Efficiency

Supply Chains, Population & Community: Conversation with Dmitry Orlov Part II

Off the microphones of Dmitry Orlov, Monsta & RE

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Aired on the Doomstead Diner on August 21, 2014

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Discuss this interview at the Podcast Table inside the Diner

In case you missed it, here is the first part of the Interview with Dmitry

Dmitry Orlov Part I

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In this part of the podcast, we discuss with Dmitry the issues of Supply Chains necessary to maintain our current Industrial Civilization, the possible effects of Supply Chain breakdowns, resiliency versus efficiency and how the various nations under the Soviet Union umbrella coped with the collapse of that mega-state.  Other topics include the possibilities for Near Term Human Extinction and principles underlying Sustainable Communities.

Coming soon to Diner Podcasts, a new Frostbite Falls Daily Rant on the 8th Crusade looking at the escalating assymetric warfare being pursued by the ISIS Caliphate in MENA.

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Waste Based Society V: The fallacy of cutting waste

Off the keyboard of Monsta666

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A prevailing viewpoint we often encounter in the mainstream media is the view that our current society is very wasteful with its use of resources and if we were more efficient then we can live an equitable life with a tiny fraction of resources consumed. This view is so prominent that it is quite commonly supported even in the doom blogosphere. However this belief that we can transition to an efficient waste free society without large scale economic and social implications is a wrong one.

While the first statement is correct; we do indeed live in a wasteful society what follows next is not so achievable under our current economic system. What people need to understand when making such statements of cutting “waste” is that all people employed produce either goods or services. If we wish to cut on wasteful production then we must cut the total amount of goods/services produced and since labour is involved in this said production then in effect by cutting on waste we are also cutting on jobs. After all, one man’s waste is another man’s job. That extra hot dog the average overweight American consumes (and does not need) is providing a job to some J6P albeit a poor paying job. While this is just one example it can extend too many occupations in our society.

Now cutting on jobs may be a necessary evil to saving the planet/future generations but one should fully consider the implications such actions would entail on the global economy. We live in an economy that requires infinite growth and one of the big drivers of this growth comes from our monetary system that is all debt based. To service this ever expanding debt load we must increase production even if this production is not needed. Indeed this need to continually expand production has caused the long-standing issue of overproduction.

As the industrial revolution took hold in the western economies and many industrial factories were built (using debt) it soon became apparent that more goods were being produced than what J6P needed or could even afford. To overcome this problem of overproduction the industry of advertising grew in earnest to generate new demand for unneeded items. It is should be noted that it is important these unneeded goods were sold because many of these new factories were built using credit so they needed to be fully utilised to pay back the debt WITH interest.

This dynamic of increasing production has created further issues however even with the aid of a large advertisement industry as demand for products has struggled to keep up with supply. The reason for this struggling demand comes from the fact that real income of households needs to rise in tandem with the increasing amount of goods produced. This issue of slow growth in real incomes became quite acute during the 1970’s oil crisis as this period marked the time that the average incomes in the US no longer rose significantly in real terms and have made up a smaller percent of total US GDP.

To compensate for this development a range of actions were deployed the two most notable being globalisation and easier access to credit. Globalisation allowed goods to be produced at a lower price as the main manufacturing bases were moved to cheaper regions were the cost of capital and labour was lower so the prices of goods sold would be lower and this would serve to prop up demand. The process of globalisation also had the benefit of increasing the numbers of potential consumers so while there was no longer great returns in the western world more countries were sucked into the debt machine and the costs could be spread over a wider base.

Obtaining credit was also made easier so J6P could still keep buying his cars and maintain his American lifestyle even though his wage was not going up and the cost of items were rising faster than his wages. Other more insidious methods to maintaining demand included such things as planned obsolesce. By having items designed to break after a set period of time J6P could no longer buy durable goods such as washing machine that would last for 20 years as they were designed to breakdown within a planned timeframe usually shortly after the warranty period. All these measures while effective, at least for a time, do not solve this problem of overproduction. It merely postpones the day of reckoning and due to the nature of credit expanding over time the problem is actually compounded (literally) when it is delayed.

What I have stated thus far maybe already widely known to people but it is important to realise the dynamic of why all this overproduction is necessary because in essence since nearly all major capital investments are financed by credit there is always a need to expand production to cover the interest on the loans. By cutting the waste in society what happens is all the capital currently being deployed will be underutilised and the loans this capital were backed by will no longer be honoured. This is likely to lead to large scale defaults and large unemployment.

The most notable example of capital investment that serves as the basic platform that makes most of our economic activities viable is that of basic infrastructure. This form of capital investment is most susceptible to the issues described above as nearly all major public works cannot be supported on their own merits and must therefore require finance to be sustained. This issue has been discussed previously in the diner and if you are interested in learning more about this subject please refer to the Large Public Works Projects series here, here and here.

Like most capital investments, major public infrastructure projects are financed by debt. Not only is ever increasing expansion credit a needed condition but as an extension to this fact is that the number of service users using the said infrastructure needs to increase or if the number of users do not increase then the average usage per customer has to rise. This increase of the amount of service user’s makes the infrastructure more viable as economies of scale can be achieved meaning the cost per unit production declines but more important is the fact the cost per user decreases.

