What if the GFC is permanent?

While Europe may be reaching a deal of sorts between Teutonic lender and Latin borrower, and while pre-election America may appear to be regaining momentum in the form of lending and employment data, economic turbulence has merely moved eastwards in its slow, global orbit.

With the Asian Development Bank cutting regional growth forecasts from 6.9% to 6.1%, and Future Fund chief David Murray warning of an external finance shock in Australia, IMF chief economist Olivier Blanchard seems right when he forecast on Wednesday that the world would not recover from the financial crisis until at least 2018.

But what if Blanchard were wrong? What if his premise was incorrect? Certainly, there is a very real structural slowdown in China, a pause in the consumption rates of South Asia and Indonesia, and a continuing malaise in Japan, but what if we didn’t look at this as a crisis, but as statis? What if our obsession with economic growth and measures of growth turned out to be an illusion.

The Financial Times’ Martin Wolf opened this can of worms on Tuesday, asking if unlimited growth was a thing of the past. Citing research on historic rates of productivity by economist Robert Gordon, Wolf questioned whether our current third industrial revolution – that of information, rather than steam and mechanisation in the 19th, or urbanisation and middle class expansion in the 20th century – was really all that profound.

Who, for instance, would trade Facebook or an iPhone for indoor heating or a flushing toilet? What economic gains could broadband have over the original subsea telegraph? Could the benefits of green energy really compare to the discovery of alternating current or the invention of the turbine?

These are questions others have asked as well, ranging from the longue durée historians of the Sorbonne, who are attempting to pinpoint capitalism’s demise by 2100 (economic systems, like those of feudal Europe or the Roman Empire, apparently last 600 years), to UBS strategist Andy Lees, who last year provocatively claimed the world had hit its innovation peak in the 1840s.

Furthermore, these questions are not new. William Morris, better known for his wallpaper designs, wrote of a cashless society in late Victorian England. In 1516, philosopher Thomas More described the isle of Utopia where gold and silver were cast aside for pursuits of real prosperity, the metals only used for the “humblest items of domestic equipment”.

And of course, there was John Stuart Mill, who in 1848 would advance the notion of the ‘stationary state’, where objectives of economic quality were to be pursued over objectives of economic quantity. This no-growth model would later have appeal for Kibbutzniks, survivalists, and environmentalists such the authors of the 1972 Club of Rome report – who reintroduced Mill’s concept of the limits of growth to a new Malthusian audience. Even John Meynard Keynes, an admirer of Mill, would at times lament the obsession politicians would come to have with GDP, an instrument of measurement he helped devise for limited use during the Second World War.

Yet Mill’s legacy is perhaps most relevant today with global populations now stabilising, the risks of catastrophic climate change becoming ever more apparent, technology supplanting labour and productivity seen by many economists as the last great hope for growth. Indeed, outside of canonising modern liberalism or the idea of falsification in the scientific method, Mill’s most important contribution to political economy was arguably his theory of development: that growth was a function of capital, labour and land (or natural resources). Mill felt that sustainable development was only possible if growth in labour was exceeded by growth in land and capital productivity, rather than debt. With middle class wages stagnating and the so-called 99% seeing few of the economic gains that we are supposed to have made since the economic deregulation of the 1980s, Mill’s dictums speak a remarkable truth across the gulf of time.

In a week where prominent fund manager Bill Gross likened America’s credit-based economic model to a crystal meth addiction (like any ‘hopium’ or narcotic, debt borrows the benefits of tomorrow for the enjoyment of today) and when central banks, from Australia to Russia, are joining peers in Europe, Britain, the US and Japan in pushing down rates or pump-priming markets with liquidity, one can see another of Mill’s classic warnings – the tyranny of the majority – coming true, with quick fixes and short-term solutions the order of the day.

Yet no country is as perhaps as apt for Mill’s analysis than China: a country that is in a self-imposed demographic decline, where utilitarianism and capital factor productivity have been warped into a fixed-asset bubble and where land is quite literally denuded of soil, drained of moisture and acidified by the detritus of industrialisation.

In an oped for the New York Times last week, economist Richard Easterlin described China’s belief it could purchase social stability through rapid economic growth as a “Faustian bargain”; a phrase also used recently by Bundesbank chief Jen Wideman’s in criticising the European Central Bank’s outright monetary transactions.

In a survey of opinions on life satisfaction scored between 1990 and 2011, Easterlin and his colleagues found that the average Chinese is no more satisfied today than they were in the aftermath of Tiananmen Square.  Moreover, scores on satisfaction for urbanites actually declined for most of the period, as old social safety nets – China’s so-called ‘iron rice bowl’ – were removed in the name of productivity, efficiency and, ultimately, economic liberalisation, and as the competitive urges of capitalism overtook the cooperation, forced as it was or not, of socialism.

Yet unlike other post-Enlightenment political philosophies – both the capitalism of Adam Smith or the communism of Karl Marx – Mill saw growth as more than material. Borrowing from its classical antecedent – the Ancient Greeks spoke of humanity’s goal aseudaimonia, or flourishing – modern society is built on the ideal of improvement, development, growth and expansion, but it needn’t be so mono-dimensional. Indeed, Aristotle considered an essential pillar of eudaimonia, or one of the four cardinal virtues, to be moderation.

The problem is that in many ways we may have already reached the limits of growth. Politicians like to talk about half-glass full and half-glass empty, yet ultimately we’re still drinking from the same poisoned chalice. By relooking at John Stuart Mill there may be a more refreshing alternative.

Michael Feller is an investment strategist with Macro Investor, which is offering a free 21-day trial. This week Macro Investor is looking at companies that are using innovation and efficiency to make profits where system growth is otherwise wanting and at concrete ways to make money in a deleveraging economy.

