Sunday, April 05, 2009

Survival+ 8: The Forces Behind Cycles of History
April 6, 2009

There are two basic critiques of historical cycles:

1 .Cycles are essentially arbitrary, an order extracted from random data to support a priori claims (i.e. finding data to support pre-selected positions)
2. Without an explanation of the causal mechanisms which power the cycles, then cycles cannot be predictive

The first argument has the strength of skepticism but the weakness of forced obscurity. Anyone looking at displays of prices over time notices patterns; the question is whether they are regular enough to suggest underlying causes are at work.

For example, if we discern cycles of crop prices, we might look first at crop yields and population growth, that is, supply and demand. We might next profitably look for regular variations in weather (rain/drought, warm/cool, etc.) which might explain why crop yields rose or fell in what appear to be cycles.

Taking the investigation one step further, we might look at the sun's energy output and the orbital variations in the planet's rotation around the sun. And indeed, we would find an imperfect but discernable cycle of sunspot activity that correlates to weather and crop yields.

The more inputs/feedback loops there are in a system, then naturally the more complex the interactions between all the "moving parts" will be. Nonetheless, within the "noise" of weather data various long-term patterns do emerge.

So if we are positing cycles in human history which we claim predictably repeat, what are the causal mechanisms for these cycles?

Environmental/demographic overreach. Like all other organisms, humans tend to fill every available niche to the maximum carrying capacity of that environment. This cause is explored in The Great Wave: Price Revolutions and the Rhythm of History. In essence, humans expand their population and resource extraction right up to the high-tide line. Then, when the tide recedes--as it inevitably does in droughts and other weather patterns, resource depletion, etc.—humans are suddenly faced with starvation/pandemics and endless conflicts over remaining diminishing resources.

State overreach. States tend to expand whenever the opportunity presents itself as the spoils of conquest (not necessarily of territory but of markets) outweigh the costs. States also relentlessly expand their share of the national income via higher taxation.

Plutocracy overreach. As the state expands, the Plutocracy leverages its growing wealth into greater power over state functions. With no natural limits on its power or share of the national income, the Plutocracy inevitably overreaches, taking so much of the national income and wealth that the middle class, the backbone of the state's tax revenues and support, breaks down. Caught between the pincers of ever-more onerous taxes and the state-granted privileges of the Plutocracy, the middle class is driven into penury and insolvency.

The four-generation cycle of forgetfulness. As individuals, we tend to truly trust only what we have experienced directly or heard directly from parents and grandparents. As a result, the follies of excess and overreach that caused declines or collapses in previous generations are forgotten in the passage of four generations, or roughly 80 years. Even cultures with written histories exhibit this pattern. Please read The Fourth Turning for more on this topic.

Marginal returns. Expansions run out steam for many reasons, but exhaustion of resources and increasingly marginal returns on investment are proximate causes. (see below)
Illusion of incremental change. As trends run out steam and reverse course, the state and Plutocracy respond with incremental changes which they hope will reverse the decline without affecting their power, wealth and privilege. Alas, merely adjusting the parameters in a failing system is not enough to rescue it from collapse. (see below)

Once the costs of Empire/expansion rise above the value of the spoils gained, the state is caught between the demands of its ever-growing army of bureaucrats and dependents for higher tax revenues and the demands of the Plutocracy for greater tax relief and more privilege.
As individual leaders within the state are inevitably beholden to sponsors in the Plutocracy, such appeals cannot be denied. Given the inevitable rise of state powers and taxation, the leaders are loath to cut either their powers or their power base—the bureaucracies and dependent citizenry that both feed on rising tax revenues.

As a result, the relatively powerless but productive middle class is squeezed for more taxes to spare the Plutocracy and those dependent on state largesse from any pain. This is the inevitable result of state and Plutocracy overreach.

In an effort to forestall the collapse of its middle class while still increasing revenues, the state inevitably turns to two mechanisms: borrowing vast sums from foreign lenders and debasing the currency to create the illusion of increasing revenues/money supply.

