Where to now?

While reading Capital in the 21st Century I was thinking. A century ago, the means of production was considered the most important economic asset – you could make things in factories and sell them in high volumes to earn a high return on investment. Two centuries ago it was agricultural land (and slaves in the USA) that earned the most money because food was in demand. Now it is human capital because of the predominance of service based income. It seems likely that growth on the order of 3-5%, as it has been for the past 30 years, will be unsustainable because of resource limitations. But which kind of resource is likely to be the limiter? What will the future look like?

Note:published with sections incomplete Sept 29 2014

I think it is natural resources and Human Capital combined – ways that are different to the distant past and even the rece3nt past. The balance between human capital and natural resources seems to have been shifting in the past 30 years. The “Oil Shocks” in the 70s and 80s were probably the first indication that scarcity of natural resources were limiting growth. Growth that was historically lower than 1% for population and near 0.1% for economic output per capita (productivity) had become more like 3% for both productivity and population, obviously with variations geographically. The book Capital in the 21st Century covers this very well so I will not reproduce much of the content here. The graphs linked below, showing Global growth in Population and Global Output per capita are the key messages anyway.

Growth – its Enablers and Constraints

Global population growth

Global population growth showing a rapid increase (approximately exponential) and decline towards long term trends. Graphic Credit to Thomas Piketty

We now have a return to more normal growth rates compared to the 20th century’s exceptional accelerations and then declines. One of the implications is that there are now seeing different constraints on growth. 200 years ago the constraint on growth was food production. Populations grew and crashed based on the ability to feed themselves (and a few other basic necessities). Jared Diamond describes this well in Collapse. Why the West Rules – For Now also addresses some of the collapse scenarios. It also looks at economic and political strength through a similar lens of constraints and enablers. Another book by Jared Diamond – Guns, Germs and Steel shows how technology and circumstance can lead to domination of less advanced civilisations. It seems there is a lot for us to learn from these emerging analyses.

Drivers for growth

What has driven the growth in population and productivity? This is an important question to answer before seeing how the drivers have produced what seems likely to be a blip in historical economic patterns. Availability of food is an obvious driver for population growth. Population growth has been driven much more by better health and sanitation that meant lower infant mortality and longer lives.

Productivity growth has been driven by mechanisation and technology that created new ways of doing things faster and more accurately. Longer working lives have also contributed to productivity.

Total output has therefore been driven by a combination of population increase and productivity increase that have been at unprecedented levels. However, there are limits to the growth that have already kicked in to dampen population growth and productivity. This will be discussed in detail under Limits to Growth, below.

Agrarian Economy

Food  was the major constraint on growth for millions of years prior to the Industrial Revolution. Without food there could be no expansion of population. Steady and incremental improvements in agriculture allowed for population growth with factors such as public health and politics (wars etc)  limiting growth periodically. Energy requirements were largely provided from the natural environment and animals; oxen for ploughing, horses for transport and flowing water or wind to grind grain (at least in towns).

Human capital was important for any reasonably advanced civilisation. Rome and Egypt were agrarian economies that grew rich from the work of others. Conquered states paying tribute and slaves. Especially slaves who allowed a small elite to control a large amount of wealth. Hereditary wealth mattered more than what you could earn as a free person. Property was the entre to political power, as was wealth. Wealth was derived from people who paid rent on property or who you owned as a slave or serf.

Until the 19th century owning people and agriculture was the way to have wealth and power. Almost every cultural aspect of human life was dominated by this factor. There were few constraints imposed by natural resources because global population was small enough to allow expansion into new territories and establish agriculture on land there. Population was the limit to wealth creation and that was in turn limited by food production. The natural environment therefore established significant limits however, those limits could be overcome by expansion.

Timber is probably the first example of natural resource depletion restricting economic growth in agrarian societies. The discussion of how depletion of this one resource can cause a civilisation to collapse is in Chapter 2 of Jared Diamond’s book on the subject. See my review for a summary.

Industrial Economy

Global productivity per capita showing the large rise and trend down to long term levels

Global productivity per capita showing the large rise and trend down to long term levels

An industrial economy took a long time to develop and it required energy in large amounts. Energy and its implications for economic growth is discussed in detail in Why the West Rules as well as in the link provided at the beginning of this sentence. Readily available and concentrated energy sources from fossil fuels drove the industrial revolution. The first forms of energy were burning wood, from wind and flowing water; these sources were able to provide enough for the slow development of early technologies such as metal production and milling. Fossil fuels provided the large amounts of energy to replace manual and animal labour to eventually drive mass production.