Comments

  1. If we have reached the limits of material growth, then growth will turn to sectors that are less material oriented. The information age has arrived. The platform for the growth in intangles is being built. There will be great growth in art and creativity. The problem we have is more in macroeconomic policy. A society loaded up with household debts cannot productive. It leads to a situation where the saver’s income is derived from the deprivation of the borrower. It leads to weak demand as a result. It is the lack of undestanding of the moral dimension of economics that has led to the current situation.

    • one extreme case of debt running amok is payday lending. How can we as a society tolerate that kind of economics?

      • How can we as a society tolerate that kind of economics? Simple really – just blame the lenders.
        Good luck trying to restrain the borrowers.

    • ‘deprivation of the borrower’?? The borrower got to be the borrower by consuming more than his allotted share at the time. The saver ended up with savings by consuming less. Now on a one for one basis this would work quite well. Eventually the borrower consumes less and repays the saver who may then choose to consume more.
      The problem of the moment where we are creating unlimited debt with zero to negative RAT interest rates is that we are not borrowing from current savers but consuming the future of our children.

      • thanks flawse. this is a priceless summary.
        reinstate two old, interlinked virtues:
        1. consume only to the extent that you save and,
        2. reserve (a portion of) savings for the future of coming generations.
        of course, the notion of savings can be enlarged to include global environmental assets, but that reflects my particular political bent.

      • Agreed, why do people who want to save for the future, like myself, always get the wrong end of the stick?

        Lift rates, make interest on savings tax free up to a point and bring house prices down please!

  2. Nice work!

    It reminds me of the story the other day about the Japanese Nappy factory that blew up and may result in a world shortage of nappies.

    Or the shortage of hard drives after the Thai hard drive factories were submerged by floods.

    We are rapidly moving in the direction of large efficient and increasing robot manned factories that can produce the bulk of the manufactured goods that we require.

    This is fantastic but does have a complication.

    As less and less labour is required the location of the factories becomes less and less significant as a means of distributing income throughout a particular population in the form of wages.

    This is a real problem as we know that the serfdom of welfare payments is not an invigorating prospect.

    How do we generate the means to purchase goods if there is little work to be done and wages to be paid.

    Give each other back rubs I suspect and practise folk songs on the beach.

    The San tribesmen of the Khalihari spend about 12-20 hours gathering food and because they have very simple needs (no clothing – let alone SUV’s) the rest of the time is spent hanging out.

    While that is not exactly my idea of a good time, the message is clear – set your ‘needs’ objectives slightly lower and the time you need to spend on the hamster wheel will shrink. (Yes – nice talk coming from a workaholic.

    Everyday, all we hear is gloomy talk that we have no choice but to reduce interest rates and keep chasing the debt dragon. That is poppycock.

    We have more than enough organisational skill, if we choose to use it, to allow the unproductive debts to default and asset bubbles to be deflated without the world ending and mass horrors.

    Giving up smokes always seems impossible until you actually do it.

    /rant

    • Interestingly this seems to be more or less what I have argued for the last decade or more.

      Predominant economic analyses are more about posturing in the main and often mutually agree to ignore various “extrenalities” as required.

      The concepts of sustainable development when applied would seem to logically lead to a slowdown in consumption, which is what we seem to see

      Everyone seems to agree that we are depleting and destroying oceans with current practices, but no one wants to change model because that is too expensive (read consumers will choose the lower cost options today worry about tomorrow later)

      We can’t always have more for less, nor can we indefinitely do more with less.

      Substantial evidence exists that the “recoveries” in the last 20 years have not led to more employment

      • “Substantial evidence exists that the “recoveries” in the last 20 years have not led to more employment”.

        I would argue that there has been significant recoveries, just not in the economies I think you refer to. Those recovery jobs have been diverted to more flexible sources of Labor.

        The drivers?

        -Technological advances.

        -Regulation and productivity shackles that make labor more expensive and unproductive in some key economies.

        -Govt policy decision making that overly rewards Capital ( and penalises workers) is out of balance and has produced negative unintended consequences . Talk about a screw up trying to “pick winners”.

        -Globalisation of finance.

        Those horses have already bolted. So, what can we do now in practical doable achievable terms, to remedy those negative drivers and win back a greater share of the pie? (Clue: Bigger Govt wont deliver the solutions.)

  3. If global growth has indeed come to an end, then everyone will try to hang on what they have. Which country is going to give back, say (thx,phf007), nappie manufacturing to the end-users if it needs the production to feed its own people? Japan? I doubt it! Welcome to the future of protectionism.

    • Yes – Supply security is likely to prove to be an important issue and countries may choose for that reason to have their own factories for mission critical products (nappies probably qualify).

      But if those factories are largely robot operated, the problem of a shortage of employment will still remain.

      It appears that we may stop hearing about the working conditions of young people in the Apple supple chain before too long.

      1 million robots in 3 years!!

      http://news.xinhuanet.com/english2010/china/2011-07/30/c_131018764.htm

      • Never waste a crisis.

        It is certainly not outside the boundary of belief that in a world that has developed and used chemical, biological and nuclear weapons – as well as genetic engineering and electronic viruses such as Stuxnet – TPTB won’t stoop to a quasi controllable extinction event, be it a super flu, genetic neutering through the food chain, or some other means of radical population depletion by destroying the food supply chain (what if oil was doctored and burnt out diesel engines?) Or does resource scarcity and debt lead us to WW3?

        If you were pulling the strings which would you prefer?

  4. Great article and worth more thinking about before any serious comment!

    However I’m a bit suspicious of all statistics and surveys coming out of China.
    “In a survey of opinions on life satisfaction scored between 1990 and 2011, Easterlin and his colleagues found that the average Chinese is no more satisfied today than they were in the aftermath of Tiananmen Square”

    A QUICK glance at the paper didn’t seem to detail where the survey was done except to say it was ‘urban’. I’m suspecting maybe it was centred on bigger cities.

    The results of the survey do not match, in any way, my experiences with people there over a period of 28 years in the smaller towns and out of the way places where factories are. But then my ‘survey’ would be at least as dodgy as anyone else’s!

