Jim Manzi's Cherry Pick

This follows on to previous discussion of Manzi here. Manzi's original piece is at The New Republic.

First off, what are integrated assessment models?

The DICE model, developed by William Nordhaus, is a dynamic integrated model of climate change in which a single world producer-consumer makes choices between current consumption, investing in productive capital, and reducing emissions to slow climate change.

... Current carbon emissions add to atmospheric concentrations via a fixed retention ratio, and realized temperature change is modeled by a three-box model representing the atmosphere, mixed-layer upper ocean, and deep ocean. Damage from climate change is a quadratic function of realized temperature change with a 3-degree change calibrated to cause a 1.3 percent world GNP loss.

(emphasis added)

Begging the question, wouldn't you say?

Jim Manzi bases his approach to the future of the world on the fact that IPCC WG II quotes the results of such models as showing modest impacts of climate change, but those modest impacts are built in. These are not simulations. These are nothing like the physics based models we have in physical climatology. These are guesses.

What does IPCC really have to say about them, other than the graph which Manzi ultimately references?

"It is likely that the globally aggregated figures from integrated assessment models underestimate climate costs because they do not include significant impacts that have not yet been monetised. It is virtually certain that aggregate estimates mask significant differences in impacts across sectors and across regions, countries, and locally. It is virtually certain that the real social cost of carbon and other greenhouse gases will rise over time; it is very likely that the rate of increase will be 2% to 4% per year. By 2080 it is likely that 1.1 to 3.2 billion people will be experiencing water scarcity; 200 to 600 million, hunger; 2 to 7 million more per year, coastal flooding."

I am no great enthusiast for the AR4 WG II report, and they are not entirely free from responsibility for Manzi's grossly dangerous conclusion. But a fair reading of the executive summary ought to have been enough to dissuade Manzi from using the figure in question. The text which he advises the world to base its entire future is an egregious cherry pick.

Nobody who calls GCMs into question should pay the least attention to the Nordhaus type model, which is grossly underconstrained by theory or observation, and instead is constrained by guesswork.

Manzi takes a different tack, treating IPCC as authoritative. Thus he accepts or claims to accept the WG I sensitivity spectrum, and uses this as cover for picking a single chart out of WG II as representative of IPCC's impact assessment. But that choice is not representative of IPCC's impact assessment at all, and is explicitly disavowed in the chapter executive summary.

I hope Manzi will acknowledge his error and change his position.

Manzi's Folly and Economics in General

Remarkably, an IPCC WGII report (see p 17) shows the "cost" of a 4 degree C temperature increase to be on the order of 3% of net economic output.

Jim Manzi uses this assertion to conclude that Waxman-Markey is a bad idea. I would go further. If 3% were a measure of anything realistic it would be hard to argue for the sort of policy measure that we are all so urgently arguing for. So I can't provide a counterargument to Manzi. He even goes so far as to address the fat-tail argument (though of course he misattributes it to Weitzman... sigh...) but it's all calibrated against that 3% .

I think it becomes crucial to track down that 3% and address it. Which makes us all economists, whether we want to be or not. Boulding's observation seems germane; total capital is NOT actually the integral of net economic output. It's where our capital stocks are in 2100, not our GDP, that matters. If climate change is marginal, we should let the chips fall where they may, but the conclusion that only 3% of net economic output is at stake seems totally disproportionate to the risks. IPCC or no (and I've never been a big fan of WGII) I have a lot of trouble believing it.

Hope to pick this up again at some point.

Update: Nice followup here. UT doesn't have priv's to the referenced article, unfortunately. Is this any way to run an intelligentsia?

Seeking Realistic Economic Scenarios

I find it enervating to listen to economists trying to explain our circumstances without reference to resource constraints, as if resources were a separate topic. Krugman's backing of Waxman-Markey carries some weight with me, but not as much as it would if he didn't totally neglect resource constraints.

Some of the things Tidal has said in comments here fit in with this point of view; essentially driving the collapse of the Ponzi scheme is the fact that our ability to borrow from the future is now facing substantive limits which it did not face before. The key resource constrain is usually taken to be peak oil; CO2 emissions constraints function similarly.

I am looking to collect articles which tie the current economic disruption to resource and especially energy constraints. Here, from the Oil Drum, is an interesting one which  manages to blame Richard Nixon for everything. 

I don't share the article's extreme pessimism (or revolutionism?) about the future of capitalism; I think the system will limp along and eventually learn to live within limits. But perhaps my own expectations aren't worth very much. Anyway I am not ready to talk about them at length.

I do share the article's sense that resource constraints and especially energy resource constraints are related to the current crisis for reasons other than a mere coincidence in time. To read even Krugman or DeLong is to believe that the problems of the economy and the problems of its key resource are completely decoupled. It's hard to find professional economists who make more sense than these guys and yet they aren't making much sense at all.

To be fair, Krugman does seem to understand that oil is finite. It's just that he doesn't seem to think that's very important, or relevant.

James Kunstler's May 18 blog entry is also worth reading. (And don't miss his eyesore of the month series if you are feeling sardonic!) But is there somebody convincingly arguing for a middle between collapse and "recovery"? Or is growth so hardwired that near-zero growth simply doesn't happen.

I'm looking for other articles wherein resource constraints are tied to the economic prognosis without going into revolutionary or Kunstlerian postapocalyptic scenarios. Any ideas, anyone?

Note: I am not looking for ecological economics, Daley, Ayres, etc., unless and to the extent that they specifically tie their analyses to the recent economic disruptions and the prognosis.

The Great Relaxation Revisited

I have tried to make the case that an economic slowdown properly handled can be a good thing on balance, even though it will be certainly stressful in the short run for people who are unprepared for it. I proposed repackaging the whole business, dropping the depressing words "depression" and "recession" in favor of "relaxation", on the presumption that the level of activity in the most advanced economies is already excessive.

There's a pair of related articles that recently appeared on the Oil Drum by Nate Hagens The first, called "It's the Ecology, Stupid" (aargh, why didn't I think of that one!) Hagens summarizes the situation elegantly:

Our current socio-ecological regime is founded on a worldview that emerged during a period—the early Industrial Revolution—when the world was still relatively empty of humans and their built infrastructure (33). Natural resources were abundant, social settlements were sparser, and inadequate access to infrastructure and consumer goods represented the main limit on improvements to human well-being. This set of circumstances has been called an ‘‘empty’’ world (34). In an empty world, it made sense to ignore relatively abundant ecosystem goods and services, and to favor the concentration of wealth in the hands of the few so that it could be invested and focus solely on increasing the consumption of market goods and services, which were relatively scarce. If wealth had to be concentrated in the hands of the few where it would be invested to fuel future growth, rather than distributed to the many where it would be consumed at the cost of growth, this was a sacrifice the present had to make for the future.

Our current worldview of what is desirable and what is possible was obviously forged in this empty world context. For example, ‘‘recession,’’ our word for economic decline, is defined as two or more consecutive quarters in which the GDP does not grow. Unending physical growth of the economy is only possible within a system unconstrained by any biophysical limits. Our current institutional and technical approach is also an extension of a long-term trend of adaptation to an empty world. Western society has increasingly favored the institutions that promote the private sector over the public sector, capital accumulation by the few over asset building by the many (35, 36), and finance over the production of real goods and services.

...

Our current [worldview is] failing to meet our needs in a changing world. Anthropogenic climate change, peak oil, biodiversity loss, rising food prices, pandemics, ozone depletion, pollution, and the loss of other life-sustaining ecosystem services all pose serious threats to civilization. These crises can be traced back to one, albeit complex problem: we have failed to adapt our current socioecological regime from an empty world to a full world. The aspects of our regime that no longer serve us in a full world can be grouped under two interrelated themes: a belief in unlimited growth, and a growing and unsustainable complexity.

