Friday, July 02, 2010

Innovation, Risk and the Forest Fire Analogy

To clear open space for innovation to take root, sometimes you need a forest fire to destroy all the deadwood. Instead, we are frantically piling up more deadwood.

What was once an inflammatory outlier--that our brand of "capitalism" incentivizes exploitation, fraud, complicity, corruption and plunder--is now commonplace. Even the most mainstream financial media websites now sport commentaries which excoriate our systemic fraud, and books galore gleefully sport titles containing "hot" words like plunder.

That is a remarkable turn of events: that a radical critique of our entire financial system has gone mainstream, and in many circles has been accepted as "obvious." (For more on the tricky nature of what's "obvious," please see the chapters on the politics of experience in Survival+.)

In Innovation: Financial, Technical and Institutional (June 30, 2010), I attempted to connect the dots between risk and innovation. I believe that the two concepts are intrinsically bound like oxygen and hydrogen in the water molecule, but this deep structural connection between the two is generally ignored or not even recognized.

In essence, innovations which remain inherently unstable and unsafe regardless of hedges, controls and safety features--that is, they embody intrinsic risk-- cannot be placed in the same category as innovations with inherently low risk.

One of the keystones of the Survival+ critique is the realization that the risks of our systemic "financial innovations" are ontological and cannot be massaged away to zero. Indeed, the idea that this was possible underpinned the entire credit bubble and its inevitable implosion.

Mathematician Benoit Mandelbrot discredited this notion in depth in his book (highly recommended) The Misbehavior of Markets.

I addressed this last year in The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009):

For decades, the operative theory of forestry management was that limited controlled burns-- mild reductions of dead underbrush and debris--would essentially reduce the possibility of a major fire to near-zero.

But the practice actually allowed a buildup of dead wood which then fueled the devastating forest fire which swept Yellowstone National Park in 1988. Various revisionist views sprouted up later, claiming the fire was not the result of misguided attempts to limit natural forces (Vast Yellowstone Fire Now Seen as Unstoppable Natural Cataclysm (NT Times, 1989).

Now we're in a financial conflagration which is widely considered the result of failed risk-suppression policies. All the derivatives originated and sold were supposed to, along with "self-regulating markets" (smirk), limit the risks in the financial systems to near-zero.

In other words, even as dead branches piled ever higher, various complex hedges would insure no fire in the FIRE economy would ever spread.

But this private and public risk suppression not only failed to eradicate risk--it enabled risk to grow to unprecedented levels.

Globally, the Central States have responded to this failure to suppress risk by creating gigantic new risks and transferring them to taxpayers and buyers of government-issued debt.

This same phenomenon can be seen in every sector which is dominated by aprotected fiefdom which views change, evolution and adaptation as threats to the Elites who are benefiting from the status quo.

Thus the "education complex" resists any changes which threaten its hold on tens of billions of dollars in State revenues ("support education!" "It's for our kids!"), the sickcare complex resists any structural changes to its gigantic share of the national GDP (17% and rising) with similar high-sounding defenses ("support high profit, oops, we mean high-quality care for all!") and the oil industry hires well-paid mercenaries to lobby the Central State to maintain its tax breaks and its grip on the nation's energy complex.

A forest fire swept through the deadwood-loaded financial complex in late 2008, but the Federal government quickly extinguished the flames by accepting all the risks which should be private in true capitalism. The scorched deadwood remains, piling ever higher, setting up a conflagration which will overwhelm even the printing presses of the Federal government.

The opportunity to replace a dead forest (the current big-bank, wall Street-dominated system) with a healthier financial ecology was thus lost as the toadies and water-carriers for Wall Street in Congress, Treasury and the Federal Reserve rushed to transfer all the intrinsic risks in our embezzlement-based crony-capitalism to the taxpaying public via trillion-dollar bailouts, backstops and guarantees.

Consider the grip of oil and the ICE (internal combustion engine) on the nation's energy and transport systems. So relentless is the marketing, the propaganda, the lobbying and the framing of contexts (i.e., what becomes "obvious" in the national politics of experience) that spending $3 trillion to pursue unwinnable wars in the oil-rich mideast "makes sense."