An industrial economy changed the political landscape and the worth of human capital to something that appears to have been a temporary aberration. The early part of the Industrial Revolution and the Information (technology) Revolution both displaced human labour with mechanical and technological machines. In both cases there was a restructure of economic activity that absorbed surplus labour in new ways. Agricultural workers and weavers became factory workers as demand for manufactured goods grew rapidly. In the last two decades, routine administrative jobs have been replaced with automation and service focused jobs have come to the fore.

Food production in the Industrial Age was less of a problem because more intensive farming methods allowed more food to be produced by fewer people on the same amount of land. Wealth could be created by selling manufactured goods and therefore land prices dropped, as did food prices relative to income. The value of bricks and mortar started to be come an important part of the economy, largely taking the place of agriculture and land rent as a wealth creator.

Availability of Capital, raw materials (another name for natural resources) and skilled labour became the limiting factors to industrial growth. A solution was found for making Capital more readily available through companies and banking innovation. Skilled labour was addressed by universal schooling and mechanical automation increased the amount of work that could be done in a working week. Transport became a new constraint. Raw materials were still abundant and it was just a matter of logistics and cost of labour (mostly) to access them.

Transition into an industrial economy had dramatic impacts on people. Dickens described this well. We can see the same kind of thing playing out as African, Latin America and Asia have industrialised. Human capital became much less important for a manufacturing economy – however, it was still needed to design and manage the industrial processes. As a result the Industrial Revolution drove a dramatic increase in service industries. Education, Finance, Health, Retail and many other service sectors came to prominence due to the need

Transitional Services Economy

Split of  employment by Sector

The split of employment across Agriculture, Manufacturing and Services over time.

I have described the period post 1960 as a transitional services economy to make the point that there has still been a large emphasis on manufacturing and even agriculture during this period. Western economic growth and industrialisation happened earlier than for Asia and Africa and it is apparent that there will be a decade or more before there is some uniformity Globally.

Collapse

Why discuss collapse of civil societies here? The answer is that this is a mechanism that has applied to humanity over many thousands of years when exploitation of resources became unsustainable. Why the West Rules – For Now by Ian Morris tracks many such events from economic and political perspectives that complement the analysis of Jared Diamond that features in this article.

Scarcity is one of the important collapse scenarios. Something that was previously abundant or in adequate supply becomes scarce and therefore a population becomes unsustainable. Politics is another collapse scenario. Oppression and ambition are probably the two biggest. Environmental change seems to be part of most collapses, however the most common scenario is several factors coming together at one time.

Scarcity

A prime example of this is the Anasazi of North America who exploited a delicate ecosystem in the New Mexico arroyos until a period of drought caused a population collapse that wiped out the civilisation.Population had grown in good climatic conditions and exploitation of the natural environment meant that deforestation and pressure on agricultural production only needed a change in the climate to cause a catastrophic collapse.

Overexploitation is not just something from the past it is also relatively recent. All the evidence points to the genocide in Ruwanda having a cause that is as much about food and water shortage as it is about tribal hatred. It is almost as described by Malthus in his dire predictions for the fate awaiting humans due to exponential population growth.

Politics

Inequality of income over time

Showing the levels of inequality of income between classes and interpreted over recent history

Getting politics wrong can cause a collapse not only of political control but also a population collapse due to several causes, including genocide, dislocation and the results of economic collapse. Another factor is internal revolution or Civil War. Here you get a different kind of collapse that is mostly driven by high levels of inequity. China in the mid 20th century, Russia in the early 20th century, France in the 18th century, Britain in the 17th century, the USA in the 19th century and many hundreds of post colonial revolutions since the World Wars are good examples. Norman Davies in his book Vanished Kingdoms describes a number of novel ways in which thriving States can implode.

The in the table above it is not hard to see that there is an increase in the inequality of income and that almost everything is pointing to a greater level of inequity in the near future. If we are to learn from history it should be that rising inequality leads to civil unrest.

Environmental Change

Environmental change has a part in many or even most population collapses. It is likely to be the trigger for a collapse that has some other element as its root cause. In some scenarios it is sufficient on its own if the change is too fast to allow cultural change or migration. Tim Flannery has written three books that make it very clear how humans have transformed their environment in the past and into the present. The Future Eaters, The Eternal Frontier and The Weather Makers.

The best predictions suggest that we are heading for higher variability in weather with an average increase in temperature that is already apparent in the weather records since 1950. With hotter temperatures in Summer we will see a reduction in the length of growing seasons in almost every location within 45° North and South of the equator – that is more than 70% of the world. The changes predicted are faster than anything in discovered geological and anthropological records. A 4º rise in temperature will have create Scarcity of food and water, Dislocation as a Billion people have to move from inundated land and Political trouble will inevitably arise from all that. We should be seeing an imminent cause of collapse on a global scale.