In fact, I wish I had written pretty much the whole thing.

the task is huge and will take a concerted and sustained effort if we hope to make the transition a relatively smooth one. It will require a whole systems approach at multiple scales in space and time. It will require integrated, systems-level redesign of our entire socio-ecological regime, focused explicitly and directly on the goal of sustainable quality of life rather than the proxy of unlimited material growth. It must acknowledge physical limits, the nature of complex systems, a realistic view of human behavior and well-being, the critical role of natural and social capital, and the irreducible uncertainty surrounding these issues. It is also important to recognize, however,that a transition will occur in any case, and that it will almost certainly be driven by crises. Whether these crises lead to decline or collapse followed by ultimate rebuilding, or to a relatively smooth transition depends on our ability to anticipate the required changes and to develop new institutions that are better adapted to those conditions.

Hagen's followup is to call attention to an article by Jay Hanson that most people, myself included, would find excessive. Like the Unabomber tract, there are interesting ideas buried in the madness and it's not unworthy of your attention, though I would like to make clear that I don't think it's remotely ethically sound and so it's fortunate that it's impractical as well.

But I did like the idea that we should replace "avarice" with "sloth" as the key vice of our age. "Lazy is good" needs to be our motto. "Shoddy is better than nothing". Or how about "Less fear, more beer." In times of shortage, laziness is immoral. In times of glut and surplus, ambition is immoral. It's the common good that requires us to scale back our ambitions.

Jay Hanson (no relation to Jim Hansen, presumably) has been talking doom at www.dieoff.org for some time. Like most peak-oilers he is infected with a truly wretched sense of design as well as a sort of apocalyptic vocabulary, but he makes more sense than you might want to admit.

On a related note I finally had a chance to actually confront an economist today about some of this stuff. She had given a talk to the Ethical Society of Austin about the roots of the economic crisis; you know, credit swaps, excessive mortgages, and all. The word "resources" never appeared.

Of course, I, member in good standing of the Virtual Club of Rome, raised the issue of limits to growth. The response was telling. It was nonsensical to talk about limits, since they were so abstract and obviously so far into the future. Substitutability. Outer space. Technology. Bla bla bla. This was all to be expected and all eventually came up.

But the strangest comment was the first one: "Why would you want to limit growth?" As if the laws of physics represented a political position! Talk about "head-slappingly false".

I think the tautology is pretty obvious, but it's outside the box for economists. I mentioned it to her and she seemed to hear it, but she didn't find it germane to her interests or as providing a realistic constraint to her models and theories.

We are just not talking their language. It's like trying to bring the hockey rule of the blue line into a conversation on swine flu.

Ultimately, it seems there are people who have tremendous faith in technology who don't really understand or care about the principles of thermodynamics. I suspect if you could catch Jeffrey Sachs in an unguarded moment he might admit to getting it. Other than the ecological / environmental economics fringes, though, you will have a hard time finding another economist who cares very much about the earth as a physical system, not even the most down-to-earth ones, like Stiglitz or DeLong or Krugman.

The most mind-boggling thing was that the economist I was talking to thought our problems were because politicians weren't paying enough attention to economists. It's really like these people live on a different planet.

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Image from The Non-Consumer Advocate from a related article called "In Defense of Non-Productivity"

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The Tautology and Its Weaknesses

A given economic growth rate can be sustainable only if the average impact per unit wealth declines at an equal or greater rate.

I argue that this is certainly true if one grants that a sustainable behavior must be sustainable indefinitely.

Shortly after coming to this pretty firm conclusion and wondering how smug to feel about it, I realized that it's just a consequence of the old I = PAT tautology, due to Ehrlich and Holdren (yes that Holdren). Tidal pointed out the same before I got round to making the connection.

I'll continue to argue, though, that it's both a striking consequence and a useful one. Anyone talking about both returning growth to the economy and about sustainability needs to take this constraint into account. This includes President Obama. If you think about returning to sustained 3 % annual growth rates you are talking about some very massive changes in the consituents of the economy.

Pointing to the constraint does not guarantee that there is a way to achieve it. There are many reasons to expect negative growth in the largest economies in the future after all. We don't even know if unsustainable growth can really be reconstituted. If we have really begun the long decline, it is probably a bit sooner than might have been necessary were it not for the great outburst of irresponsibility in the financial sector of late.


What the constraint does guarantee is that we will not be able to revive growth at full steam without a very substantial virtual tax implied by accounting for what has until now been treated as external, and shunted to later generations. We are no longer in a position to shunt things to later generations. We are the later generation that those awful people who were right about the environment warned our parents about.

I'm not claiming some secret key to answer all our problems. I'm suggesting only that those desperate to avoid challenging the growth paradigm have a very steep and narrow path ahead. I'm noticing that this includes our otherwise enormously admirable leader. I hope President Obama or someone around him has some secret recipe to make these ingredients work together, but I think instead that nobody has faced up to the constraints properly.

So I'm proposing we be as optimistic as possible, and also be sort of mathematically oriented. Proving that growing impact is unsustainable is easy. Detaching our institutions and traditions from growing wealth appears very difficult. But is it impossible? We can take the mathematician's approach and assume a solution exists, and try to examine the properties that follow from the constraints we have set in search of a final contradiction.

So consider some of the responses to my previous article in this vein.

Let's first tip our hats in the direction of the stuff that John Mashey wants us to take into account: the fact that whatever we do, energy is going to get more expensive. This surely makes many things more difficult, but I don't see that it makes a sort of numerical growth in wealth more difficult. On the contrary, it would appear in some odd paradoxical way to help! We want more wealth per unit of energy and we will automatically get less energy per unit of wealth. Isn't that the same thing, really? Well, no, not exactly, because it means all else equal that real wealth tends to decline, but suppose all esle is not equal. If there's some other sort of low-impact wealth that compensates, the combination actually pulls in the right direction. I am scratching my head about this one, too, but not everything works the way intuition says it does.

The question, though, is what that other source of wealth might be.

Another interesting comment comes from Dave Gardner of Growthbusters :

I like your notion that perhaps we can all be delusionally happy if we are simply given more Monopoly play money and it has no connection to more resource depletion or environmental degradation! You may be onto something.

I think this takes it just a hair too far. I don't think the currency can be entirely delusional, although one might argue that it is already play money in some circles.

(For the love of God, why doesn't Microsoft just take its money home and shut down its production of worthless garbage so everyone can migrate to a sensible platform? What drives their intense drive to prevent us from having useful tools? It's not because they are literally hungry, is it?)

No, the currency has to convey real advantages. Maybe very few people will fly, but the people with more of it will still be able to take luxury liners to fine hotels, eat the little bit of sushi that is left, and so on. The real question remains what is it that has been growing all along? The concept of aggregate wealth seems to me to evaporate the closer one looks at it. It does seem that the changes in the rules of the game might not have to be all that large.

Bart Verheggen offers a challenge from a different direction.

But in the current financial crisis, didn’t the fact that money is already to a great extent decoupled from material items contribute to the problem? Didn’t the (risky) dealing with money as hot air, without a link to a real product or service, play a role in the current financial crisis?

This came at me rather unexpectedly, but I have to admit there is a point. The fact is that our system failed because of its abstraction from real processes. This perhaps ties in with the Monopoly Money issue that Dave raised. But I am not arguing for devaluing real processes. I am arguing for increasing their valuation. Food and energy in particular will become relatively more expensive in proportion to finished products; indeed this is what is likely to happen anyway.