    • On the quote flawse has commented on, Japan saw a similar trend where life satisfaction remained constant over the Twentieth Century. That said, there’s no doubt that living standards are higher. I think we tend to readjust our reference point and have higher standards, meaning our comparisons will ensure we are no more satisfied. But we are still better off!

      Cracking article, thanks. Good to see Mill/Malthus etc getting a mention, given that modern economics tries as hard as it can to forget these guys.

      • This is why focussing on ‘life satisfaction’ is such a bad measure of successful policies. Humans are hardwired to see problems everywhere and ‘solve’ them. Ever thought about making toast and just how much needs to go right in order for you to have a peice of toast? It’s immense! But who cares? ‘One side is more toasty than the other damnit!’

      • And why should anyone take any notice of Malthus? What has he ever been right about?

        Technological progress is exponential, more so than population growth. That is what makes Malthus wrong.

  5. Mills concentration on land labour and capital is just about being realisitic.
    Too many times in these pages, and indeed across central banks, there is a tendency to ignore Land labour and capital and think we can provide prosperity by pulling money printing levers to make the machine run at a faster and faster pace.

  6. Simply superb. Thank you.

    Perhaps this piece will inspire others to join me in calling for the discrediting and ultimate elimination of the bogus “GDP” measure from the popular lexicon.

    • Diogenes the CynicMEMBER

      +1 on eliminating GDP as a measure we should focus on. It regards destruction as a plus! It does not focus on productivity. And ignores the environment ie resource inputs are infinite and costs byproducts (ie pollutants, degraded land, loss of species etc) at zero.

      Great article. The follow up question is give that what do we do then? Are we to follow Schumacher’s concept of Small is Beautiful? Everyone lowering expectations and becoming expert artisans, churning out masterpieces and growing vegetables? Whilst growth in intangibles is possible it makes me think we are headed for a Matrix virtual reality end game where we all simply plug in and dream.

      Or as the competition for a piece of the good life intensifies (underpinned by scarce resources) do we face war?

      At a minimum I can only urge our current central planners to try and come up with some medium term approach to tackle Australia’s liquid fuels import problem. Our “economy” is horribly exposed to a hiccup in supply.

        • Yes the planners have already committed our troops to support the elites opium and oil economies.

      • Everyone growing their own vegetables? When urban planners trying to conserve resources, expect us to live at 20 homes to the acre?

        Greenies in the 1970’s tended to be all about lifestyle block living. This actually made a lot more sense. There are numerous things you can do to live “sustainably” on an acre or 2, that puts you way ahead of the 20-homes-to-an-acre crowd.

  7. Where are the Cornucopians (3d1k, GSM, loonyright…) to lecture us that infinite growth is simply a matter of getting government out of the way?

    • Ah well I must be out of step then, I think that we will have infinite growth because government does get in the way. Of course there are times when they become their own worst enemy, but that’s another story.

      • I have never said ‘government get out of the way’ – I see a role for government and am not of the zero-government libertarian ilk. However, that said, reach of government must have limits as must our dependency on ever-expanding government largesse.

        • Exactly right, I find it funny that opponents of this doctrine never actually address the arguments. They usually use some strawman or exaggeration in an attempt to demean the people making an argument.

          For some reason, if you want government limited, taxes lowered and personal freedom and rights increased you are somehow a ‘no government idiot’ or a ‘mad TEA partier’. Where has any reasoned person proposed to do away with government completely? The idea is absurd. How is wanting personal rights and freedom’s crazy or even wrong? Our very culture is built on it!

          • You need to be more specific I think, otherwise it just sounds like loony right rhetoric.

            What personal freedoms and rights are currently being suppressed ? To what point should they be increased ?

            How low should taxes be ? Which taxes ?

            Which activities should government be limited to ? What services should government provide ?

    • Morning Lorax.

      Nice distortion btw. No, my position is that real growth, the type that ADDS value, can be best achieved by Govt’s being smaller and yes “getting out of the way”. And by that I mean remaining small and ceasing the constant outflow of regulatory burdens and tax impositions.

      “infinite growth is simply a matter of getting government out of the way?” That is your poor interpretation, not mine.

      Flashman’s piece is a good one. Unfortunately, good luck with getting today’s population with accepting a no growth world. ATM Govts are stepping in to pump up their brand of growth which means more costs to taxpayers and more loss of freedoms.Stupidly, we allow it.

      Or Lorax, do you advocate a European style solution, Govts being 50% of GDP and borrowing to infinity, with all its wonderful outcomes?

      The truth is our future prosperity should be determined by US as a nationa of enterprising individuals and we have to get off our lucky ar$es and work for it , without Govt being a bullwark or a nanny .

      • I agree that today’s population won’t accept a no growth world. I also agree that small government and minimal regulation is likely to result in faster growth. Where we disagree is whether free markets are effective at anticipating longer term problems (climate change, peak oil, peak fish etc) without regulation.

        It is my suspicion that most laissez faire types secretly concede this but get around it by denying the existence of the problem. I think its fair to say that most people at the Tea Party end of the political spectrum tend to be skeptics of climate change, resource scarcity etc.

        I’m a science guy. Science is rarely completely wrong. Its driven by rigorous method, not opinion. If mainstream climate science were seriously flawed there is zero doubt that further observation and testing would have exposed it by now. If there’s one thing that will truly make you as a scientist, its when you disprove the prevailing wisdom. Look at the teams that discovered the accelerating expansion of the universe. You don’t get the Nobel Prize for simply confirming what others have observed.

        • Lorax,

          I’ll share this FWIW. Labelling people who dont share your view with terms like “laisses faire types”, “Tea Party” and the psuedo religious slurs like “sceptics” or “denialists” is profoundly offensive, lazy and derogatory in my personal view. While you are perfectly entitled to your learned POV, so are others. Demeaning someones intelligence or qualifications because you are a “science guy” is well, better standards are available shall we say.