What next?

Right now, I think we are entering a new phase of a transition  that of 30-40 years ago moved from a manufacturing dominated world to a services oriented world. No we appear to be entering a period where service is king and manufacturing is no longer the key to wealth. Agriculture is still important but accounts for only a tiny fraction of the economy. Manufactured goods are still growing at a high rate, however marketing of the goods makes more of a difference to profit than the production of the good itself. This is a clear indicator of an economy dominated by Services. In the early part of the 20th century demand was there and it was a matter of producing the goods and people would buy. If you produced them cheaper then more would buy. Now, more than a third of the world has more than its basic needs met. Therefore selling is more about creating a need than fulfilling it.

Limits to growth are threats to Industry and Agriculture. The environmental damage we are doing Globally is even an existential threat to living things, post particularly mammals – i.e.: us.

With productivity and population growth low and rapid changes in wealth and income distribution that happened in  the 20th century reverting towards the long term trend, there will almost certainly be another kind of structural adjustment to the economy and civil society.

As so well described in Capital in the 21st Century, services are not very amenable to productivity increases, unlike the case with manufacturing and agriculture. The example of a haircut in the 16th century taking about the same amount of time to complete as one now seems to get the argument.

Threats

Here are the threats as I see them and measured against the likely drive towards a standard First World Lifestyle:

  • First is overpopulation
  • Second is pollution, greenhouse gasses, toxic waste and persistent waste are the big ones
  • The next biggest threat is Energy supply and it taps into the first threat.
  • The next biggest threat is water scarcity
  • Then there is food, related to most of the above
  • Finally, a broad range of natural resources that are relatively scarce but essential for a first world lifestyle

All of this is related in some way

Oil is probably the best illustration of what I am thinking. It has become a commodity that currently costs per litre less than a bottle of drinking water. That is despite it being sold in chemically refined form at a petrol bowser and having to be extracted from far below the ground and transported much further than the water in that bottle. Energy has been the driver of economic and population growth for two centuries and it has been seemingly unlimited. Until recently fossil fuels have been virtually unlimited. To some extent we can see them as still sufficient to allow growth in less developed countries. That ignores an unavoidable fact – they are finite, although large, resources.

Petroleum to valuable to burn

One of the ideas that emerged in the 1980’s was that petroleum is too valuable to just burn. Its use for manufacturing plastics and even pharmaceuticals far surpasses its value burned for heat (that is what powers a car engine). Well, not the commercial price of oil is rising not because of artificial scarcity but because of peak oil production. We are running out of it and therefore its price rises. As oil costs more so do other energy sources which are more in demand. All non-renewable fuels are going to increase in price and their other uses are likely to be of greater value than just burning them.

Coal past its useby date

Coal was an important part of the Industrial Revolution because it produced a more intensive energy source than wood and therefore made it possible to locate industry nearer the raw materials and/or labour. Initially it created a pollution problem when used in cities until electricity allowed “clean energy” in cities with power plants in the countryside – out of sight and out of mind. Scaling up the generation of electricity from coal meant that the pollution problem has become too large to ignore. Carbon Dioxide pollution is just one of the many types of pollution problem and only recently acknowledged as dangerous because nobody is clearly dying by breathing it in right now; and other reasons.

Coal fired electricity production relies on economies of scale to be effective. Large power plants with huge supporting infrastructures are well suited to a constant output of power with limited ability to increase or decrease production in much less than several days. To handle peak loads for short periods, electricity providers use gas fired generation or hydroelectricity (usually at higher cost) to meet demand. The fixed output caused a problem. Generate enough to deliver the demand for industrial peaks combined with evening meal preparation during the week and you have more power than people wanted to buy overnight and on weekends.  The solution was to provide overnight and weekend “off peak” rates to encourage the use of electricity then and often in the form of energy storage for hot water or heat banks.

In recent times this limitation of coal fired electricity generation has been turned into a benefit by opponents of renewable energy – the Baseload argument.Electricity use in a First World economy is much different to how it was 30 years ago. Now there is a fluctuating demand for electricity with much shorter cycles and more in line with the needs of airconditioning for offices and homes than it is for industrial uses. This means that times of high solar energy are exactly the times when peak electricity supply is needed. The demand is more in line with solar renewable electricity than it is with Baseload generation.

So from a perspective of both pollution and modern demand coal is not the best solution to current energy requirements. And it will run out at some time too.