Another problem is raised by my intervening posting about the vast wealth of the internet and the complete lack of sensible models to pay for it. "Too cheap to meter" turns out to be a problem. We used to believe that our material pursuits would be replaced by artistic and intellectual ones. In a sense that is entirely true for me. I hardly care at all where or how I live as long as I have a decent internet connection and a few good friends. (I'm an extreme case being childless, but the principle holds to a lesser extent for families too.) But as a producer as well as a consumer of exactly the sort of intellectual and artistic content that was supposed to be the salvation of the future dematerialized civilization, I find myself in a strange economy, one where the currency of attention can't easily be exchanged for, say, shoes. Admittedly I could get into endless pissing matches with famous denialists, but after all, I do have some standards. I'd rather just work at Wal-Mart.

Maybe I can follow in The New Yorker's footprints and sell Tobis's Tautology T-shirts. (I have seen someone selling T-shirts with the slogan "There is No Planet B" which I wish I had thought of.)

Maybe this is teh whole story, though: we will just need to adjust to a radical rearrangement of pricing structures. But this brings me back to my basic confusion about economics. As the "basket" of goods we choose changes, the "value" of the "currency" in which we measure our "wealth" becomes less determinate. So what, exactly, is it that is supposed to be growing? Can we keep that something growing while decreasing absolute impact?

But what is the something? Bart ponders along these lines:

Could a redefinition of the growth parameter (GDP) help? More car accidents raises GDP, but decreases the average wellbeing. If impacts, also those that are distant in time or place, are included within the growth parameter, then the picture of growth would quickly look very different. The genuine progress indicator (GPI) and other initiatives along similar lines could perhaps serve as an example.

To which the Texas answer is a squint and a "y'all aren't from 'round these parts, are ya?" Around here we spend money, not GDP.

I think it's the individual and institutional incentives that matter, not the collective metrics. But we do have to play around with them and stop letting them have their way with us.

It's interesting. So far my answer to the question framed by the tautology is "maybe". I haven't convinced myself that we absolutely need to let go of something very much like growth. I freely admit to being uncomfortable with macroeconomics. Unfortunately, it's not just my own grasp of the subject that I find wanting, though. I doubt everyone else's as well. That said, I think the present company will be able to recognize cogent analysis and we will all appreciate any further consideration of these ideas.

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Image from the T-Shirt sales at the New Yorker. Please do buy something from them and keep their lawyers at bay so I can keep the cartoon up.

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Cassandritis in the Financial Sector

Hats off to Gil Friend for spotting the New York Times' enthusiasm for Wall Street deregulation a decade ago.

Proponents:

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''

...

''The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''

In the House debate, Mr. Leach said, ''This is a historic day. The landscape for delivery of financial services will now surely shift.''

The Cassandras:

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''

The jovial rebuttal, of course, was that the worriers worry too much, and shouldn't do so much standing in the way of progress:

Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.

''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.

Oh yes, and those gigantic super-powerful super-intelligent razor-clawed crabs bred for work at corporate construction sites? Don't worry about them either. Almost all experts are agreed that they pose no threat.

 

The Problem and the Problem with the Problem

The prolific (and arguably indispensable) Joe Romm has a terrifying summary about global warming which appears to me to be pretty much on the mark.

Joe believes that people who understand the situation in this way should stick together. Given the scope of the problem, and the vast difference between the perspectives of those few who understand it and those many who don't, you'd think we ought to stick together through thick and thin.

Matt Yglesias makes a similar point:

Where he goes wrong is that he seems to see this primarily as a political calamity in terms of the administration’s standing both domestically and in the eyes of international participants at the coming Copenhagen conference. That’s all true enough, but I think it’s important for people not to write about this issue without mentioning that failure to start reducing carbon emissions in the very near term is a substantive human and ecological catastrophe. Absent emissions reductions, the globe will continue to warm. That will, year after year, keep altering weather patterns around the world. A world inhabited by six billion people based on patterns of settlement established under existing climactic patterns. Climate change means drought and famine, flood and forest fire, all in new and unprepared places. People will die.

Well, people will die anyway, but let's not split hairs. This is starting to look like the whole world is a complete idiot and will march over the cliff in some sort of hypnotic trance.

The problem with the problem is that people don't actually believe it. They think we are, not to put too fine a point on it, making shit up. Why they think that is obvious enough. Some people are trying very hard to confuse matters. And being very effective at it.

The question that immediately follows, the motivating question of "In It" is "so what should we do about it"? And here we have a problem: the confusers have managed to convince the public that people who express deep concern do so for personal gain. In my own case, it has been nothing of the sort, at least insofar as personal gain reduces to wealth.

I very much appreciate and enjoy any encouragement I get form my readers. It has been one of the nicest aspects of the past couple of years. Indeed, I would like to be able to get a tiny amount of personal gain from doing what I do here. While not everybody could do the work I currently do for pay, I'd have to admit I'm replaceable. I could make a much better contribution given the time.

But that leads to an interesting problem of credibility. Lawrence Lessig, at a very impressive talk at SXSW, argued that a big problem with government nowadays is the corrupting power of money which mostly flows through issue advocacy. Once you associate yourself with a position for pay, your opinion, your arguments, even your soundest unassailable proofs, automatically lose value in the discourse.

Unfortunately we have entered a period when the truth itself "has a liberal bias". Things are really serious.

Does that mean that one has to toe the line for fear of injuring one's allies? Many people seem to think so.

But I'd like CSS on the table, and nuclear, and also reduced growth and economic decline. All of these options are anathema to the engine of green politics. And as for the cap and trade vs carbon tax thing, I'm just completely dazed and confused. I'd like to take it up as a neutral party.

I am no longer interested in debating the "Ravens" of the world on their terms. They are a problem but I find it odd that people persist in engaging them as if they had any intention of examining their beliefs. But we have to find some way to make it visible to the world that they are not actually the real thing.

To do that we need credibility, and to gain credibility we have to avoid lining up behind ideas that make little sense.

For instance? I'm glad you asked.

I am interested in debating the proposition that "green jobs" will "revive the economy" in the short run. It's considered heresy to question this in some circles, but there's a simple argument that in traditional economic terms it just can't be true, else it would have happened already.

Yes, it will cost. The longer we wait the more it will cost. We have to get started regardless of the cost; there is no limit to the cost of never shifting to sutainability. No limit short of the end of life.

Does it really help matters to pretend that there is some conspiracy behind the use of coal instead of wind and solar? How shall we think about these things if nobody is allowed to say anything other than the most cheerful nonsense on their side?

Well, it's not disallowed, it just doesn't have much presence in the "marketplace of ideas". Scientists are funded to talk to scientists. Anti-scientists are funded to talk to the public. Even the political parties aligned with the science scowl furiously at any effort to publicly think things through.

So how to fund a voice that is perceived as intelligent and independent, that engages with politics while representing science? The traditional structures of science and of politics and of journalism all fail us: not just me, who really would like to do that sort work if it existed somehow, but all of us, who need to think our way out of our quandary collectively.

Like Lyndon Johnson, we should recall the words of the prophet Isaiah: "Come, let us reason together." That doesn't mean ignoring the seriousness of our predicament, but on the other hand it doesn't mean marching in lockstep either.

We have to butt heads or we won't get anywhere. There's my paraphrase of Isaiah 1:18.

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I am going to try to do better with image credits, but I can't track down the page the excellent drought photo was on. It is from a government site in New South Wales, Oz.
The grackle is available at Stuffed Ark .

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Is Money Itself a Ponzi Scheme?