          Science is a very broad church as no doubt you already know. There are well respected voices besides yours in Science that conflict with your stated views and concur with those “denialists, Tea Partyists and laisses faire types” . They are not idiots either. When science appears hijacked to promote a dodgy political agenda then people are well served to be sceptical.

          Then, there is the whole other question of how deal with the so called “Science”.

          • When a political party appears to have been hijacked by a movement intent on creating the perception that science ‘appears’ to have been hijacked to promote a dodgy political agenda, in order to promote their own dodgy political agenda, then people are equally well served to be sceptical.

          • When science appears hijacked to promote a dodgy political agenda then people are well served to be sceptical

            You seem to have swallowed the Tea Party/Libertarian agenda hook, line and sinker. 🙄

          • Nonsense. I didn’t label you as anything except a Cornucopian. I didn’t call you a denialist, and what on earth is wrong with using the term climate skeptic?!

            FFS you are delicate flower.

            Science has not been hijacked by a dodgy political agenda. Science is science. Its not opinion. It is backed by evidence and experimentation that can be repeated. If its wrong, believe me, scientists will be working furiously to prove it so.

            It is completely untrue to suggest that statistically significant number of climate scientists disagree with the consensus. There are more physicists who are flat earthers than climate scientists who are skeptics.

          • “delicate flower”, eh?

            From your fevered defensive response I think it’s pretty clear who the delicate flower is.

            Are you really suggesting that after all the revelations of Climategate, the Copenhagen begging fest and countless CC “defections” by prominent scientists and reams of contradictory evidence (Flannery’s there will be no more rain falling in Eastern Australia meme, record cold temps etc?) that at least there is not some grounds to be sceptical of the whole Climate “catastrophe now!” industry? After all, BILLIONS of tax dollars are involved in funding then swaying the CC decision outcomes. We have whole Depts of PS’s devoted to this catastrophic future. No vested interests there ya think? I don’t believe you could be that naive.

            We used to be a country where almost every child was born with an inbuilt BS antennae. I wonder what has happened? Ah, of course- we have such a great education system.

        • General Disarray

          I think it’s best to leave anything science related out of the comments here, Lorax.

          I don’t disagree with you, it’s just that there’s clearly no point in it.

    • It is funny how Cornucopians worry endlessly about leaving future generations with debt/deficits, a man-made construct that can be quite meaningless in the face of calamities like climate change and over-exploitation of finite natural resources.

      Future generations can choose to wipe out debt/deficits off the slate with a few key strokes; but they can’t reverse climate change nor put back natural resources into the ground.

      • “a man-made construct that can be quite meaningless in the face of calamities like climate change ”

        Your comment would hold more water if it was something to be concerned with 😉

        • Yeah, leave it to the future generations to be concerned with the balance of probability that Climate change is real.

          PS: Even Tony Abbott agrees that Climate Change is real, although his proposal to tackle it is big government socialism aka Direct Action.

          • A changing climate has been real since climate became a phenomena. What is at issue is whether ruining our economy and taxing everything that moves will even have any beneficial effect whatsoever.

            Don’t for a minute distort that comment as an advocation of raping the environment.I love and value our blessed place in this world. There are solutions here that meet both our POV’s here- PTR’s for one. Solve the base load issue without wasteful subsidy. Entirely doable.

          • Who ever said that climate change wasn’t real? Climate has always changed. It’s whether or not human Co2 emissions (co2 being a required element of life on earth that is at historically minute levels) are somehow going to do damage to the planet.

            A look at the fundamental evidence says the idea is laughable, yet somehow it’s become a massive issue. Very strange indeed.

            Honestly, future generations are going to look back and say “hahaha, they actually thought CO2 emissions were dangerous!? What idiots, everyone knows [insert current fear campaign ala climatechange, Y2k, etc… here] is the biggest threat in history!” 😀

          • MattR, fortunately the internet has recorded our opinions one or or the other for posterity.

          • Is there a facility with this blog to killfile ignorami who thumb their noses at science?

      • Mav,

        This may come as a shock but there are lots of Australians who actually prefer less intervention in their lives from the so well meaning authoritarians. We don’t see Govt as holding the answers to the challenges of our lives and the future of our kids. We see those answers largely within ourselves , built around a good set of personal and community values with MINIMAL Govt.

        Freedom is a commodity too. Hard won and too easily given up to the well meaning authoritarians and totalitarians who constantly bombard us with their insidious subverting dogma of “it’s for your own good”. Breeding a nation of weaklings and dependancy.

        Bollocks to that.

        • This may come as a shock but there are lots of Australians who actually prefer less intervention in their lives from the so well meaning authoritarians.

          You might want to add “In my opinion”… because apparently not enough Aussies think that and not elect an allegedly Left leaning government. That brings me nicely back to my offer to buy you a one-way ticket to Somalia.

          • “That brings me nicely back to my offer to buy you a one-way ticket to Somalia.”

            LOL, are you sure you could afford it? I didnt know Govt benefits stretched THAT far 😉

          • Ahh the old, “if you don’t like it you should move to [insert some country here that I think reflects your values]” argument.

            What evidence do you have that most aussies don’t want less government intervention in their lives? I’d say it’s a pretty common theme outside the “gummint should do something” ACA/TT crowd.

          • erm.. MattR, do you have reading comprehension difficulties?

            If majority of Aussies like your idea of Ayn Randian utopian, we would have had a mindless drone from the IPA as our Prime Minister by now.

          • Lol OK kiddo, what unbeatable logic you have there.

            Couldn’t possibly be that people don’t have the option of voting for what they actually want or anything…

            And who said anything about a Randian utopia? Lol, talk about dribbling.

    • I’ll step up as a “Cornucopian”.

      Every human being who could have been “time-travelled” a century into the future, would see a veritable “Cornucopia” of technological solutions that has in fact enabled exponential human growth.