Just as inevitably, the state eventually defaults on its foreign debt, and the currency collapses in value and is replaced with a new "good money" currency. In the decline/collapse phase, the impoverished middle class, a powerless underclass and a recalcitrant Plutocracy do battle for the diminished resources and state powers.

In cases such as the French Revolution, the Plutocracy is overthrown, however briefly, and replaced with a "revolutionary" ascendant class of political plutocrats. In cases such as the American Revolution, the middle class joins with enlightened segments of the Plutocracy to achieve a more balanced state structure. The Plutocracy agrees to these limits not out of selfless noblesse oblige but out of a long-range understanding that political and financial stability serves its self-interests.

Increasingly Marginal Returns Lead to Collapse

One of the structural impediments to fashioning a true prosperity from the ashes of the bogus prosperity now imploding is marginal returns and the illusion of incremental change, two key topics I have covered in Marginal Returns Trigger Implosion , The U.S. Economy: Increasingly Marginal Returns (2009) , The Seductive Illusion of Incremental Change (2008) and Incremental Change and Collapse .

Author/thinker Jeremy Rifkin describes this mechanism extremely well in his fascinating book The Hydrogen Economy . He illustrates the concept on a global scale by using the Roman Empire as an example.

Rome's early conquests yielded huge returns on "investment": large tracts of fertile cropland, significant treasure, productive populaces, etc. But as time progressed, more and more of the Empires' wealth flowed to the citizenry of Rome, and conquests of distant lands such as Britain yielded less and less return; garrisoning these distant territories began costing more than they produced.

Eventually even holding onto the now-exhausted croplands and restive populations exceeded Rome's dwindling wealth, and the Empire collapsed. There are many ways of accounting for empire-collapse, be it Roman or Mayan, but certainly "marginal returns" describes one element.

Here is how Rifkin applies the concept to U.S. farming practices:

The pesticides also destroy the remaining soil. The soil contains millions of microscopic bacteria, fungi, algae, and protozoa, as well as worms and anthropods. These organisms maintain the fertility and structure of the soil. Pesticides destroy these organisms and their complex habitats, hastening the process of soil depletion and erosion.

American farms lose more than four billion tons of topsoil annually, much of it because of the high-tech farming practices introduced over the past half century. By the 1970s, the U.S. had lost more than one-third of its agricultural topsoil. The depletion and erosion, in turn, have required the use of ever-increasing amounts of petrochemical fertilizers to maintain agricultural output. Marginal returns have set in. More and more energy inputs are required to produce smaller gains in net energy yield...

The Seductive Illusion of Incremental Change

An apt summary of the principle can be found in the ancient Chinese saying, "the journey of a thousand li starts with a single step." We all know small changes can eventually make profound changes in a system or person's life. For instance, lose a pound a week and in a year one has lost 50 pounds. As a society, increasing the efficiency of buildings and homes, one at a time, can add up to stupendous savings of energy and money.

The illusion is in the happy story that incremental changes will fix a fundamentally broken system. If a person doesn't profoundly change their understanding of self, diet, nutrition, self-image, identity, marketing, exercise and discipline, then the likelihood of incremental changes in their lifestyle producing profound long-term results is unfortunately low. The same can be said for a wastrel, profligate economy that wastes energy on a vast scale or an economy addicted to cheap, abundant credit.

In systems analysis, incremental change is likened to adjusting the perameters of a system. But as Donella Meadows outlined in her seminal paper, Leverage Points: Places to Intervene in a System (Sustainability Institute), adjusting the perameters of a system has limited effects. What this means is that fiddling around with "reforms" like increasing the fee paid by Medicare recipients by $10 will never make Medicare financially sustainable.

As an example of how the forces discussed above work in the real world, consider:
Food Shortages, Rising Prices, Stagnant Wages: Welcome to the 13th Century .