Here's an alternative view of economics that I heard in a talk, written up by Douglas Rushkoff. The most interesting point to me is this one:

Local currencies favored local transactions, and worked against the interests of large corporations working from far away. In order to secure their own position as well as that of their chartered monopolies, monarchs began to make local currencies illegal, and force locals to instead use “coin of the realm.” These centralized currencies worked the opposite way. They were not earned into existence, they were lent into existence by a central bank. This meant any money issued to a person or business had to be paid back to the central bank, with interest.

What does that do to an economy? It bankrupts it. Think of it this way: A business borrows 1000 dollars from the bank to get started. In ten years, say, it is supposed to pay back 2000 to the bank. Where does the other 1000 come from? Some other business that has borrowed 1000 from the bank. For one business to pay back what it owes, another must go bankrupt. That, or borrow yet another 1000, and so on.

An economy based on an interest-bearing centralized currency must grow to survive, and this means extracting more, producing more and consuming more. Interest-bearing currency favors the redistribution of wealth from the periphery (the people) to the center (the corporations and their owners). Just sitting on money—capital—is the most assured way of increasing wealth. By the very mechanics of the system, the rich get richer on an absolute and relative basis.

The biggest wealth generator of all was banking itself. By lending money at interest to people and businesses who had no other way to conduct transactions or make investments, banks put themselves at the center of the extraction equation. The longer the economy survived, the more money would have to be borrowed, and the more interest earned by the bank.

Does that make sense? Opinions please? Counterarguments?

Although Rushkoff has a substantial Google footprint I was unable to turn up a rebuttal. (This may be symptomatic of how thoroughly we talk past each other these days.)

To me it seemed compelling at first blush, but when I tried to convey it to others I was not altogether convincing. On further consideration, I conclude that it MUST be an oversimplification, because a Ponzi scheme can't work for 400 years, and after all, the system DID succeed in increasing wealth vastly since medieval times.

But there's a real question here for those of us (like me and Rushkoff) interested in economics, skeptical of it, and not especially well-versed. Is growth built in? Because if it is, we have a problem. Given that wealth has environmental impact, given that there is no particular constraint that causes environmental impact per unit wealth to fall as fast as aggregate wealth increases, we eventually hit a brick wall.

There is certainly a case to be made that eventually is now, and accordingly Obama's efforts to reboot the economy are doomed to failure. But that's not what I am trying to address here.

The question I would like to raise is whether unsustainability is built in; whether as Rushkoff suggests we are institutionally incapable of a steady state economy, or whether it might be workable.

The alternative, which I find very intriguing, is the idea that somehow we constrain environmental impact per unit wealth to fall slightly faster than wealth increases. This would be the least disruptive path to sustainability if it were possible. Admittedly this is a vague idea. I got the germ of it from Robert Rohde on a very interesting thread on the globalchange list a couple of years back, when he just calmly asserted that it could naturally emerge that way. Now with all respect to Robert I thought that was a bit, hmm, overoptimistic. But maybe there is a way to make something like that work with some careful design effort.

Maybe we can have a steady state impact constraint atop a nominally growth-based economy by design.

I don't know of anyone (besides myself) trying to envision how such a thing might be constructed. The concept that sustainability could be constructed as a layer on top of an unsustainable system came to me almost two years ago under the influence of a (mostly very technical) Google talk, but I haven't made much (OK, any) progress with it. I find it hard to communicate these sorts of ideas to the sorts of people who might be able to get a grip on the details. Maybe it's just not feasible, but I'd like someone who knows why to acknowledge what I am saying and then reply with an explanation of why it couldn't be practical.

I have a couple of grounds for skepticism myself.

It seems to me that eventually production is actually negatively correlated to wealth. First of all there is the lawnmower problem.

Then there is the fact that I, for one, measure my own wealth in social and artistic and intellectual experiences. This decreases my net impact but doesn't really promote growth at all. If the society moves to an economic metric that values low impact wealth, that means information will be monetized (DRM and such). Recent trends are not indicative that this will work. What's more, there are strong reasons to believe that they shouldn't. In other words, the attention economy doesn't map very well onto traditional economics.

Most economists treat these as aberrations, but both of them are core features of my experience, which may have something to do with why I regard economics with considerable skepticism. But maybe these things can be worked around too.

Economists Trying to Control the Discourse

You would think the situation might call for a revisiting of conventional notions, a moment of introspection, an admission that perhaps past advice may have been not entirely of the finest caliber.

You might think so but, well, no.

David Leonhardt, in an unusually early preview of this week's New York Times Magazine:

But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention — and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy’s heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow?

That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country’s growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country’s growth rate “dwarf all other economic-policy concerns.”

(Note, the links pasted through from the Times, which continues to have a completely idiotic policy to automatically link irrelevant articles, but that's a minor gripe compared to this one. Normally I just excise them but I'm too peeved at the moment to bother.)

I admit I haven't screwed up the courage to read beyond that point as yet. I'm sorry but it appears that I am too feebleminded to be able to understand the point on which the whole lengthy article expands.

Will someone, please, very slowly and patiently, explain to me what it is that is should be growing forever, how it is possible that it can do that (when all other growth processes in nature eventually terminate), and why we need it to do that? Please also explain why that should dwarf all other "economic-policy" concerns, like, say, sustaining a viable planet. I and the other seven billion of us would be most appreciative. Thanks in advance.

Update: Reading on:

For centuries, people have worried that economic growth had limits — that the only way for one group to prosper was at the expense of another. The pessimists, from Malthus and the Luddites and on, have been proved wrong again and again. Growth is not finite.

Which raises another request for assistance. Can someone provide such a "proof", please? Perhaps that word means something different to an economist.

The rest of the article is not too offensive though it seems a bit oblivious to, well, a lot of things. To be fair I did like this bit though:

He then told a story that John F. Kennedy liked to tell, about an early-20th-century French marshal named Hubert Lyautey. “The guy says to his gardener, ‘Could you plant a tree?’ ” Summers said. “The gardener says, ‘Come on, it’s going to take 50 years before you see anything out of that tree.’ The guy says, ‘It’s going to take 50 years? Really? Then plant it this morning.’ ”

The Lawnmower Problem

OK, never mind, for the moment, if lawns are a good idea. Let's consider lawnmowers.

If you have a typical American house, you have a typical lawn in front of it, a lawn that is in need of occasional trimming. Unless you contract out for lawn services, you almost certainly own a lawnmower too. Most likely it has a cheesy, loud, polluting little engine.

You only use this for an hour every other week, or 1/336 of the time. OK, you don't want people mowing lawns at night, so say 1/168 of the available daylight time. So you and your 167 nearest neighbors own 168 times too many lawnmowers. If you could coordinate your lawnmowing, you would need to spend 1/168 as much on a lawnmower. Similar calculations apply to every other household tool you own that you don't use intensively in your work or your principal hobbies.

OK, it's a slight exaggeration for various reasons, but there is no reason 50 people couldn't share a really good lawnmower except for logistics. Less intensive tool sharing is already happening informally in more civilized neighborhoods on local mailing lists. ("Has anybody got one of those really tall pruning shears?") Sure enough, people are trying to build web tools to facilitate more effective sharing. ( H/T @timoreilly )

Though it strikes me as possibly overkill, and that perhaps a local mailing list would be more fun, this sort of thing may move the process of substituting relationship for stuff forward.

Now consider that this would reduce the demand for lawnmowers by 98% over the long term, and create a vast oversupply in the short run.

This is part of the trend to substitution of information for materials. Knowing where to borrow a lawnmower is actually better than owning a lawnmower: it saves you some storage. Substituting information for materials decreases impact on the environment; the impact from the manufacture of 49 lawnmowers in this case.