I addressed this in Cost of Iraq War: $3 Trillion; Cost of Solar Plants to Power all 105 million U.S Households: $500 Billion (April 10, 2008):

Let's not be coy about the hoped-for "return" on the $3 Trillion investment of cash and 5,000+ American lives: it's the oil. Free the U.S. from the threat of weapons of mass destruction, foster democracy, blah, blah, blah. The purpose of the war is obvious: secure Iraq's oil for the West, establish American military hegemony over the region, and create a bulwark that limits Iran's reach/influence.

If the U.S. built 500 solar power plants each generating 250 megawatts, the total cost would be $500 Billion-- 1/6 of the cost of the war. Even if you refuse to make any conservation effort then you need 600 plants, and the cost is $600 Billion. Throw in another $100 Billion for new transmission lines, and you might spend $700 Billion-- a third of the cost of the war.

The U.S. spends $250 Billion a year on imported oil. The U.S. consumes about 21 million barrels a day and pumps less than 5 million barrels a day domestically.

Note that the 500 solar plants would generate at least 35,000 new jobs (perhaps laid-off oil-industry workers could be retrained?), and that the total land area required would be a trivial (compared to the deserts in Nevada alone) 2,000 acres X 500 = 1,000,000 acres or 1,563 square miles. The Mojave Desert alone is 50,400 square miles; the deserts in Nevada are even larger. Other suitable solar sites include New Mexico, Colorado, Texas, Utah and Arizona.

Fun Fact: The Nevada Test Site (used for nuclear tests) is 1,350 square miles, roughly equivalent to the area needed to power 105 million U.S. households.

You can check my math and sources; let's say you want a wider margin of error, and so let's double the cost to $1 trillion--a sum which pales compared to the cost of the war(s) which may well far exceed $3 trillion, and to the estimated $13 trillion which has been spent or guaranteed to stop the financial forest fire from clearing out the deadwood of big banks and Wall Street.

One reader wrote to complain that solar panels need to be cleaned. True. This looks like a trivial risk and cost compared to the costs of the oil well blowout in the Gulf.

What no one seems to notice is that solar panels will not blow up, they do not generate nuclear waste, nor do they threaten ecological disaster--meanwhile, dropping a pipe through one mile of seawater and then boring a hole 13,000 feet down to extract a modest quantity of oil will always be risky.

It is of paramount importance that this distinction between intrinsic high-risk and low-risk be recognized and entered in the calculus of "what makes sense" and what is "obvious."

Countless critics of alternative energy complain that it is sporadic, doesn't work when there is no sun or wind, etc. etc. Two points:

1. Tides don't stop, and neither does geothermal heat

2. Over a large enough grid, wind and solar become non-sporadic

If you put one wind farm off New York's coast, the energy does fluctuate with wind speeds. But if you connect 100 such wind farms from South Carolina north to New England, then you get a relatively stable baseline of energy.

The future of electricity (Scientific American).

Federal government approves Cape Cod offshore wind farm

Yes, transmission of electricity "costs" in both money to build it and in loss of energy over distance. So double the generating capacity for another trillion dollars; that's still less than 2/3 the cost of our endless wars to insure access to mideast oil and a mere slice of the cost of the financial bailout/backstops.

In other words, all the "reasons why alternative energy can't work" are bogus artifacts of propaganda, marketing and misinformation. Spending $3 trillion to secure access to oil and $13 trillion to squelch a much-needed and inevitable cleansing of the financial deadwoood "make sense", as does drilling down miles beneath the seabed for 3 weeks of our oil consumption also "makes sense" while solar panels "don't work" because they have to be cleaned periodically and the nation's electrical grid would have to be upgraded.

I have been accused of "overthinking" things; when it comes to the politics of experience, I plead guilty, your honor, for without even being aware of it, citizens parrot propaganda as "obvious" truths. To add insult to injury, they busily lend a hand passing buckets down the line to suppress the forest fire we desperately need to open some space for low-risk innovations. Instead, the fires are beaten down for one more season, and the deadwood--from blown-out wells 3 miles down to systemic risks in the inherently unstable financial system--pile ever higher.

Innovations which are intrinisically high-risk may not be innovations of any lasting value.

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