Human history is not just a chaotic cacophony; if we pay attention, we observe rhythms and structures. The reason is as obvious as it is profound. Like all species of life on earth, humanity has been structured/selected via complex adaptations to survive and reproduce within various ecological niches. That our social structures and our histories share certain characteristics over historical time is common sense.

History, like an individual, is unique even as it shares characteristics with previous eras. Without studying history, we are prone to both arrogance and insecurity. Unaware of the past, we proudly reckon we've gone beyond the reach of cyclical history; and then, when the cycle turns and we are adrift and fearful, then we feel inadequate to the task of righting the sinking ship.
History properly studied renders us humble about our ability to control nature and events, and confident that we too can survive bad times.

Which brings me once again to The Great Wave: Price Revolutions and the Rhythm of History by historian David Hackett Fischer (recommended by reader Cheryl A., who kindly sent me a copy of the book.)

In Fischer's well-documented view, there is a grand cycle of prices and wages that turn on the simple but profound law of supply and demand; all else is detail.

As a people prosper and multiply, the demand for goods like food and energy outstrips supply, causing eras of rising prices. Long periods of stable prices (supply increases along with demand) beget rising wages and widespread prosperity. Once population and financial demand outstrip supply of food and energy--a situation often triggered by a series of catastrophically poor harvests--then the stability decays into instability as shortages develop and prices spike.
These junctures of great poverty, insecurity and unrest set the stage for wars, revolutions and pandemics.

It is remarkable indeed that the very conditions so troubling us now were also present in the price rises of the 13th, 16th and 18th centuries. Unfortunately, those cycles did not have Disney endings: the turmoil of the 13th century brought war and a series of plagues which killed 40% of Europe's population; the 16th century's era of rising prices tilled fertile ground for war, and the 18th century's violent revolutions and resultant wars can be traced directly to the unrest caused by spiking prices.

(The very day that prices for bread reached their peak in Paris, an angry mob tore down the Bastille prison, launching the French Revolution.)

After a gloriously long run of stable prices in the 19th century--prices were essentially unchanged in Britain between 1820 and 1900--The 20th century was one of steadily increasing prices. Fischer takes great pains to demolish the ideologically appealing notion that all inflation is monetary; the supply of money (gold and silver) rose spectacularly in the 19th century but prices barely budged. In a similar fashion, eras of rising prices have seen stable money supplies. Yes, monetary expansion can play a part, but Fischer has done his homework, and population growth is a far stronger correlation than money supply.

Monetary inflation can lead to hyperinflation, of course, but there are always mitigating factors in those circumstances. The long wave is not one of hyperinflation but of supply and demand imbalances undoing the social order.

Americans are inherently suspicious of anything that seems to threaten constraint of the American Will or Dream; thus it is not surprising that cycles of history are largely unknown in the U.S. As Fischer explains:

This collective amnesia is partly the consequence of an attitude widely shared among decision-makers in America, that history is more or less irrelevant to the urgent problems before them.

Fischer notes that he describes not cycles but waves, which are more variable and less predictable. (Surfers know to count waves, as they tend to arrive in sets.)

Is the sudden rise in the price of oil unique? Not at all. Energy in 1300 was firewood, and as Fischer relates, the cost of energy skyrocketed then, too:

In England from 1261 to 1320, the price of firewood and charcoal rose faster and farther than any other commodity. Close behind the soaring cost of energy came price-rises for food-stuffs of various kinds--particluarly for grain, meat and dairy products.

Talk about being ripped from the headlines: this describes our current situation remarkably well.

In response to this great rise in prices of essentials, both commoners and governments debased the currency. In their day, this meant shaving the edges of coins, or debasing new coins with non-precious metals. The debasement was an attempt to increase money to counteract the rise in prices, but it failed (of course). Every few decades, a new undebased coinage was released, and then the cycle of debasement began anew.