It will also greatly reduce employment in the manufacture of nasty little two- four-stroke engines. According to almost all economists and almost all politicians, this is a bad thing. Obama has as his first priority re-employing all the people who until recently were diligently employed creating, servicing and financing a huge housing glut. The public agrees. They are wrong.

Economists would argue in theory that if a web site or more reliance on mailing lists or even old fashioned community "bulletin boards" (corkboards and thumbtacks) can replace 98% of lawnmowers with a few pennies worth of information exchange, this amounts to creating value.

But it's value that's very hard to capture: the people putting up the web site will invest a few hundred hours of effort but not much else, and will probably get by on advertising revenues. The vast bulk of the return goes to the people who don't have to get new lawnmowers. So in practice, wealth is moved from the money economy back to the informal economy.

GDP goes down. Employment goes down. Collective well-being goes up a little bit but individual well-being of people who make and market little two-^H^H^H^H four-stroke engines goes down. Crisis is declared.

Yet this is exactly the opposite of the behavior that got us into trouble in the first place: the replacement of community with commerce. Isn't this the sort of "decline" we should be encouraging?

Of course it is no pleasure to lose your main income stream, especially when your savings are crumbling too. The response to this shouldn't be to "revive" the economy, especially the manufacturing sector which has obviously overproduced. The response should be to make it less of threat to be unemployed: public health care, decent housing and food standards provided for everybody. Losing income should not be an existential threat. Calm, underemployed people can be a huge source for creativity and restoration of the social fabric. Desperate underfed people can't.

The answer to past overproduction can't be to bring back the good old days of overproduction.

Don't work too hard to keep your job. Apply your extra efforts to find out how you can contribute to the informal economy.

Don't replace your lawnmower. Meet your neighbors.

Relaxation is progress. Take advantage of the Great Unwinding, and unwind.

Via @timoreilly, here's a discussion of the very topic at hand.

Can Computation Help Solve the Economic Crisis?

Thanks to "Tidal" for pointing out the fascinating essay by a similar title, CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS? by Brown, Kauffman, Palmrose and Smolin. I mostly agree with their perspective (I have a few quibbles about what "equilibrium" means) enthusiastically, and I appreciate the kick it gave me to express what I have come up with so far myself.

As I admitted in the discussion on a recent thread here, I have come to the conclusion that a workable, resource-aware economic theory is absolutely indispensable in the current circumstances. Unfortunately, we don't really have one, so in our new circumstances, coming up with one is about the most important thing to do.

One thing about complex systems is that you don't ever completely understand them; you just get to know them. The way you get to know things about the economy is exactly the way you go about getting to know things about oceanography, glaciology, geophysics/planetary physics and astrophysics, and to some extent meteorology, among many other disciplines I don't have much of a feel for.

That is, you build a complex artifact that behaves similarly to the complex system in nature that is of interest, and you study it as a proxy for the unique real system, constantly seeking to improve its resemblance to the real system.

In other words, you build a science around computer modeling.

Actually, the best thing to do is to build a whole lot of computer models, and have them compete to give you the best explanation.

Climatological aside: Note that nobody has created an otherwise useful dynamic model of the atmosphere that has the small sensitivity that many people are urging you to bank on. I don't know if this is for want of trying. It seems, actually, like something very much worth trying, so it surprises me that nobody wants to take it on seriously.

So how do you build a useful computer model of economics?

Well, let's consider how you build a useful model of climate.

Is there some code that says "here is the El Nino kicking in every few years?" "here is the PDO" "time to add a cold front"? No, you let the properties emerge from the low level description: here is what a parcel of air will do, in this environment, heated in this way, pushed that. Then you put all the parcels together and watch them behave. Once they settle down and act reasonably, the process couples back, and you start learning things from the modeling process. The 3 degrees C global warming stuff is a byproduct. It is not the main output of the system; the system is the partnership of minds and complex simulations; the output is understanding about the real system.

There are models of the atmosphere with much smaller numbers of parameters, and they can be didactically useful and useful in coming up with hypotheses. The general equilibrium models of conventional economics are similar to those. They are like the undergrad matlab exercises in meteorology classes. Except that they seem carefully designed to be anti-scalable; if I recall correctly, computation cost for economic equilibrium models actually scales exponentially with the number of free variables!

What we want is a huge system where the computational cost of each individual event is very small and the scaling is nearly linear. And we want huge amounts of observational data to calibrate against them. And we want to build lots of models. Lots and lots.

The analogy to a continuum model for economics is an agent model. The simulation thus needs make no assumptions of perfect information, price equilibrium, discount rates, anything. No approximation for the whole system is necessary and it seems likely that none is even possible. What we can model is how individuals make decisions in certain circumstances and see the large scale economic activities that emerge.

I've met a few people who both understand this much and indeed are pursuing it. Yet they are still hypnotized by the idiot passivity of the "neoclassicists" (H/T Erik Conway) and thus, think of economics as a branch of pure science,.

It is anything but. Economics is the most applied of sciences.

Of course, for almost thirty years we have been assured that everything would go just marvelously if we refrained from designing the economic marketplace at all. The result was, well, we'll see. Everyone agrees that the times for hands off is over.

Nowadays, we don't need to just understand economics as a matter of some urgency, we need to apply the understanding that we acquire. Computational science applied diligently and competently is the only tool that is up to the job.

I say this even though, of course, computation was at least an accelerating and exacerbating factor in the current mess.

The purpose of the computations is to represent how humans, acting individually and collectively as economic actors, make decisions, and to design the system to reward benign behaviors and increase the cost of behaviors that might be harmful, even sociopathic. Such experiments performed, appropriate incentives and disincentives can be written into law after they have been written into a particularly appealing model.

The idea of achieving such an option by the sort of deal-cutting and difference-splitting that normally is how laws are put into effect will fail. The entire package has to be designed coherently and implemented both urgently and fastidiously. The response of the real system has to be monitored carefully, and feed back to tune the system.

People need, essentially, the maximum freedom that is consistent with a sustainable totality. That is a hard problem.

It also has to get past the politicians intact. Also hard.

A lot of people want very much for it to be an easy problem, but it ain't.

Economics is about to begin to undergo a transition very much like the one climatology is still struggling with. Suddenly, it is consequential, and as a consequence of its sudden consequence, it is not up to the task. It's a matter that should engage whatever creativity and intelligence that can be mustered.

Computer generated glowing fossil Created by R Neil Marshman in 2003 - using a fractal generating program and then enhancing it with Paintshop to create a glowing fossil image. Released under GNU GFDL 1.2. See Wikipedia for details.

Update: My enthusiasm for the Edge article has waned upon reading the commentary to the article, though I'm still glad of the incentive to state my beliefs about this.

Of course, different people have different ideas of what the "crisis" actually amounts to. They seem to be talking not about what I'd call the economic crisis but merely about the financial crisis that hastened the inevitable economic crisis.

I am looking at a longer term than these people are. In my view the economic crisis is about reconciling the creative power of the marketplace and the desire for prosperity with the constraints of sustaining the planet as a suitable habitat for life indefinitely.

Regarding the short run, I don't know whether a theory of economics can properly regulate the financial sector without substantially diminishing it (my own preference). Anyway I very much doubt that such a theory could emerge in time to help with the present tangle. And in any case, finance is just the froth; I am interested in the cappuccino. The fact that some people like too much froth is neither here nor there. As far as I am concerned, the crisis is reconciling economic policy with sustainability with political viability.

