Monday, April 04, 2011

The Grand Failure of Conventional Economics

The "fixes" of conventional economics such as Keynesian stimulus will all fail catastrophically within the next 10 years.

The next decade will see the complete failure of conventional economics. Why is this so?

If we take the very long view, we find that all of conventional economics developed in the era of ever-cheaper, ever-more abundant energy and the miraculous "low hanging fruit" productivity gains made possible by cheap energy and the tools of mass production and industrialization. Like a creature that was born in the morning and has only seen daylight, conventional economics has never experienced night and so it has no conception of darkness.

This is true of classical, neo-classical, Marxist, Socialist, Keynesian, Neoliberal, "Capitalism with Chinese characteristics," etc.

Not one of these ideological strands of conventional economics recognizes the limits on conventional "growth" as measured by GDP, increased production, etc.When the planet's population stood at 500 million, there were sufficient resources to enable a doubling to 1 billion. Then 1 billion tripled to 3 billion, which doubled to 6 billion. Now, the 600 million high-energy-consumption "middle class" of post-industrial economies is expanding four-fold to 2.4 billion.

There simply isn't enough oil on the planet, in any remotely plausible scenario, for 600 million of China's 1.3 billion people to live on an American scale of oil consumption, not to mention 600 million of India's 1.2 billion, and so on for every developing economy.

As population and energy use per capita have expanded, the curve of consumption approaches an exponential function. Frequent contributor Harun I. has often commented on the impossibility of this curve continuing in the physical world we inhabit.Exponential Growth and Depletion: Chart of the Century? (May 3, 2010)

Here are his recent comments on the impossibility of limitless growth as defined and measured by conventional economics:

Think about what pension funds expect, 8 percent per annum. Let's think about this in terms of inputs and output. For simplicity's sake let's round to 7%. This means that every ten years inputs have to double in order for outputs to double. On the finite sphere that we call earth this reaches its limit at a pace that accelerates. Imagine that today if we were to make two iPads per household. In ten years we would need to make four, then eight, then sixteen, etc. We already have gone from one car per household to two. Since four cars per household is unlikely all eyes are upon China (brace for disappointment).

This goes back to my discussion on thermodynamics. The net energy required for every chemical reaction is constant. In a finite realm, more of something cannot be made. If stranded at sea with few rations of food and water, you can consume it all in one day or portion it out. Regardless of what is decided there will come a point where nothing is left. This nullifies the notion that each successive generation can have a better quality of life. Within the finite sphere of earth, this is simply not possible.

Many smart people have placed their hopes on technological innovations such as nuclear power, fusion, biofuels, and so on. As I have noted here many times, under close examination, each of these promises of limitless cheap energy either violate the laws of thermodynamics or they have severe limits in scalability, cost, waste, etc., or they end up being dependent on cheap, abundant oil for their functioning in the real world.

Others look to innovations such as iPhone apps to provide "growth," conveniently forgetting that an iPhone app is just as dependent on electricity, security, a power-hungry Internet, etc., as a sewage system, highway network or any of the other infrastructures of modern life.

Nothing in conventional economics of any flavor suggests how to create "growth" when oil is scarce/rationed and it costs $300 per barrel. Having been conceived in daylight, conventional economics has never experienced darkness, and has no way to conceptualize a world without "limitless growth."

Behind today's carefully contrived fa├žade of normalcy, the only limitless resources are paper money and propaganda. Everything else is limited by real world constraints. An economy which consumes ever-greater quantities of real-world resources such as oil, and harvests renewable resources such as timber and fish at rates far in excess of their renew rates, will soon encounter shortages and higher prices as those with paper or electronic money bid for the remaining reserves.

The Keynesian experiment is being extended to its ultimate point of failure.Interestingly, China, Europe, Japan and the U.S. are all pursuing the same Keynesian credit-expansion Grand Strategy. It is the single tool available to States and Central Banks imprisoned by conventional economic theories, and they are hitting that single policy switch like cocaine-crazed lab rats clamoring for another hit.

Their lab cage is our world.

The Federal government is now borrowing in excess of $1.6 trillion every year to prop up the Status Quo, fully 11% of America’s GDP and 40% of all Federal expenditures. This stands in stark contrast to the traditional economic view that deficits in excess of 3% of GDP a year are inherently destablizing. Now we borrow roughly four times that much (once we include the off-budget “supplemental appropriations” that run into the hundreds of billions of dollars every year) and the political and financial class evince a complacent confidence that these extremes are sustainable indefinitely.

The globalization of financialization is another conventionally approved system that is unraveling. The world’s central banks and governments are waging an unprecedented “war” on global financial instability using the “battle plans” perfected in the wake of the Great Depression in the 1930s. Unfortunately, they’re fighting the last war, and today’s global financial system is fundamentally different from the one which imploded in the 1930s.

Theirs is not a failure of individuals, but of the whole of conventional economics.

These articles dismantle a key part of conventional economics, the benefits of "free trade":

Economists Are Hopelessly Naive About International Trade

The theory of "comparative advantage" and why it's wrong.

Behind all the elaborate theoretical facades, the foundations of the current system, globalization and cheap, abundant energy, are eroding, and as they devolve then so too will all the promises of "permanent growth" made by conventional economics, along with all the policies and theories that were hatched in the bright light of a long-ago morning.

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