Just as insidiously, wages fell:

But as inflation continued in the mid-13th century, money wages began to lag behind. By the late 13th and early 14th centuries real wages were dropping at a rapid rate.

Hmm--sound familiar? Now guess what happened next:

At the same time that wages fell, rents and interest rose sharply. Returns to landowners generally kept pace with inflation or exceeded it.

This growing gap between returns to labor and capital was typical of price-revolutions in modern history. So also was its social result: a rapid growth of inequality that appeared in the late stages of every long inflation.

And what happened to government expenditures? It's deja vu all over again--deficits:

Yet another set of cultural responses to inflation created disparities of a different kind: fiscal imbalances between public income and expenditures. Governments fell deep into debt during the middle and later years of the 13th century.

Oh, and crime and illegitimacy also rose. Fischer summarizes the end-game of the price-rise wave thusly:

In the late 13th century, the medieval price-revolution entered another stage, marked by growing instability. Prices rose and fell in wild swings of increasing amplitude. Inequality increased at a rapid rate. Public deficits surged ever higher. The economy of Western Europe became dangerously vulnerable to stresses it might have managed more easily in other eras.

And there you have our future, writ large in the 13th, 16th and 18th century price-revolution waves which preceded ours. It is hubris in the extreme to think we have somehow morphed into some new kind of humanity far different from those people who tore down the Bastille in a great frustrated rage at prices for energy and bread they could no longer afford.

It is foolish to blame "speculators" for the rise in food and energy, when the human population has doubled in 40 years and the consumption of energy and food has exploded as a result. Yes, technology in the form of the Green Revolution enabled vastly greater yields per acre; and yields in many places can still be increased with fertilizers, improved seeds and so on.

But all of this was the result of cheap, easy-to-pump, readily available oil. All the miracles resulted from cheap oil, and now that it's gone--yes, yes, there is more, but it's not cheap or easy to pump--then we have to replace it with some other energy source.

But petroleum and natural gas are wonderfully adaptable energy sources, handy for making fertilizer, plastics, and other chemicals as well as for fuel. Both are readily stored and possess very high energy densities. Yes, Lithium-ion batteries also have a high energy density, but it isn't a matter of drilling a hole and complex lithium-ion batteries gush out. It takes tremendous energy and technology to fashion lithium-ion batteries, and as a result they're expensive.

If the market responds to the oil price-revolution with sufficient verve, capital and innovation, perhaps a rich brew of petroleum replacements will appear in mass production. But there is a peculiar feedback loop at work; there has to be enough energy on hand to build this new infrastructure of solar-cell factories, algae-to-biofuel plants and all the rest. If we consume all the cheap oil in a vain attempt to maintain the status quo, then the replacement becomes ever more costly. And then we have a price-revolution on our hands which looks eerily like the ones which swept Europe in the 13th, 16th and 18th centuries.

So where does this leave us? In Dude, We Are So Doomed, I noted the intersection of four long-term cycles (waves), which suggest that the era from the present (2009) to 2021 will be troubled indeed, and may result in a war, revolution or equivalent re-ordering of U.S. society and perhaps the world.

It doesn't take much thought to anticipate the post-cheap-petroleum era might be fraught with risk and turmoil as the transition--messy and unpredictable in some ways, but predictably messy in any event--takes place. Based on the history so painstakingly assembled by Fischer, we can anticipate:

--Ever higher prices for what I call the FEW Essentials: food, energy and water.
--Ever larger government deficits which end in bankruptcy/repudiation of debts/new issue of currency.
--Rising property/violent crime and illegitimacy.
--Rising interest rates (by a lot, not a little).
--Rising income inequality in favor of capital over labor.
--Continued debasement of the currency.
--Rising volatility of prices.
--Rising political unrest and turmoil (see "Insurrection" and "Revolution").

NOTE: My computer/web time continues to be extremely limited; my apologies for the inability to respond to emails for the next week.

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