Second, they refer to Eric Weinstein who in his comments and on his website refers to some advance in economic theory involving differential geometry. I don't doubt that a better general model could emerge from some mathematical legerdemeain, but better is not necessarily good. Climatology teaches us the limits of general theories of messy systems. What I'm advocating here is a pragmatic approach that lets go of the idea that economics is a discipline that is subject to a eureka-style generalization at all.

Regarding the ambitions of this posting, I don't really know on whose behalf I'm being ambitious. It's hard for me to see a scenario where I actually end up working on such a project. I'd be willing to participate if I could see how, but I have shown no signs of developing the political skill or political capital to start such a huge ball rolling.

I am hoping someone else reads this who can pull it off. (Youth would be a tremendous advantage here.) This is also a long-term project, and its fruits probably won't emerge for decades.

I have ideas sometimes. Some of them are good sometimes. I am not too fussy about taking credit for them either, so just go for it if you can. A hat tip in my direction along the way would please me but is in no way required.

What I am saying is that, at least in part, this is what a realistic science of economics would look like.

Economics as Begging the Question

I mean "begging the question" in the original sense, of constructing a complex but ultimately circular argument that depends on the result you intend to to prove, not the unfortunate sense that it inevitably developed in casual speech of "begging for, or raising another question".

I think great swaths of economics are based on question-begging. In pursuing the blogospheric take on Tierney vs. Holdren, I came across this amazing essay by Dave Roth on a blog called Geryon: Obama's science advisor and the theory of sustainability. (See also follow-up articles Response on Holdren and Tierney and The Holdren Pick on the same blog, the latter by co-author "Bosie".)

For a more defensible quote, consider this from the latter:

I did not intend to question the ability of Holdren to be a useful and competent science adviser. I know nothing about his views other than in the Erhlich-Simon wager, so perhaps it is unfair to judge him on the basis of this incident.

Note, however, that Holdren can continue to maintain something (that we can run out of natural resources like oil) that is provably wrong on economics but that this does not make people question his fitness as a science adviser, while Larry Summers statements on genetics and intelligence (which may be wrong but are not universally agreed to be wrong) disqualified him in the eyes of many from being an economics adviser. I find this double standard interesting.

Now this sounds reasonable at first blush. I don't propose to open the Summers can of worms here, but it is interesting that the claim is not just that "we are running out of oil" is taken as false nor even that the claim "we CAN run out of oil" is taken to be false, but that it is taken to be provably false ON ECONOMIC GROUNDS.

This is perfectly silly, isn't it? Whether there is or isn't an essentially infinite supply of a consumable resource is not a question that can be settled by economics, any more than the orbit of Jupiter can be settled by a plant taxonomist. If there is a result in economics (to the exclusion of geology) that shows that "it is impossible to run out of oil", that result is false, and must be based on false reasoning or false assumptions.

Now let's go back to the original article:

Now, of course, I might disagree with (to take just one example) the psychologist's conclusions about what we should do in response to the agreed-upon fact that x percentage of child abusers were abused themselves. That is to say that it is generally considered acceptable for me to disagree with an expert on the ultimate implications of basic facts and theories in the sciences (such as, e.g., the best policy for preventing child abuse), but it is not considered acceptable (i.e., worthy of an educated, intelligent person) to disagree with them on what the basic facts and theories are.

When a biologist explains the theory of evolution, provides evidence for the theory, and then shows that the whole framework of biology is based on this theory, only a deeply unscientific person would dispute it. We might still fairly dispute whether this theory means that there is no god (for example) -- so we could disagree on secondary matters -- but on the primary matter itself there is no real tolerance for disagreement (and there shouldn't be either).

And this rule holds for basically every hard and soft science I can think of except for one, and that one is economics. For some reason, it is considered completely acceptable for intelligent, educated people not only to disagree with economists on the secondary matters (i.e., the ultimate implications of economic theory and facts) but also on primary matters (i.e., on the facts and basic theory themselves).

People can, and do, routinely claim things like "trade makes everyone worse off," "the earth will run out of natural resources," "the rise of China and India will be bad for US standard of living," and "the global prosperity of today is not sustainable." All of these things are not only proven wrong by economic theory, but they are demonstrably wrong and can be shown to be demonstrably wrong with all sorts of empirical evidence. But for some reason, it's entirely legitimate to ignore or disbelieve the most basic tenets of economics in a way that is not permissible in any other field.

Well, I don't think that's true at all. Climatology, for one, is constantly questioned as we can attest around here easily enough. Evolutionary biology is constantly called into question by fundamentalists. Even branches of pure physics are sometimes questioned for being unfalsifiable and fanciful. The claim that it should be otherwise
("there is no real tolerance for disagreement (and there shouldn't be either)") is made without justification, and shows a real lack of understanding of human intellectual history. Disciplines really do go off the rails; disciplines really ought to be prepared to defend themselves.

If someone makes the claim that a theory of human resource allocation decisions is sufficient to prove the claim that physical reservoirs of a consumable resource are inexhaustible, they are making a remarkably extravagant, to my ears bizarre claim. I don't believe them that this is "proven" by economics, and what is more, if it turns out that most economists believe such a thing, it reflects very badly on the credibility of the field as a whole.

The whole Tierney/Holdren thing is great in that it brings the question of the relative credibility of economics vs climatology into focus. I think it's a very good idea to keep this question in people's minds.

Roth's position is easy and at first blush consistent: "trust all experts". However, I will have no difficulty finding experts on oil recovery who believe that we are closing in on depletion of practically recoverable oil. This contradicts Roth's claimed economics-based expertise, and thus resolves nothing. We have to determine whose "expertise" actually corresponds to reality.

Interestingly, one can make an economist-style argument by noting that oil companies hire many more seismologists and geologists than they do economists...

 

Another Sign of Dawning Realization

Dot Earth is running "Eleven Questions for Obama's Science Team" and I would like to especially recommend they (and all of us) think long and hard on question eight, which is a nice statement of one of our themes here:

My request to the Obama transition team is to introduce the economy team to the science team. Economists like Daniel Tarullo would benefit from discussing the laws of thermodynamics with Steven Chu. I’m also sure that the science community would benefit from learning something of the complexity of economics theory and practice. New ideas might evolve!

I’m certain that physics has laws that must be obeyed at our peril, but I’m not convinced that economics has shown their ‘laws’ to be inviolate. In fact, just now to the contrary those principles are looking quite tarnished. And, I’d like to see a science-cum-economics dialogue continue and evolve throughout Obama’s tenure in the White House. It would greatly benefit our transition to a sustainable economy based on alternative energy, resource conservation, green jobs and creative partipation by all sectors of our society.

Thanks to the questioner, Wayne Hamilton of Springdale, Utah.

 

Post-Growth America

A surprising glimmer of recognition spotted in the major media:

"Look," said the President, walking across the stage with a microphone in hand, "here's what no one wants to tell you. Structural changes in our economy, and new competition from countries like China and India, mean that we're in a different world now. That pattern we once took for granted, in which our incomes basically kept rising across the board, turns out to be something we can't sustain. Many of you are earning less than your parents did, and the truth is, many of your children will earn less than you do."

The President paused, watching as the words sank in. "I don't think denial helps any of us. I know it won't help us come together to do the things we need to do as a nation to thrive even amid these new realities."

Don't worry, you didn't miss the news; the scene above has not happened yet. Few politicians would say those things even if they believed them to be true, because it would challenge a notion at the heart of the American dream: the idea that the kids will earn more than we do.

...

