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Dualist Economics

by Herman Daly

Herman DalyFrederick Soddy (1877-1956) discovered the existence of isotopes and was a major contributor to atomic theory, for which he received the Nobel Prize in Chemistry in 1921. He foresaw the development of an atomic bomb and was disturbed by the fact that society often used the contributions of science (for which he was partly responsible) for such destructive purposes. The reason for this was, in his view, faulty economics, so in the second half of his 80 years he set out to reform economics. He was the first person coherently to lay out the policy of 100% reserve banking, later taken up by the Chicago School economists and by Irving Fischer of Yale — and still an excellent idea. Soddy was considered an outsider and a “monetary crank” by mainstream economists. Nevertheless, his views on money are sound and highly relevant to today’s financial debacle. Another neglected but increasingly relevant contribution is his philosophical vision of the place of economics in the larger intellectual map of the world.

For Soddy economics occupies the middle ground between matter and spirit, or as he put it, “between the electron and the soul:”

In each direction possibilities of further knowledge extend ad infinitum, but in each direction diametrically away from and not towards the problems of life. It is in this middle field that economics lies, unaffected whether by the ultimate philosophy of the electron or the soul, and concerned rather with the interaction, with the middle world of life of these two end worlds of physics and mind in their commonest everyday aspects, matter and energy on the one hand, obeying the laws of mathematical probability or chance as exhibited in the inanimate universe, and, on the other, with the guidance, direction and willing of these blind forces and processes to predetermined ends.
(Cartesian Economics, p. 6)

Soddy did not mean that economists should neglect the two end worlds of electron and soul — much to the contrary he insisted that wealth must reflect the independent reality of both end worlds. What must be resisted is the “obsessive monism” of either idealism or materialism. We must recognize the fundamental dualism of the material and the spiritual and resist attempts to reduce everything to one or the other.

Wealth has both a physical dimension, matter-energy subject to the laws of inanimate mechanism, especially the laws of thermodynamics, and a teleological dimension of usefulness, subject to the purposes imposed by mind and will. Soddy’s concept of wealth reflects his fundamental dualism and is why his first lectures on economics were entitled Cartesian Economics, meaning in effect, “Dualist Economics” (not, as might be imagined today, economics diagrammed in terms of Cartesian coordinates). The subtitle of Cartesian Economics, “The Bearing of Physical Science on State Stewardship,” better reflects his dualism in the contrast between “physical science” and “stewardship.”

Philosophically Rene Decartes accepted dualism as a brute fact even though the interaction of the two worlds of mind and matter, of soul and body, of res cogitans and res extensa, remained mysterious. Subsequent philosophers have in Soddy’s view succumbed to monistic reductionism, either materialism or idealism, both of which encounter philosophical problems no less grave than dualism, as well as provoke greater offenses against both common sense and direct experience. It is fashionable to reject dualism nowadays by saying that humans are a “psychosomatic unity” even while recognizing a “polarity” within that unity. Nevertheless, the two poles of electron and soul are very far apart, and the line connecting them is, as Soddy argued, twice discontinuous. While we are surely in some important sense a “unity,” it would be good to recognize the legitimate claims of dualism by writing the word “psycho–somatic” with a long double hyphen.

Soddy's Dualist Economics

Soddy’s Dualist Economics

Soddy’s view can be represented by a vertical line connecting the electron (physical world, useful matter-energy, ultimate means) at the bottom, to the soul (will, purpose, ultimate end) at the top. In the middle is economics (efforts in ordinary life to use ultimate means to serve the ultimate end). Soddy did not draw such a diagram, but it is implicit in his writing. The vertical connecting line has two mysterious discontinuities that thwart monistic attempts to derive soul from electron, or electron from soul. The first discontinuity is between inanimate mechanism and life. The second discontinuity is between life and self-conscious mind (will, soul). Monists keep trying, and failing, to leap over both chasms. Dualists accept them as irreducible brute facts about the way the world is.