      This is actually the intellectually sound position. The other is “hyper-linear thinking”, of which Thomas Malthus is the obvious classic example. Hyper-linear thinkers tend to be the sources of wonderful quotes that people will guffaw over 100 years later – like the streets of New York being 20 feet deep in horse excrement by now.

  8. With debt at the core of economic growth, the biggest impediment to growth going forward, as always, will be the stubbornness of notions of cultural identity, religion, independence. Globalisation is a passive-aggressive approach to creating a framework of centralisation and global governance – harmonisation of standards, laws, regulations, policies, procedures, conditions, work practices, compliance, etc, which are envisioned as a mechanism to minimise the risks in supply chains in one country from leaching into other parts of the global economic system – thereby better enabling continual growth. Such a system is predicated on the erosion by degrees of cultural identity, religious beliefs, and political independence – anything that might impede such centralisation and harmonisation. Time was countries would seek to attain this objective by explicitly militaristic and violent means. This approach is now at the core of the corporate business model, engendered by the strong economic incentives given to individuals pursuing their own self-interest, reinforced by law, and policed by a market of same self-interested individuals who punish failure to create growth by said corporations and governments. Beyond the structural incentives/legal obligations to keep growth at the core of our activity, there is the continuation of a deep philosophical stream which views ‘stasis’ as unhealthy, representative of sloth, wasteful of human capability, sinful. This philosophical view seems to have leached into secular society. The whole system is further underpinned ever more fervently by the pursuit of ‘individualism’, and a vehement distaste for notions of collectivism. This central contradiction – that so many self-interested, independent agents are driving an objective that can ultimately only ever be achieved with the co-operation of a collective acting in accordance with a centralised, harmonised dictate – seems to me to have sown the seeds of its own destruction. But I could be wrong.

    • With debt at the core of economic growth

      I would argue that usury is at the core of “economic growth”.

      By eliminating usury from the equation, the ponzi scheme of “economic growth” collapses of its own accord.

      • I don’t think you’ll ever eliminate usury (lending of money at any rate of interest, I assume you mean), nor am I sure that should be an objective. It has its purpose – but as it relates to our current economic situation, it has run wild – taken over the host’s body. If anything, it needs to be ‘domesticated’. Not sure how you do that with people foaming at the mouth about deregulation, small government, and the primacy of the ‘rights’ of individuals above all other considerations. Will people and corporations be any less subservient to the demands of growth (and the debt used to leverage it) in the absence of ‘big’ government and strong regulatory structures? Taxes might be smaller, but presumably economic growth is still going to driven in part (if not largely) by the debt issued and accumulated by the private sector. That sector may be more incentivised to drive efficiencies, but is it really any more rational than government as it relates to sustainable levels of consumption which ensure that the level of debt does not reach a point of undermining the system itself ? I think we need stronger regulation and government (not necessarily bigger government) to reign in the worst excesses of self-interest. I think a more balanced system of ‘usury’ is a more realistic objective than eliminating it – which of itself would require a far more autocratic system of regulation.

      • pingupenguinMEMBER

        I keep reading you saying that on different posts on this blog, and forgive me if I have missed it, but I haven’t seen you anywhere explain how a modern economy would work without interest bearing debt.

        That is not to say I think that everything is fine with the way things are going at the moment, far from it, but it seems to me that getting rid of usury isn’t as simple as setting interest rates to zero and hoping for the best. Some radical changes would be necessary.

        What are those changes?

    • This is very interesting and I have been thinking along similar lines. Aggressive individualism is not just enshrined in law, but in cultural norms and institutional structures… you can date it back to when Prometheus first stole fire from the gods, or when Adam first bit the apple, whichever you subscribe to. So while I’m not sure what the solution is this most certainly is the ultimate moral dilemma of our species. Are we producing and consuming ourselves to extension? Hopefully not.

    • A thoughtful post Pit. I think individualism is the driver, collectivism the passenger.

      Individualism in the sense that ‘the individual’ is the ‘essence’, collectivism the result of individual actions. A small point of disagreement with you – collectivism is prevalent to the point that recognition of the role individualism is negated.

      Back to the beginning, you can’t have one without the other but individualism must lead.

      Kinda circular?

      • collectivism is prevalent to the point that recognition of the role individualism is negated

        I don’t necessarily disagree with that, but therein lies the political divide which is confusing efforts to correctly idenfity the problems, and find solutions. Either side thinks there’s either too much of one and not enough of the other, and become so entrenched in defense of one perspective that the whole system is constantly prone to long periods of disequilibrium. I know it’s ever been thus, but from my relatively brief time observing politics I see things becoming more and more partisan. Unproductively so, if our ultimate goal is to maintain that equilibrium between the individual and the collective.

  9. ive been reading ” the creature fro jekyll island”

    1st published in 1994, republished in 2002 – amazing to read and then look back at the events of the GFC !

    its a bit of a conspiracy theory book, in that socialism is taking over the world (which i dont subscribe to), but the message and lessons within are eye opening! very much the same as the above article !

  10. Bear-Feller – cheer up!

    Growth (or fluidity or evolutionary transition – whatever you may wish to call it) will continue in one form or another. We may change the parameters by which we measure this ‘movement’ in human economic and social cycles, but it will continue. It cannot be stopped. It must be adapted to.

    We in the West have had decade upon decade of comparatively excellent living standards – we are never satisfied – and squeal like stuck pigs when faced with the prospect of material decline in standards endured by four-fifths of the world’s population.

    Our current system has served well, despite some serious flaws and inequities. These will be resolved, probably to be replaced by another set of ‘problems’ apparent to another generation. This is life. Get on with it.

    • True that developing economies should not be cheated of their opportunity to grow by decadent first-worlders who’ve had their cake and how want everyone to go on a diet…

      But China etc also can’t cheat history and their attempts to accelerate development are not going to work either. Theres no real shortcut. Pretty soon they’re going to have to deal with the consequences of their overinvestment.

      • And that is what they will do. Flashman writes of the environmental degradation resulting from China’s rapid development – and much like the degradation London faced post industrialisation it will be addressed.

