risks? Those are the sort of things that “we” – in other words those unlucky enough to be living in a gas field “can cope with”.

Of course in this case we in the UK are lucky because we have the experience right across the USA to help us decide whether to ban fracking or not. All the evidence is still not in – but we have a fair amount to go on. In this respect books like those of Mike Stephenson, which are powerfully misleading to the public and politicians can do a lot of damage. It is true that at £70 a copy not many people will read it but it will help to cover the backs of the decision makers and gives the appearance that they are following the evidence of their scientific advisers. No doubt it will also help the BGS show loyalty to its friends in the oil and gas industry. This will help to keep pulling in the money and contracts which pay for such a very large percentage of what the BGS does. It will keep the government sweet too.

Conclusion – the central idea of this book is banal and naive

In conclusion, the central theme of this book – that “science can be allowed to decide through peer reviewed debate” is at best innocent in the naive sense, pious and misleading. It evokes a world where issues are decided on by politicians and the public guided by neutral scientists who deliver the facts. But this fairy tale for the children begs all the difficult questions.

Firstly it takes time for the facts to emerge and, in the meantime there is uncertainty about how dangerous the industry is or is not. To find out what the situation is you have to let the industry proceed in at least one or more places but what you might find is that it does a lot of damage. So you find out when the damage has already been done – when, for those places it is too late.

Secondly what you are likely to find out if and when there is damage done is that a lot of resources get put into a cover up and massaging the truth. The clash of ideas is inevitably “polluted” by public relations strategies used particularly by the most powerful actors to influence which interpretations are presented and which get noticed in public debate.

Thirdly, the way issues are framed makes a huge amount of difference and it is possible to choose some issues and some papers about them and ignore or dismiss others in a way that is incredibly misleading.

Fourthly generous resources are available to present and research some avenues of inquiry while not being available at all to investigate others. The idea that there is ‘no evidence’ for a problem can be presented as proof that the problem does not exist whereas it may be proof that no resources have been made available to look.

Fifthly, narratives of risk and reward can ignore the way that some people might be rewarded while everyone else, including future generations, can lose badly. This can lead to a further paradox – the winners in public policy debates may be the people with the greater resources. But their greater resources may be because they are the beneficiaries of a process that others suffer from, and are impoverished by. There is then an asymmetry in the resources different groups bring to the public policy debate as well as an asymmetry in access to the “corridors of power” and the detailed policy making process.

In the end this leads to a situation in which the people who write the policy are the people who benefit from the policy – this includes the frackademics of course who get lots of money and are feted with lots of attention by high ranking politicians. Then places like the British Geological Survey keep raking in the money and the research grants – though quite why a geological institution should be a lead agency to research multi-dimensional issues of public health and environmental damage is itself debatable. Sure they have a role – but as a lead agency? Might it be because they are already closely tied into “collegiate” relations with the oil and gas industry so can be trusted by a government and officialdom that has also been co-opted by the industry? As Stephenson puts it:

“…if its properly funded, if the scientists are listened to and if their results are out for all to see then the public debate is better and policy and regulation are better…” (p145)

Yes, he would say that wouldn’t he?


Most, though not all, of the literature referred to in this review are taken from the compilation of the concerned health professionals of New York which is downloadable at

You can see Paul Mobbs’ scalable diagram of the political, academic, PR and industry connection which Stephenson is in at

(1) S”hale gas and public health – the whitewash exposed.” The Ecologist Mobbs P. (2014)




(5) GEOPHYSICAL RESEARCH LETTERS, VOL. 40, 4393–4397, doi:10.1002/grl.50811, 2013

(6) “Remote sensing of fugitive methane emissions from oil and gas production in North American tight geologic formations” Oliver Schneising, John P. Burrows, Russell R. Dickerson, Michael Buchwitz, Maximilian Reuter and Heinrich Bovensmann, in “Earth’s Future 2 (10) 548-558) Article first published online: 6 OCT 2014 DOI: 10.1002/2014EF000265;jsessionid=EA0823B336056464D344E41EE226992A.f01t04

(7) ; ;

(8) ‘Methane leaks erode green credentials of natural gas’ by Jeff Tollefson at

[9]    “A reality check on the shale revolution”, David Hughes, Nature, 21st February 2013 – http://fraw/files/extreme/hughes_2013.pdf