Nuclear is more problem than solution

Not much more to be aid. If nuclear power was clean and safe it would be a great thing. The unfortunate fact is that it is neither. Pollutants from nuclear power stations are low in normal operation. That part is ok. The dangerous by-products of nuclear fission are amongst the most poisonous with long term health consequences in even minuscule doses. The risks associated with nuclear fission power generation are almost impossible to manage. Something will happen to one of them, given enough time. Four or more major accidents have already happened and none of the consequences were good.

On top of that the energy needed to build them and clean up afterwards makes them unviable with current technologies and major advances. Those advances have not happened – fusion power is still a dream that cannot exit the laboratory.

Population is not sustainable if every person is to have a good standard of living.

Not unlike the predictions of Malthus, we are already seeing the effects of resources made scarce by increasing populations. Think Sub-Saharan Africa and the Middle East. Think oil crises in the First World. Think of the competition for water across National borders (or State one in Australia). Energy is a key to standards of living and the Limits to Growth scenarios are clearly being played out. Smaller populations in most of the world are necessary if resources are not to be depleted to the level of causing Collapse as documented by Jarod Diamond. Inequality is highly unlikely to be addressed by reducing the First World standard of living but it is likely to be achieved by bringing the lower standards closer to the First World – this is happening now and driving potential collapse unless the bases of inequality get a thorough rethink.

The problem of population is a Wicked one. The best driver for population reduction is to increase economic wealth and standards of living (education, healthcare, good living conditions and enough food) and therefore ensure a high survival rate of children – allowing more investment of time and money into each individual’s future success. Doing that makes a Collapse scenario more likely unless we rethink our use of resources. Energy is probably one of the easiest to manage. Water, food, wealth and land are much harder to address.

Opportunities

If we look at things from a different perspective then we can see some opportunities to do things differently and most likely improve the situation – not head down the path of Collapse and avoid the kinds of decisions that lock in a high chance of disaster. Energy is one of the most obvious. Slightly less obvious is the role of health and education. Finally I will suggest some mechanisms that promote sustainable decisions.

Renewable Energy

This is the simplest in concept and execution. It is also the place where we see the most entrenched opposition from vested interests. Renewable energy has the most fortuitous benefit of favouring the late developing economies. The book Why the West Rules – For Now  shows how laggard economies often benefit from late adoption of technology. Renewable energy is most likely to prove such a benefit. India, for example can proceed with large scale solar, wind and geothermal projects without concern from entrenched coal and “Baseload” power interests. They can also develop their grid to take advantage of decentralised generation rather than having the conflicts that developed countries have when the power generators build a “poles and wires” infrastructure that favours the coal fired Baseload generation that they own; funded by the consumers of the electricity who pay a high price up front for something that is quite possibly not in their own interests over the long term.

Another example that makes sense is to consider the Aluminium industry. Aluminium refineries can be located almost anywhere that electricity is cheap because the cost of shipping the finished product and the bauxite input to the smelting process is relatively low. The main input to the smelting process is electricity so in Australia the first smelters were using hydroelectric power in Tasmania and then coal fired power in Victoria. There is an opportunity to rethink that industry and locate it near geothermal energy sources that might be otherwise too remote to exploit (just now with the limited grid flexibility typically on offer) and use geothermal power efficiently. Other micro-economic benefits are likely to arise from this kind of industry restructure too.

Refer to analysis of how Renewables can meet World energy demand.

Education and health

Good levels of public health and education are major factors in reducing population growth (even promoting a decline in population) and maintaining good social order . Both those factors contribute to an increased likelihood of avoiding catastrophic Collapse scenarios. It is about increasing standards of living so that there is less need for more than two children in a family and a greater attention to giving them a good start in life. That brings the focus to the future rather than the present. It allows forward thinking and consideration of consequences of current actions on several levels.

Custodianship

This is a concept that has been around for thousands of years. It fell out of favour for the Anastazi and inhabitants of Easter Island. It has fallen out of favour with industrialised countries too – and the consequences are playing out. Yet, highly productive sustainable communities have managed their environment for thousands of years and made it work. To become custodians you have to think of the Earth’s resources as something that is in your care and that you intend to make it better or at least no worse for future generations.

Think Globally; Act Locally

Naomi Klein in these articles says a few things about globalisation and how it masks a host of things we would not like happening on our own front doorstep but are happy to have “somewhere else” out of sight. She also goes through a significant number of scenarios where there is a clear conflict of interest for those making significant investment decisions on our behalf. Those decisions can be shown to be flawed in several ways:

  • Public policy aimed at achieving benefits to private enterprises at the expense of the public
  • Short term economic/political gains that disregard long term consequences (eg promote and subsidise the fossil fuel industry)
  • Refusal to acknowledge that future events are influenced to a high degree by decisions made now (pollution, financial boom and bust etc)
  • Creation of artificial crises to mask problems and allow punitive policies to be pushed through
  • Co-opting of large NGOs by making them dependent on patronage from Government and/or benefactors “with interests”

If these global issues can be addressed positively then there is a good chance that we can make a difference to the future. The key is to act locally with a view to changing the global thinking and political landscape.