        Nothing remains stagnant, change is a given.

        • There is quite a big difference though. The likes of the UK and US benefitted from plentiful resources and land, and a population that scaled with economic growth. For example, UK pop in 1800 was about 11m.

          China is faced with a vastly different situation and IMO some of the environmental problems will be extremely hard to overcome. Cant make water where there is none. Cant make trees when you’ve used them all already (compare with UK which had vast areas of forest consumed during the industrial rev).

          • China doesn’t need to use trees for what the British used them for during THEIR “development”.

            “Late developing” nations have a huge advantage; they can utilise the latest technology immediately. Think Victorian England with cellphones. This is what a lot of Africa is like.

    • The sun’ll come out
      Tomorrow
      Bet your bottom dollar
      That tomorrow
      There’ll be sun!
      Just thinkin’ about
      Tomorrow
      Clears away the cobwebs,
      And the sorrow
      ‘Til there’s none!

      Tomorrow!
      Tomorrow!
      I love ya
      Tomorrow!
      You’re always
      A day
      A way!

  11. While the illusion of growth based on ever expanding debt may be an illusion that has run it’s course, there is MORE growth potential now than at any time in history.

    Despite the accelerated pace of technical evolution (i.e. Garden variety Smartphones have more computer power than the recently retired Space Shuttle) Most of the energy dependant modern world is still powered by 100 year old technology (eg. fossil fuels)

    Green energy is still in it’s infancy with the early effects on the mass market only just starting to be recorded. As there is no fuel cost to renewable energy and it can be generated on any scale from mW to GW, this will gradually lower the cost of ALL energy freeing Trillions of dollars in capital flows.

    Just as oil price increases cause broad-based price inflations, so the elimination of fossil fuel dependence will gradually eliminate that enormous cost input.

    Forget about Facebook and iphones (which are only prominent due to their consumer facing marketing campaigns) there is a bigger revolution taking place typified by roof-top solar PV coupled with plug-in Electric vehicles.

      • Diogenes the CynicMEMBER

        Yeah Kurtzweil technofantasy…and I have solar panels, a local water supply and am interested in an electric vehicle/bicycle…but the liquid fuels problem will not be solved by a mass switch to EVs (not enough lithium at the moment). We need major changes to the way society operates.

        • Diogenes, very admirable, but sadly you are a tiny, tiny minority. I’m hopeful that there’s a technological revolution ahead that will make tsport100’s vision a reality before mid-century, but its unlikely IMO.

          Until renewable energy is cheaper, more reliable and more convenient that fossil energy very little will change. Governments will never artificially raise the price of fossil energy to a point where it hurts electorally. We will simply invest more digging the stuff up and get poorer and poorer returns.

          Society may well change, but only when it is forced to. In the meantime we will continue to accelerate towards the cliff.

          • “Society may well change, but only when it is forced to.”

            Society is changing ALL the time, natural ‘forces’ see to that, coercive forces tend to see rapid change, not always of the kind desired.

            “In the meantime we will continue to accelerate towards the cliff.”

            What cliff? I prefer to see a mountain, to be either contemplated from distance or surmounted to reveal new vistas.

          • President Obama knows that the gig is up and GFC2 is inevitable – I think that Obama may have already given up, no 4 more years. Why? Who wants to preside over GFC2 with the whole world sucked in this time? Obama knows something bad is a foot; ditto with possible new wars (Iran). He can take his money and run to Hawaii and his new $12 million dollar home and be treated like a King for the rest of his life, as the first ever black President of the USA and miss being the worst ever President as the world crashes.

          • Many of people I know want sustainability. The problem we don’t have good policies for it IMO.

            We have to encourage people to stop buying the massive SUV to take the kids to school. My next door neighbour on the left has three SUV.s for a family of four and the kids are 7 and 9 so hardly needing an SUV yet or needing to be driven 1.6 km to school daily plus plus.

            We have to build more sustainable houses, make public transport more accessible etc.

            Want happen quickly if ever.

          • MineBot: By “change” I mean radical, rapid change not in a good way, that is forced on us by resource scarcity or environmental degradation.

            The “cliff” is the moment when carrying capacity is exceeded. Studies of populations of many organisms suggest that populations tend to grow rapidly until the carrying capacity of the environment is exceeded, and then collapse rapidly. We’re like bacteria in petri dish racing towards the edges completely unaware the food is about to run out.

            I’m glad you see mountains and new vistas. Its all very cornucopian. It must be nice to be so deluded.

          • Spleen, broadbrush strokes: for brevity a dude invents the printing press, accessibility to ‘knowledge’ released from the cloisters, society changes; agricultural expansion, society changes; steam engine enables widespread movement of people and goods across vast distances, society changes; industrial revolution, society changes; combustion engine, telephone, universal suffrage, television/movies, computers, medical science, womens’ rights, animal welfare, and myriad other innovation all, over time change societal mores. Smartphones, iPads, nanotechnology, hitherto unknowns…society will continue to change.

        • “We need major changes to the way society operates”

          Totalitarians throughout history have endorsed and acted on exactly the same sentiment, for our own good of course.

          I prefer this;

          “For to be free is not merely to cast off one’s chains, but to live in a way that respects and enhances the freedom of others.”- Nelson Mandela ( Now, THERE is a true living hero!)

          • A hero …

            … or terrorist. Depends from which perspective and which point in time you make that assessment.

            It’s not just medal wearing totalitarians that make that judgement about ‘changing the way society operates’. It’s also at various points in time religious groups, professional bodies, businesses, monopolists, convicted ‘terrorists’. You say yourself that you want people to be able to lead lives built around a good set of personal and community values with minimal government, but government is the mechanism for enacting those personal and community values, and for balancing them against those forces that want to change the way society operates for their own interest.

            So, what is it about government that you want to minimise, specifically ?

          • I’ll still take Mandela as a hero spleen , tyvm.