[10]    “Natural gas: The fracking fallacy”, Mason Inman, Nature, 3rd December 2014 –

[11]    “Variability of Distributions of Well-Scale Estimated Ultimate Recovery for Continuous (Unconventional) Oil and Gas Resources in the United States”, Open-File Report 2012-1118, U.S. Geological Survey, U.S. Department of the Interior, June 2012 –

[12]    “Updated Fugitive Greenhouse Gas Emissions for Natural Gas Pathways in the GREET Model”, A. Burnham et al., Energy Systems Division, Argonne National Laboratory, October 2013 –

(13) “Years not decades. Proven Reserves and the Shale Revolution. The Apparent End of the Beautiful Story”

(14) Editorial: “Mistaking Best Practices for Actual Practices. Public Health Englands Draft Report on Shale Gas Extraction”, British Medical Journal, 17th April 2014

(15) “Influence of Oil and Gas Emissions on Ambient Atmospheric Non Methane Hydrocarbons in Residential Areas of Northeastern Colorado”,Thompson et al 2014. Ementa: Science of the Anthropocene 2, 000035



(18) “Occupational exposures in the oil and gas extraction industry: State of the science and research recommendations.”, Witter, R.Z., Tenney, L., Clark, S., and Newman, L.S. (2014). American Journal of Industrial Medicine, 57(7), 847-856.


(20) “Potential health impacts of the proposed shale gas exploration sites in Lancashire.” Karunanithi, S. (2014, November 6). Reported at a meeting of the Lancashire County Council Cabinet, Thursday, 6th November, 2014 at 2.00 pm in Cabinet Room ‘B’ – County Hall, Preston, Item 9 on the agenda(1-68). Retrieved from

(21) Compendium at

(22) “Study: More gas wells in area leads to more hospitalizations.” The Citizen’s Voice. Skrapits, E. (2014, October 2). Retrieved from

(23) “Fatal truck accidents have spiked during Texas’ ongoing fracking and drilling boom.” Houston Chronicle. Olsen,L. (2014, 11 September). Retrieved from (24)

(25) “Proximity to natural gas wells and reported health status: Results of a household survey in Washington County, Pennsylvania.” Rabinowitz, P.M., Slizovskiy, I.B., Lamers, V., Trufan, S.J., Holford, T.R., Dziura, J.D., Peduzzi, P.N., Kane, M.J., Reif, J.S., Weiss, T.R. and Stowe, M.H. (2014). Environmental Health Perspectives. Advance online publication.

(26) “Drugs, oilfield work, traffic pushing more people through doors of Watford City ER.” Bakken Today. Bryan, K.J. (2014, August 3). Retrieved from
(27) S Schlanger, Z. (2014, May 21). In Utah boom town, a spike in infant deaths raises questions. Newsweek. Retrieved June 10, 2014, from
(28) American Lung Association state of the air 2013. Retrieved June 10, 2014, from .
(29) “Birth outcomes and maternal residential proximity to natural gas development in rural Colorado.” McKenzie, L. M., Guo, R., Witter, R. Z., Savitz, D. A., Newman, L. S., & Adgate, J. L. (2014). Environmental Health Perspectives, 122, 412-417. doi: 10.1289/ehp.1306722
(30) “Study shows fracking is bad for babies”. Whitehouse, M. (2014, January 4). Bloomberg. Retrieved June 10, 2014, from
(31) “The impact of oil and gas extraction on infant health in Colorado.” Hill, E. L. (2013, October). Retrieved June 10, 2014, from
(32) “Shale gas development and infant health: Evidence from Pennsylvania (under review).” Hill, E.L. (2013, December). Retrieved June 23, 2014 from
(33) “Fracking’s real health risk may be from air pollution.” Abrams, L. (2013, August 26). Salon. Retrieved June 10, 2014, from
(34) “Statement on preliminary findings from the Southwest Pennsylvania Environmental Health Project study” [Press release]. Dyrszka, L., Nolan, K., & Steingraber, S. (2013, August 27). Concerned Health Professionals of NY. Retrieved June 10, 2014, from
(35) “Investigating links between shale gas development and health impacts through a community survey project in Pennsylvania.” Steinzor, N., Subra, W., & Sumi, L. (2013). NEW SOLUTIONS: A Journal of Environmental and Occupational Health Policy, 23(1), 55-83. doi: 10.2190/NS.23.1.e
(36) Poll shows support for a drilling moratorium in Pennsylvania. StateImpact. Phillips, S. (2013, May 14). Retrieved June 10, 2014, from

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The Flim-Flam Men by Cognitive Dissonance   I suspect if average Joe or Jane were asked to identify [...]