Change like this has happened in the past. Outcry over CFCs depleting the Ozone layer changed refrigeration and aerosol sprays so that we avoided a catastrophe. Sulphur pollution was stopped. Use of persistent pesticides was largely stopped. Nearly all of it was stopped by people at a local level voting with their feet to not buy products, name and shame polluters and work together with like minded people – local but with a global understanding.

The opportunity becomes clear when you think of how much pressure can be put on Governments and utilities by turning away from any polluting option and installing your own electricity generation that works best when they most want to make a profit from their own supply. Add to that the kind of momentum that can be gained through a Marshall Plan (in scale and intent) aimed at preventing The Battle for Earth (my invented term). It takes a large proportion of the world’s population to see a need to avoid catastrophe and a small amount of leadership that looks beyond the next election to take bold steps to prevent a destructive and predictable catastrophe from occurring.

Services Economy

What will a Services Economy look like?

It will look more like an office environment or a shopfront than it will look the factories and mine pits of the past. It will be one where things that cannot be automated very easily are done by people. What people did in the past for low skilled jobs will change from process workers to caring or similar things. Of course there will still be manufacturing, mining and agriculture but because these industries are heavily automated (and more so over time) the employment in those industries will be small and more focused on keeping the mechanised processes running smoothly.

Instead of people being employed to physically dig minerals from the ground, they will be employed to control the machinery that digs and transports them. This is already happening. Those people are now employed in a Service Industry to the Mining Industry where the employment is increasingly based on achieving measurable results rather than simple hours worked.

Most importantly, transition to a Services Economy leads to an increase in disposable income. How that disposable income is used becomes an issue addressed in Sustainable Lifestyles.

Sustainable energy use

A Services economy needs energy. IT needs reliable and mostly predictable amounts of energy to run its automated processes and support the electricity hungry service management infrastructure – telecommunications, buildings, computers etc.

Sustainable Lifestyles

Spending money on consumer goods that need constant replacement

Spending on long term sustainable communities and infrastructure.

Personal choices and public choices.

Changed values

Values have changed over the past 100 years. They have changed a lot in the last 30.

Human Capital

A Services Economy values Human Capital. The experience, skills and knowledge that allows a person to deliver good service is what is needed for a successful Services Economy. A focus on Human Capital delivers the education, flexibility of lifestyle choices and adaptability to rapid technological and other change that drive services.

A Question of Growth or Balance

Do we need growth? This is a more complex question than it seems. It goes beyond the Marx vs Smith arguments of more than a century ago. We have learned a lot more about growth, capital and people since then. Here, I look again to the book that started this little blog post. Capital in the 21st Century.

Case for growth…

The case for growth is about equality. Low growth rates in population mean that inherited wealth stays much more “in the family”. Low growth rates in productivity drive low inflation (of course coupled with low population growth this is more so). Combined these factors appear to lead directly to increasing inequality when growth is low and greater equality when growth is high. Economic growth has historically been low but with a period from the outbreak of WWI through to the 1970’s having a very high growth rate and a slowdown since then. Equality increased during that high growth period and there was also a historically high rate of inflation. Inflation erodes the value of inherited wealth that is not in Real Estate (property and other tangible goods that appreciate in line with growth). Inflation also means that wages rise and change the dynamics of income from rent on Real Estate and investments (interest and dividends). Wage earners start to have comparable incomes to those with inherited wealth and can build significant personal wealth in their own lifetime.

Inequality is lower only when the gap between income earned from return on Capital is close to the growth rate. When there is a higher return on Capital than the rate of growth then there is increasing inequity because inherited wealth is narrowly distributed and wage earning is widely distributed.

Case against growth …

We return to Limits to Growth and Malthus for this one. High growth leads to depletion of resources and pressure to do things inefficiently to keep up with competitors. This argument seems to head inevitably to an argument against Capitalism as it is now understood.

 

The Balance

If humans are to survive several slowly developing crises that are facing us (somewhat like the discredited boiling frog meme) Capitalism may be something that might survive but it is unlikely to be recognisable as we now understand it. It is more likely to be something more cooperative, enlightened and adaptive.

What is not yet clear

We have a lot of unknown unknowns here. I am predicting where I think we are heading. I am highlighting the paths that we might follow. Describing them as choices. Choices that can make a difference for the future.

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