There's a third worrisome attitude traceable to our faith that the kids will earn more than we do. This is the imprudent conviction that we can live beyond our means, because somehow we'll earn enough later to deal with any problems. This outlook represents a dramatic shift from earlier American thinking, as the sociologist Daniel Bell noted in 1976. "Twentieth-century capitalism wrought a ... startling sociological transformation," he wrote, "the shift from production to consumption as the fulcrum of capitalism." Both as individuals and as a society, we've been gambling on better days tomorrow to make good on unsustainable borrowing today.

Such is the toll of a Dead Idea.

This is from Matt Miller, editor at Fortune, raised in Greenwich CT and Rye Town NY, BA economics magna cum laude Brown, LLD Columbia Law School, member Council on Foreign Relations. In other words, to the extent that there's still an "Establishment", he's in it. You heard it there second.

 

Failure of Networked Systems

This article, "The Failure of Networked Systems", on The Oil Drum explains matters very well.

It is sort of an engineer's twist on the tradeoff between risk and return. Go read it.

It applies both to the immediate financial mess and the even bigger picture reservoirs-and-flows views of the earth system.

What I have to add is this:

The current financial disaster is based on people deluding themselves that they had eliminated risk, when in fact they had coupled risk. The consequence is that small failures were avoided at the expense of big failures.

The whole setup of modern human activity makes a comparable error. There is no such thing as unlimited growth. All growing systems reach limits. The most casual understanding of exponential growth (h/t HR) makes this clear.

Either fuel supply or carbon waste are likely candidates to be the limit we hit first, but there are others. It doesn't matter. The "growth forever" idea is really "growth until it stops". If we base everything we do and everything we think on an assumption of growth, we start to build things in to protect the growth.

Much of government of the past century has been about protecting the growth. Sooner or later it is doomed to fail.

Has this just happened? Has the system reached old-fashioned bubble-popping so emphatically and so hard upon its physical limits that we will be unable to right it? Maybe, but probably not.

The problem is that righting it is not what we need to do. What we need to do is relax.

What we will inevitably try to to is rebuild the tightly coupled growth-dependent system that has spectacular failures built into its whole M.O. Realistically, some of this is unavoidable at this stage, but it's an ill-timed distraction. What we ought to do, instead, is reduce growth dependency and increase redundancy and resilience.

We need to convert to a world where less wealth gets created, and less wealth gets destroyed.

This is the relaxation scenario; it is easier on everybody, but it will take some creativity. In a perceived crisis, can we find the creativity to say, "no, we don't particularly want things to get back to normal"?

Resilience, not growth, is the goal of our time. We need to build a world where time to think and time to enjoy and time to care is valued more, where time to achieve and money to spend is valued less. Say you don't want no diamond rings and I'll be satisfied. Tell me that you want the kind of things that money just can't buy.

Trying to find sustainability in conventional economics at a time of stress is a category error if ever there was one. This mistake has its precedents and they are not encouraging.

Asking the Right Questions

From Herman Daly's keynote to the AMS workshop on Federal Climate Policy:

However, it is useful to back up a bit and remember an observation by physicist John Wheeler, “We make the world by the questions we ask”. What are the questions asked by the climate models, and what kind of world are they making, and what other questions might we ask that would make other worlds? Could we ask other questions that would make a more tractable world for policy?

The climate models ask whether CO2 emissions will lead to atmospheric concentrations of 450-500 parts per million, and will that raise temperatures by 2 or 3 degrees Celsius, by a certain date, and what will be the likely physical consequences in climate and geography, and in what sequence, and according to what probability distributions, and what will be the damages inflicted by such changes, as well as the costs of abating them, and what are the ratios of the present values of the damage costs compared to abatement expenditures at various discount rates, and which discount rate should we use, and how likely is it that new information learned while we are constructing the model, will invalidate the results? What kind of world is created by such questions? Perhaps a world of such enormous uncertainty and complexity as to paralyze policy. Scientists will disagree on the answers to every one of these empirical questions.

Could we ask a different question that creates a different world? Why not ask, Can we systematically continue to emit increasing amounts of CO2 and other greenhouse gasses into the atmosphere without eventually provoking unacceptable climate changes? Scientists will overwhelmingly agree that the answer is no.

...

To make the point more simply, if you jump out of an airplane you need a crude parachute more than an accurate altimeter.

Go. Read it. He's just getting warmed up.

Update: Thingsbreak points out that you can read the same text with less strain on your eyes and your mouse hand at Grist.

 

It's Raining and It's Windy and I'm Sad

The rest of the cartoon (H/T Dot Earth) is here. Another timely toon here.

H/T Atmoz for the title of this posting.

The NY Times points to an audio production of an outsider's asking stupid questions about finance. It promises to be very interesting.

I thought I'd capture my opinions about what I'll call the wtf, by which I mean the current financial/political situation, before listening to that report.

My background, as regular readers know, is a PhD in climatology and a long standing interest in the processes of policy and collective decision making under complexity. So of course the present clstrfk fascinates me.

My opinion is informed by an undergrad class in economics in the 70s taught by a Keynesian, occasional and spotty reading in the area since, and fundamnetal doubt regarding some axioms of economic thought, especially that growth in measurable financial transactions is a useful measure of public well-being. The last keeps me very separate from Keynesians like Krugman to whom I am otherwise closest. It puts me closest to a small camp of anti-growth economists, but they also seem wrong to me on technical grounds I won't get into here. I make no claim to being an expert; I merely doubt that there is much expertise at all.

For instance, here is Kalinda Stevenson, Ph.D., financial adviser, life coach stating "However, the bank cannot loan out all of its deposits. If you deposit $1,000 in the bank, the bank loans most, but not all, of your $1,000 to other customers." As I will explain briefly below, this seems obvious enough but it is completely wrong. Anyone believing this falsehood will find it impossible to understand wtf, their eyes will glaze over, they will sigh, and they will go with their "gut" which will steer them wrong. OK, her PhD turns out to be in protestant theology, so I'll put my Ph.D. up against hers as a basis for thinking about economics any day, but she doesn't stress this at all and happily poses as an expert on money. Her implied perspectives in the latter article should fascinate those who don't understand the "conservative", "red state mentality". But I digress.

Anyway, here's my own first attempt to explain wtf before shuffling off to my day job this morning.

---

First of all, the intrinsic worth of a dollar is obviously zero; a dollar is simply a measure of how much purchasing power everybody agrees you have. The fact that it's disconnected from gold is pretty secondary. The practical uses of gold are real enough, but the value of gold is also pretty much dominated by convention and not by actual utility. The number of dollars in the world (I use the term loosely to include all fungible currencies here) is not the total of printed and minted currency; the existence of printed and minted currency is a bit anachronistic. Most dollars are digital. So what prevents the bank from "lending" more of these bits than they actually have?

Well, in fact, nothing. More to the point, banks are encouraged to do exactly that. Lending money you don't have is the prerogative of a bank. Banks are the institutions which are licensed to lend money they don't actually have! This is the keystone of the whole situation. Currency comes form the mint, but money comes from the bank. Anyone with a license to lend money they don't have is a bank, any bank is licensed to lend money they don't have.

The crucial aspect is the multiplier, the ratio of how much they lend to how much they have.

What controls the multiplier? Could a bank abuse this and create infinite amounts of money? Well, in the past this would cause a run on the bank. Everyone with any real money on deposit would "pull it out", ultimately turning it into currency, stuffing their mattresses, and buying up ammunition. (This is of course rather silly, because even the stuff in your mattress is ultimately imaginary.) The amount of actual cash on hand at the bank would become negative, the ratio would become infinite, and the bank would find itself unable to get currency and would "collapse", leaving remaining deposits worthless. Something like this happened in 1929 if I understand correctly.