            Govt is not THE mechanism for enacting those values. It is just one- YOU are another.

            I’m surprised that you don’t see Govt as the major force trying to “change the way society operates”. My point being the balance is way out of whack- Govt intervene far to much because it has been encouraged by weak minded populations to nanny them. Our Govt has clearly stated its intent to continue growing that. State Education carricula tilted towards leftist idealogies has seen to said weak minds and the nanny mentality.

            What do I want Govt to minimise? Everybloodything!

            Good target now- 25% reduction in their take of GDP and a redeployment of priority spending. To where? I have stated enough times previously spleen and we have discussed that at some length in the past.

          • I’m with you, GSM.

            It never ceases to amaze me how the alarmists and doomsayers telling us we must give up our cars and decent homes, NEVER state what government programs need to be also cut by way of response to the ALLEGED crisis we face.

          • GSM – I appreciate that we are all personally responsible for living according to our own values, but how are our personal values, which inform and are inter-related to the common values of the community in which we live (in the local and broader sense), enforced if not by some mechanism that emanates from a body granted authority to create, monitor and enforce rules which reflect and proscribe those values as they relate to the way individuals and corporations should behave in the community? That is to say, government.

            So in that sense, of course government is a major force in changing the way society operates. Whether one particular structure of government achieves this more efficiently/effectively than another is a different issue to whether government reflects the values of the community. And separate altogether is whether the community values that government is supposed to embody, is in fact a representative aggregate of personal values, and whether one group or another attempts to distort/influence community values for their own personal/financial benefit, and the feedback loop into personal values this creates.

            I am trying to disentangle these issues from the rhetoric I keep hearing on this site about getting government out of our lives. What does that actually mean? Which activities should government be involved in? What is your alternative mechanism for providing the hard and soft infrastructure of society that reflects your values? Is this just about efficiency gains? Expunging certain services from our lives altogether? Shifting costs from taxpayers to specific users? Please be specific in your answers. Otherwise it risks sounding like empty rhetoric from the loony right, devoid of context, and which my six year old could learn by rote.

  12. sounds like 1984 with a perpetual boogeyman to chase. Don’t give the p’s fuel for covering up their BS.

    Seriously, something always comes along to shake things up and move us out of our quagmire. This is a situation where most can’t see the forest from the trees due to the high level of instability in the system. There is a lot of constraint due to instability in the system and constraint brings creativity.

    Now is not the time to think like an economist. Think like an investor/opportunist on meth looking for the breakout position.

    • +100

      “Seriously, something always comes along to shake things up and move us out of our quagmire.”

      Very true and that is usually either a major conflict,a natural disaster or a technological revolution.

      Constantly looking to nanny Govt to provide our answers is a definition for insanity.

      • “Must-read” for all secondary school students: Matt Ridley, “The Rational Optimist”. I shudder for the eco-fascist indoctrination our youth are being subjected to. There has probably never been a man in human history with the grip on the allegience of the modern world’s youth, as Al Gore today. And we are fools to trust anyone with this kind of power.

  13. If you want to consider the “Information Revolution” as having spun out and not provided anything, I think you’re calling it way too early. 3D printing is something that is going to shake up everything we know, and broadband will play a part in it.

    Just the other day there was controversy in the US because someone attempted to “print” a gun using a 3D printer. It’s something that could legitimately happen with the right plans – and anything with a physically reproducible structure is in trouble. Electronics is possibly the only thing that is safe as yet, and only insofar as the parts are not commonly or cheaply available.

    It’s early days on the 3D printing front, but the multitude of technologies available to do it is going to shake out and we’ll see this within our lifetimes become something which turns mass production around and gives it a good goddamn shake.

    • Yep, 3D printing could be a game-changer and so could Thorium, but until we reach that next technological level there’ll be interesting times ahead…

  14. Interesting. The problem with the idea of permanent GFC is that the crisis is a financial one. It is a problem of debt and of system rather than any material things. Our capacity to make things, to build, to provide real benefits has not diminished it is simply withheld by our creditors as it is used to repay our excessive debts.
    The real change from the GFC is the financial sectors domination (or ownership) of the world economy is more exposed and is entering a final phase as it absorbs the remains of the worlds wealth and dismantles entire countries.
    The current situation could become permanent, a new feudal era with almost all labour and resources pledged to our bankster masters. Or the backlash could come sooner and transform into something new or at least different. Interesting times.

    • I think what characterises this age is “financial innovation” at the expense of real-world innovation. Thats the issue. It appeared that growth could be magiced out of nowhere with the more creative and extensive innovation of financial products. This turned out to be nonsense.

      So now we are back to the basic question – can we continue to produce more with less and parlay that into higher living standards for all? Real world solutions required.

      The answer for the moment is no, so we’re in a zero-sum game of players trying to protect whats left of their piece of the pie.

    • glissom,
      “The problem with the idea of permanent GFC is that the crisis is a financial one”

      It WAS a financial one. Now it fairly and squarely has become a POLITICAL one.

  15. Ronin8317MEMBER

    Throughout Chinese history, economic development has been the forerunner of internal social unrest. This is due to China’s geography : the coastal area becomes very rich due to trade while the inaccessible inner west remains poor. Keeping everyone (except the rulers, of course) is be better for social harmony.

    The economic development was driven by national security concerns : the industrial base has fallen too far behind, and it’s a national security issue. The war with Vietnam drove home the point : China’s army, despite being many times the size of the Vietnamese army, lost very badly. That is the main reason why the CCP initiated market reform, as communism clearly wasn’t working.

    The Chinese, for all its fault, does not worship ‘the market’ like a religion. While the economy remain constrained by the law of economic, they are never afraid to break the rules when it suits them. This is why you should take Chinese politics into consideration when evaluating events in China. As a lot of Chinese bloggers have said : “this is China, anything is possible” 😛

  16. Deus Forex Machina

    Great article Michael…really enjoyed it.