This need for greater infrastructure usage does generate much wasteful economic activities and much is said about reducing such wasteful activities. After all how many articles have you read about reducing the amount of wasted water or electricity per customer? The issue with reducing demand is that while it can be a positive thing on an individual level on a more macro level it will lead to a more negative outcome as it would mean a drop in aggregate demand.

Since the infrastructure is financed by debt a decrease in aggregate demand would mean the overheads can no longer be covered and the price per user will have to rise. This last point is important because when it comes to covering costs “wasteful” activities cannot be discounted as unneeded. For example much of the telecommunications infrastructure achieves its low price because certain users using it frivolously for unneeded economic activities such as the child playing on a XBOX 360 using gigabytes of bandwidth. This unneeded activity allows the small business round the corner to enjoy cheaper prices. If you removed the wasteful user in this case then the costs imposed on the needed users would rise and their economic activities are less likely to remain viable. This is the big issue, as prices rise the user base will decline leading to more users being unable to afford using the infrastructure. If this process were to continue then the infrastructure would suffer tremendously as the same expensive overheads would still need to be paid but with fewer users. Even if such structures could remain intact they would begin suffering from diseconomies of scale; that is the costs per unit production would rise as the number of users decline. In short if the number of users decline sufficiently it is likely the whole project will lead to some kind of death spiral.

While the issue is most acute in basic infrastructure works the dynamic remains largely the same for any good produced; the wasteful demand cannot be dismissed as disregarding that demand not only leads to direct unemployment (people responsible for that production are laid off), it also means the cost borne on the remaining users who demand the product rises as the total costs are spread over fewer users. This then results in even less people who can afford buying the goods/services at this new higher price leading to even higher prices as there are even less users to support the cost of overheads. Thus this process leads to a destructive feedback loop developing that is likely to result in dire outcomes.

If we want to reduce wasteful activities we need to recognise a reduction in waste will lead to mass unemployment and large scale defaults since many assets are backed by the debt which would no longer be met if the factories were only working at low utilisation rates. Another important point to consider is that since much of the upper class hold assets in these factories a large scale default is going to hurt them disproportionately hard so it seems unlikely such reductions would be tolerated even if the lower classes could recognise the issue which is unlikely since their jobs depend on these wasteful activities.

An argument often made to make such investments more viable is to increase the efficiency of such capital so the cost per unit output is less even if the number of users or usage per user remains the same. Therefore as a result of this the reduced costs will be passed onto the consumer. While there are definite merits to this approach, which should be pursued, it must be noted that none of these actions will provide an ultimate solution to the problems faced.

The issue with greater efficiency in resource consumption actually lies in its perceived strength that is the lower cost in using the said item. For example if we can provide an infrastructure that produces electrical energy 5% more efficiently the cost per user will decrease. This decrease in costs will result in demand rising negating some of the efficiency gains made. This effect is known as a rebound effect and any increase in efficiencies will cause some kind of rebound effect. As a result of this one must be wary of any claims that suggest that all efficiency gains will result in the same reduction in total usage. It may still bring total demand down but it will always be more marginal than hoped on account of the rebound effect.

Indeed in some cases increase in efficiencies can actually result in greater resource consumption and these occurrences are known as the Jevons paradox. This issue of rebound effect and possible Jevons paradox is not a new topic; it was first in early 1865 and was covered in Jevons book: The Coal Question. It should be noted however this effect only applies if demand is highly elastic where demand rises disproportionally to price decreases. Thus this paradox is more likely to occur in competitive markets were small price differences can lead to significant gains in market share or the amount of users consuming the said commodity. This final point of expanding user bases should be considered in an expanding world of globalisation.

Inelastic Demand resulting in only the rebound effect

Elastic Demand Resulting in Jevon’s Paradox

There are also further issues with increase efficiencies and this issue of increasing efficiencies, like many other things, suffers from diminishing returns. That is over time the returns per unit investment declines and there will come a point that further gains will become prohibitively expensive and even if such expensive gains were pursued the return would be smaller. In other words there will be a limit to how much efficiency can be gained before it reaches some hard limits either from an economic standpoint (which is likely to come first) or a thermodynamic limit. After all it is impossible for us to have 100% efficiency!

The final issue, and one that is perhaps most pressing, is that most cases made for pursuing wide scale adoption of efficiency gains requires extensive use of credit. It is likely going forward that credit will become increasingly constrained so the amount of available credit necessary to fund aggressive efficiency projects will not be available. Without widespread credit the chances of rapid increase in efficiencies being developed are considerably less. This issue of a lack credit is often avoided or implicitly assumed by strong advocates of making things more efficient but it is an assumption that is likely to prove false.

In short while increasing efficiencies can buy some time and keep capital investments particularly basic infrastructure projects viable for a longer period of time there are limits to this process and increased efficiency cannot provide the ultimate solution. At some point efficiency gains will cease occurring in any meaningful level and due to the required need for further credit expansion those issues will have to addressed at some point even if efficiencies could be maximised which is unlikely considering that further credit is likely to become more limited going forward.

The other solution of outright demand destruction as commonly suggested will lead to very negative outcomes as explained above to the investments in question and more generally the global economy. What needs to be recognised is our current economic and monetary systems are not suitable for dealing with declines in demand or credit. They only function well in world of expanding demand and credit as this is how the system was designed for. If we wish to cut all waste then we need to devise a system that can operate under the condition of perpetual demand destruction.

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