To prevent this, we have a federal reserve bank, whose function is primarily to insure the first $100K of any deposit at any bank. (Does bank consolidation limit the amount of money you can insure?) In order to insure this, the "Fed" is empowered to regulate the banks, including setting the limits on the multiplier.

This worked out brilliantly for a long time, almost 80 years in the American context; lots of "growth" happened, much of it actually corresponding to well-being. Some of us have been worried that this would eventually blow up, since many types of "growth" aren't actually improvements. Indeed, people have of late become tired, angry, stressed and shallow. This certainly feeds into our other problems. Growth addiction prevented the substitution of long-term sustainable energy supplies for short term ever-burgeoning fossil fuel consumption, and this finally provided the trigger for the wtf.

In my view, though, the wtf occurring now is decades early with respect to resource limits. Normally we could have worked through the petroleum shortfall using the genuine creativity and competence that capitalism unleashes. This ought to have been a glitch. The Kunstler scenarios never rang true for me. If we are going to be reduced to an Argentine-class collapse anytime soon, (and it looks all too likely that we are) it will be a mistake to attribute it to resource limits. Eventually those will bite, but this is too early.

Anyway, this central role of the Fed means that the libertarian "government-out-of-the-economy" advocates are thus fundamentally either ignorant or dishonest. The entire structure of modern capitalism is entirely based not only on regulatory powers but also on deliberate manipulation on the part of governmental entities. The idea that regulation could go away and everything would continue to work out is simply at odds with reality.

And this idea, the idea that markets need no regulation, the idea that modern markets even exist in the absence of regulation, not oil, not housing, not outsourcing, is the root of the problem.

After decades of republicanism, interrupted only by a brief interlude of Clintonesque "market-friendly" democratism that is not substantially different in this regard, the boundaries between banking and non-banking enterprises blurred. Because banking is so profitable compared to, you know, actual work, anyone who could get in on this something-for-nothing business looked for ways to do so. The availability of vast computing power contributed. Many brilliant people who might have been doing useful work involving derivatives and integrals were diverted to parasitical efforts involving derivatives and options. Essentially these "products" were bets on bets about bets on bets. These products essentially replicated the banks ability to manufacture money without being subject to regulation.

Remember the science fiction story about so many volumes of cross references and indexes that the actual information got lost? "Ms fnd n a lbry" it was called... It's sort of like what has happened. There were so many bets and bets about bets that they amounted to a huge financial structure dwarfing the real economy on which they were perched. And now the whole structure is tipping over.

For years, rewards went to people making elaborate bets far more than to people doing real work. (Even our heroes at Google and Apple are fundamentally in advertising and fashion, though to be sure they have done more real work than most beneficiaries of the current period!) This fed the building boom, feeding the real estate boom, feeding into many of the bets that suddenly went sour at the first provocation.

Of course, there's also a lot of resources lost to literally blowing things up these days too. But I don't think the awful tragic waste of the Iraq escapade is crucial.

My idea of what happened is that the bets about bets about bets became so huge as to so dominate; that their consequent effect is essentially to undermine the whole concept of money. More money changed hands in the phantom economy every day (if I recall correctly) than was transmitted in real transactions in a year. The bets on bets came to dominate finances. So at the first significant setback to the real economy that all these bets were magnifying, multiplier effects started cascading up the betting chain, and now they are set to cascade back down.

Because the system was unregulated, it became too risk-tolerant and brittle. At the first provocation (peak oil is not peak energy, folks) rather than adjusting it started to crack.

The $700 bn can be looked at as an effort to grout the cracks. Will it work? I don't know. Is it a good idea? Well, since the money is sort of an imaginary quantity anyway, and if we don't risk it, it will become sort of worthless anyway, I figure, yeah, it's better than instability.

For once, I have a little bit of sympathy with the extreme republicans. They say that a core tenet of capitalism is letting failures fail. Maybe we ought to take them up on it and see where that leaves us. One thing is certain; rich people would lose more than poor people would. There's a certain rough justice in that. The outcome though would be a huge leveller, something I think the hard core Republicans (representing mostly relatively rich people in relatively poor regions) would not care for.

I also think the liberal impulse is easy to understand. This looks like the middle class bailing out the rich!

The thing is, it's all paper. If the value of the paper goes away, the middle class is even more thoroughly screwed. So they really have got us over a barrel. I am not smart enough about these things to have much to say about the details, but I am smart enough to understand the political calculus of it. Pelosi is right to insist that the Democrats not be saddled with the blame; I have no issue with that. I think we should try to keep the existing mechanisms wheezing along as best we can rather than trying to reinvent them from scratch, though. So I don't know what should be done, but it seems to me like it's not nothing.

In the end, though, it's the market libertarians' incapacity to see that the system we have set up is an elaborate artifact, not a fact of nature, that is at the root of the problem. We are now in a position that the whole of capitalism needs to be reconsidered and largely reinvented, and it's hard to see who is on the scene to do the thinking.

In the short run I think we need to try to flex rather than breaking the whole thing in one swoop, though there is a strong argument for getting the collapse over with based on the plausible idea that any bailout won't work anyway. The way I see it, if things are that bad it hardly matters what we do though. It's hard to understate the risk associated with total breakage, so that's why I'm for at least trying to patch it together.

It's interesting that it's the deregulators in congress who caused the problem and thus created the risk of collapse seem to be the ones trying hardest to finish the job...

Interesting times, either way.

Update: Unsurprisingly, the Texas delegation has been particularly unenthusiastic about the bailout, this despite the extent to which Phil Gramm, former Texas senator, was a crucial player in inflating the bubble in the first place. Did you expect a population that keeps electing Ron Paul to be very enthusiastic about this thing? What's perhaps a bit surprising, though, is that the eight members from Arizona, evenly split between the major parties, were unanimously in opposition, despite the urging of their own Senator McCain.

Update: James Galbraith:

Despite the common use of language, the capital cost of this bill does not involve "taxpayer dollars." It authorizes a financial transaction, exchanging good debt (U.S. Treasury bills and bonds) for bad debt (the "troubled assets"). Many of those troubled assets will continue to earn income for some time, perhaps a long time. The U.S. Treasury commits itself to paying the interest on the debts it issues. The net fiscal cost -- which is also the net fiscal stimulus -- of this bill is the difference between those two revenue streams. Given the very low rate of interest presently prevailing on Treasury bills, this is likely to be somewhere between $20 billion per year and zero from the beginning, even if the Treasury were to issue all $700 billion in new debt at once. It is a mistake, in short, to count the capital cost as a "cost to the taxpayer."

This is not the war in Iraq. In the longer run, of course the Treasury will incur capital losses on the assets it acquires. The entire purpose of the bill is to overpay for bad assets, so as to give financial institutions a chance to recapitalize themselves.

H/T 3Quarks.

Update: Tom Friedman is apocalyptic.

Update: In the comments, David Benson agrees with me that the newfound availability of vast computing power is a component of the financial fiasco. But HPC Wire (the newsletter of the high performance computing community) takes exactly the opposite perspective!

"Why didn't the sophisticated, computerized pricing models that Wall Street firms use to predict returns and risk for complex derivatives save them from the sub-prime mortgage mess? The short answer is: Fund and portfolio managers rarely use them." Crosman goes on to reveal some problems with the algorithms themselves, noting that "some models for analyzing mortgage-backed securities don’t include house prices, which are a fairly important piece of the puzzle." In other cases, the models were simplified for the sake of expediency. One quant noted that "[t]raders will like a light model because they don’t need heavy routines that will take forever to run on their machines."

Update: Krugman not only is apocalyptic, he uses the word "apocalyptic".