Thursday, May 19, 2016

Continuous geometric growth in a finite biosphere is impossible

Continuous geometric growth in a finite biosphere is impossible
There is nothing quite as seductive as extrapolation.  I remember when I was in junior high study hall, we budding gearheads would sit around making "calculations" such as "if you can get a car to go 80 Kph with 150 horsepower, you should be able to go 320 Kph with 600 horsepower." And while this childish foolishness was wrong for dozens of sound reason, it was certainly no worse than the typical budget, growth, or profit calculations one finds in daily newspapers or teevee newscasts.

Geometric extrapolation is even worse.  It is probably the most commonly practiced form of utter insanity. For how long have we known this is crazy?  The Sumerians taught us about the S-curve at least 4000 years ago.  The S-curve is based on the historical experience of producing things--whether corn or iPhones.

Michael Hudson on the humans who knew better
Hudson says that – in every country and throughout history – debt always grows exponentially, while the economy always grows as an S-curve.
Moreover, Hudson says that the ancient Sumerians and Babylonians knew that debts had to be periodically forgiven, because the amount of debts will always surpass the size of the real economy.
For example, Hudson noted in 2004:
Mesopotamian economic thought c. 2000 BC rested on a more realistic mathematical foundation than does today’s orthodoxy. At least the Babylonians appear to have recognized that over time the debt overhead became more and more intrusive as it tended to exceed the ability to pay, culminating in a concentration of property ownership in the hands of creditors.
Babylonians recognized that while debts grew exponentially, the rest of the economy (what today is called the “real” economy) grows less rapidly. Today’s economists have not come to terms with this problem with such clarity. Instead of a conceptual view that calls for a strong ruler or state to maintain equity and to restore economic balance when it is disturbed, today’s general equilibrium models reflect the play of supply and demand in debt-free economies that do not tend to polarize or to generate other structural problems.
And Hudson wrote last year:
Every economist who has looked at the mathematics of compound interest has pointed out that in the end, debts cannot be paid. Every rate of interest can be viewed in terms of the time that it takes for a debt to double. At 5%, a debt doubles in 14½ years; at 7 percent, in 10 years; at 10 percent, in 7 years. As early as 2000 BC in Babylonia, scribal accountants were trained to calculate how loans principal doubled in five years at the then-current equivalent of 20% annually (1/60th per month for 60 months). “How long does it take a debt to multiply 64 times?” a student exercise asked. The answer is, 30 years – 6 doubling times.
No economy ever has been able to keep on doubling on a steady basis. Debts grow by purely mathematical principles, but “real” economies taper off in S-curves. This too was known in Babylonia, whose economic models calculated the growth of herds, which normally taper off. A major reason why national economic growth slows in today’s economies is that more and more income must be paid to carry the debt burden that mounts up. By leaving less revenue available for direct investment in capital formation and to fuel rising living standards, interest payments end up plunging economies into recession. For the past century or so, it usually has taken 18 years for the typical real estate cycle to run its course.
As I have previously pointed out, our modern fractional reserve banking system is really a debt-creation system, which is guaranteed to create more and more debts. The modern banking system is therefore exacerbating the debt growth problem which countries have suffered for thousands of years.
Hudson calls for a debt jubilee, and points out that periodic debt jubilees were a normal part of the Sumerian, Babylonian and ancient Jewish cultures. Economist Steve Keen and economic writer Ambrose Evans-Pritchard also call for a debt jubilee.
If a debt jubilee is not voluntarily granted, people may very well repudiate their debts.

It is important to understand the reasons why geometric extrapolation is ultimately impossible because those assumptions are built into almost every newscast, financial arrangement, political planning, etc.  It would be a rare days anymore when the subject is implicitly brought up at least ten times.

At this link, you can find 23 different charts showing historic geometric growth of human activity--which is why all of them are destined to crash in the very near future.
The human economic growth story is incredible. Population increased exponentially, as did global wealth, factory output and other measures of development.
But the flip side is the steady exhaustion of resources and destruction of the environment. As growth continues, planetary tensions will increase too. This is why we're running into peak everything.

Real Economics are best Described by Evolutionary Theory

In 1859, Charles Darwin would publish his seminal work entitled "On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life."  This work would set off controversies that resound to this day.

Before Darwin, the generally accepted idea was that the world was the way it was because that is how the Creator wanted it.  The majority of intellectual speculation, whether of a scientific, philosophical, or religious nature, assumed that the goal in life was to discover those divine rules that ordered a fixed universe.  After Darwin, while folks still sought to discover the natural laws with universal applications, the focus shifted to describing the mechanisms of change.

No wonder Darwin is often considered the most disruptive thinker in history.

Taking Darwin out of the biology context is a hazardous occupation.  The ugliest of the non-biological manifestation of Darwin's theories is often called "
Social Darwinism."  Perhaps the most famous social Darwinist in USA was the 19th century chairman of Political Economy at Yale by the name of William Graham Sumner.  His most famous student was a kid from Minnesota named Thorstein Veblen.

Veblen was influenced by Sumner--though not in ways usually expected.  Veblen thought Social Darwinism was a monstrous error and devoted much of his life's work to debunking Sumner's teachings.  This did not mean Veblen rejected the theories of evolution.  Far from it.  In 1898, even before his first book was published, Veblen wrote an incredibly important paper entitled “Why is Economics Not an Evolutionary Science”.

Suddenly, the extant economics looked as static and ridged as any holy book.  Veblen would go on to write a body of work that would described "economic man" as a dynamic actor with complex motives who was constantly evolving.  Veblen is usually considered one of the fathers of a discipline called evolutionary economics.  Wikipedia defines this speciality thus:

Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology. It stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena.
Evolutionary economics deals with the study of processes that transform economy for firms, institutions, industries, employment, production, trade and growth within, through the actions of diverse agents from experience and interactions, using evolutionary methodology.
Evolutionary economics is validated by the existence of something that can only be called evolutionary industry.  Toyota imported evolutionary concepts into their system of quality control and called it Kaizen (continuous improvement).  The results were stunning--Toyota so revolutionized quality control they were able to leverage this reputation into their present status as world's largest automaker.

Why this is important

Evolutionary economics, especially in its heterodox manifestations, is hands down the best ways to understand and describe the complexity of the real world.  Typical non-evolutionary economic statements like

The market is always rational
A corporation exists only to maximize the return to the shareholders
Free Trade will bring generalized prosperity

are wrong because they are as static and ridged as any theological statement they so resemble.  This blog rejects static economics--mostly because dynamic descriptions of economic behavior are far more accurate.

Evolutionary industry is important because if we ever produce one, the green sustainable society will happen one tiny little improvement at a time.  And the folks MOST likely to create those new green bits and pieces are those most industrially evolved already.