    I guess for me the question you ask can be answered either in theory or in history. The theories you have set out nicely and as you know I wonder if we aren’t seeing the unwinding of the benefits of the Industrial revolution right here and now as the model of growth for the past few hundred years breaks down.

    But history does give a guide to the persistence of these types of events which have occurred a number of times since the banking crisis in Sienna in 1269. The history simply says that this mess can take up to a generation to work through – somewhere between 5 and 25 years.

    History also tells us that the impact is felt unevenly across the population.

    For those reading this who haven’t subscribed to MI or aren’t on our team its one of the reasons MI exists. To try to make sense and money of a an economic environment that is conditioned by Macro Pessimism but still gives lots of opportunities for Micro optimism and growth.

    I’ll stop the ad there but an enduring and painful adjustment process to a slower growth future for the globe and for us here in Australia seems assured for some time yet.

    Thanks again Michael brilliant article and some nice debate above.

    Cheers
    Greg

    • I remember visiting Siena and thinking how different it was Florence. They obviously never really recovered from 1269. I wonder what that says about us. Where do you think the next Renaissance will be?

      • Hopefully when renewable energy becomes cheaper (and more reliable) than fossil energy. We’re really not that far away.

        My one concern is that if humanity figures out how to produce plentiful, cheap renewable energy we will have the good sense to preserve what remains of the natural world.

      • Deus Forex Machina

        Yep the fact the Cathedral was never completed is testament to how long run these things can be.

        Next renaissance – Not in my lifetime unfortunately. Hopefully my kids though.

  17. 1000 word article, 64 comments and not a word about peak oil (unless you count the Heinberg reference).

    I don’t think peak oil implies immediate economic calamity, but for a very long time it will be a constant headwind pushing back against increasingly frantic efforts to get the growth engine going again.

    Time to think about creative ways of “degrowing” with dignity.

      • Indeed. What we have done to the world’s oceans over the past 200 years is truly astonishing and will likely never be repaired on human timescales.

        I doubt even the most hardened cornucopian would claim fish stocks will recover to pre-industrial levels anytime soon.

        • Greenies frantically oppose fish farming, because they hate any human ingenuity that averts the crisis they all get frissons of delight over. This is the same story over and over again. No nuclear! No fracking! No deep sea drilling!

          These people WANT the end of civilisation, not progress into new paradigms.

    • New technologies will often arrive to deal with seemingly insurmountable problems. Peak Oil is not the issue it once was circa the hysteria of 2005/6/7. Peak “cheap oil” however is an issue but more to do I think with CB manipulations of currencies and sponsored market distortions than scarecety of the commodity.

      What is needed is common vision, inspiration and a positive belief in our future. That will now be much harder to achieve with DEBT being seen as the pathway to to achieving those aspirations. The legacy we are building with DEBT, whether public or private, has shackled our prosperity and our ability to aspire to it.

      • So according to you, peak oil is not a geologic issue but a financial one?

        Do you acknowledge that oil is finite, and that we are going to enter a period if inexorable decline in the next decade or so?

        Do you accept that CO2 is changing the climate, as 97+% of the world’s climate scientists insist?

        Just wondering at the extent of self delusion going on in your head. GSM = gibbering sans mentation?

        • R2M, you sound like religious zealot. a

          “Oil” or energy comes in many forms. Is it finite? Yes, but when will that point arrive? Only theories are available. In 2005 “Peak Oil” was going to be 2010 as crunch year.

          Show me where I have not accepted that climate is changing?

          Pompous insults; how mediocre.

          • GSM, you would probably enjoy “Environmentalism Refuted” by George Reisman if you have not read it already.

            You are right on with your “religious zealot” references. We should bring back the medieval papal hierarchy, they were not such an obstruction to science and progress as the modern Greens. There is no evidence at all of “the enlightenment” in Malthus/Ehrlich/Lester Brown etc etc.

  18. Thank you for the article. It was a good read. However, there is nothing wrong with the market economy, except perhaps the way it has and continues to be manipulated, measured and mangled.

    I wonder, Michael, whether he questioned to be addressed is how the questions are asked. GDP is a poor proxy for standard of living, for instance. It is not possible to measure subjective value, contrary to what mainstream economics touts. One helpful measure could be the amount of both money capital and capital goods per person are invested and thus the productivity of that investment per person. I know, more output per person does not equate with happiness. But they are separate questions.

    Another point of clarification: credit expansion via monetary expansion does indeed distort the capital structure of an economy, as do many other types of interventions distort markets. And if intervention is laid upon intervention it is nigh difficult for the price mechanism to work. But that’s the whole point: those of the interventionist view feel that government choice should prevail over individual choice, and thus we see the depth of debt that is the legacy.

    Either private property is private or it is not. My money is not the state’s property. It should not have the right to manipulate its purchasing power. But it does because of the faith in public, central banks. Rather than being financial innovation, which is a good term, davel, I feel that it is more: moral economic adventurism. If find it amusing that so-called democratic states are subject to this form of economic immorality of such a huge and humungous order. I am not stating that here was no private fault; but for the state to rescue and to continue to rescue default banks smacks of highhanded immorality. Cal it public theft.

    I cannot comment on an ongoing GFC. But what I feel is an ongoing phenomenon is further central bank intervention to try and “fix” what is purported to be market failure.

    • Very interesting points. I am a liberalist by instinct and most of my career has been in the markets of course, but I don’t know if finding a sustainable solution to the global commonweal will be as easy as adjusting our units of economic measurement. I hope it is however.

  19. The GFC has happened because environmental theology has led to urban planning which has led to classic “Baptists and Bootleggers” rackets in urban land, which has led to massive debt overhang and cyclical volatility.

    This is self-fulfilling prophecy stuff. “See, we are running out of land, the prices are going up”.

    “See, we are running out of fossil fuels, the price if going up” – when massive reserves are off limits due to regulations.

    And when nuclear is banned in many countries.

    Etc, etc, etc.