The Coming War With China Re-posted from   (Have you noticed that (suddenly) Ch [...]

Papers Please! By Cognitive Dissonance     For those who may not know, Mrs. Cog and I live in the mo [...]

Lies, Damn Lies and Coronavirus Statistics By Cognitive Dissonance     “Never believe anything in po [...]

The Decline and Fall of Civil Society Chapter One By Cognitive Dissonance     From my perspective at [...]

Event Update For 2020-07-01 [...]

2020 - JUN - Spotlight StoriesCategory: Variety Pack2020-06-01 - Boatyard erupts in flame, fire gets huge, in coastal Wadebridge ( [...]

2020 - People Burning To Death2020-07-01 - Yacht goes up in flames and kills 2 people while docked in coastal North Geelong (Austr [...]

However don't expect strikes and yellow vests to fix underlying problems [...]

So how many more times are we going to hear that this is our last chance to take action in order to [...]

This is definitely not a bona fide post [...]

Daily Doom Photo



  • Peak Surfer
  • SUN
  • Transition Voice

The Great Pause Week 15: Pirata"The white gull can bank steeply, climb, dive, and even invert, but it lacks by a large margin [...]

"The blow felt by a globalized, just-in-time, cheap-energy driven, modern consumer economy will [...]

"There are ten million times more viruses on Earth than there are stars in our universe."H [...]

The Great Pause Week 11: Son of a Lab Rat"Humans, by and large, seem unshakable in their beliefs that skin color, religious affiliation, [...]

The Great Pause Week 10: President Jill Stein"President Stein asked what preparations were warranted at this time. The CDC Director said tha [...]

The folks at Windward have been doing great work at living sustainably for many years now.  Part of [...]

 The Daily SUN☼ Building a Better Tomorrow by Sustaining Universal Needs April 3, 2017 Powering Down [...]

Off the keyboard of Bob Montgomery Follow us on Twitter @doomstead666 Friend us on Facebook Publishe [...]

Visit SUN on Facebook Here [...]

What extinction crisis? Believe it or not, there are still climate science deniers out there. And th [...]

My new book, Abolish Oil Now, will talk about why the climate movement has failed and what we can do [...]

A new climate protest movement out of the UK has taken Europe by storm and made governments sit down [...]

The success of Apollo 11 flipped the American public from skeptics to fans. The climate movement nee [...]

Today's movement to abolish fossil fuels can learn from two different paths that the British an [...]

Top Commentariats

  • Our Finite World
  • Economic Undertow

In reply to Pintada. That is the Obamacare health plan, is it not? [...]

In reply to Kim. "It is only greed or selfishness to want more than one needs at the cost of ot [...]

In reply to covidinamonthorayearoradecade. just like the tsunami waves keep the spent fuel ponds coo [...]

In reply to covidinamonthorayearoradecade. words of wisdom from, of all places, the Trump Whitehouse [...] "According to new data, New [...]

I don't get it. For years this blogger and others like Martenson have been on about the fragili [...]

In reply to steve from virginia. This Brookings webinar goes over some of the ground discussed here [...]

In reply to Ken Barrows. Everything is bullish! [...]

Also, it's very possible we could send the virus packing if everybody would just wear a face-ma [...]

The crux of the problem is that what Chris Martenson has christened the "Honey Badger Virus [...]

RE Economics

Going Cashless

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Simplifying the Final Countdown

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Bond Market Collapse and the Banning of Cash

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Do Central Bankers Recognize there is NO GROWTH?

Discuss this article @ the ECONOMICS TABLE inside the...

Singularity of the Dollar

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Kurrency Kollapse: To Print or Not To Print?

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Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money

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Merry Doomy Christmas

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Peak Customers: The Final Liquidation Sale

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Collapse Fiction

Useful Links

Technical Journals

This study aims to provide improved knowledge and evidence on current (1986–2015) climate vari [...]

In many countries, urban heat island (UHI) effects come along with urbanization in metropolitan area [...]

The impact that climate change and urbanization are having on the thermal-energy balance of the buil [...]

Although there is a general consensus about the trends of current climate change, the North Atlantic [...]