Dualists use the axiom of duality to interpret other phenomena instead of vainly pursuing the illusion of reductive monism. Nowadays the dominant monistic obsession is materialism, supported by the impressive successes of the physical sciences, and the lesser but still impressive extrapolations of Darwinist biologism. Idealism does not have so much support at present, although modern theoretical physics and cosmology seem to be converting electrons and elementary matter into mathematical equations and strange Platonic ideas that reside more in the minds of theoretical physicists than in the external world, thus perhaps bending the vertical line connecting mind and matter into something more like a circle. Also, a Whiteheadean interpretation of the world as consisting most fundamentally of “occasions of experience” rather than substances, is a way to bridge dualism, but only with the help of widely separated and mysteriously combined “polarities” of mentality and physicality posited or anticipated in each occasion of experience. While these are challenging and important philosophical developments, it remains true that materialism currently retains the upper hand and is claiming an ever-expanding monistic empire, including the middle ground of economics. In addition, physics’ modern revival of idealism so far seems morally vacuous — among the equations and Platonic ideas of modern physics one does not find ideas of justice or goodness, or even purpose, so the fact-value dimension of dualism remains.

As Soddy insisted, economics occupies the middle ground between these dualistic extremes. Economics in its everyday aspects remains largely “unaffected whether by the ultimate philosophy of the electron or the soul,” but this may be the big weakness of economics, the myopia that leads to its growth-forever vision. Each end world reflects unrecognized limits back toward the middle world –limits of possibility from below, and limits of desirability from above. Economics seems to assume that if it is possible it must be desirable, indeed practically mandatory. Similarly, if it is desirable it must be possible. So everything possible is considered desirable, and everything desirable is considered possible. Ignoring the mutually limiting interaction of the two end worlds of possibility and desirability has led economists to assume a permissiveness to growth of the middle world of the economy that is proving to be false. For Soddy this is reflected concretely in the economy by our monetary conventions — fractional reserve banking, which allows alchemical creation of money as interest-bearing private debt:

You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy].
(Cartesian Economics, p. 30)

Debt is confused with wealth. But unlike debt, wealth has a physical dimension that limits its growth. This reflects mainly a misunderstanding of the physical world and its limits on wealth. But Soddy also saw limits coming from the end world of the soul.

Just as I am constrained to put a barrier between life and mechanism in the sense that there is no continuous chain of evolution from the atom to life, so I put a barrier between the assimilation and creation of knowledge.
(Cartesian Economics, p. 28)

For Soddy the assimilation of knowledge was mere mimicry, and was discontinuous with the creation or discovery of new knowledge, which he saw as also involving a spiritual top down influence from the soul, from the mysteriously self-conscious mind that could not be derived from mere animate life by a continuous chain of evolution. Soddy said little about the life-mind discontinuity relative to the matter-life discontinuity, but it was clearly part of his philosophy, and has come to the fore in modern philosophical debates about the “hard problem of consciousness.”

To the mechanistic biologists, who were already around in his day, Soddy had the following barbed comment:

I cannot conceive of inanimate mechanism, obeying the laws of probability, by any continued series of successive steps developing the powers of choice and reproduction any more than I can envisage any increase in the complexity of an engine resulting in the production of the “engine-driver” and the power of its reproducing itself. I shall be told that this is a pontifical expression of personal opinion. Unfortunately, however, for this argument, inanimate mechanism happens to be my special study rather than that of the biologist. It is the invariable characteristic of all shallow and pretentious philosophy to seek the explanation of insoluble problems in some other field than that of which the philosopher has first hand acquaintance.
(Cartesian Economics, p. 6)

To generalize a bit, monists, who deny the two discontinuities, seek to solve the insoluble problems that they thereby embrace, by shallowly and pretentiously appealing to some other field than that of which they have first hand experience. This is a serious indictment — is it true? I will leave that question open, but will note on Soddy’s behalf that regarding the matter-life discontinuity, Francis Crick evidently thought it more likely that first life arrived from outer space (directed panspermia) than that it formed spontaneously from inanimate matter on earth, given the demonstration by Pasteur and Tyndall that “spontaneous generation is not occurring on the earth nowadays.” And, as already mentioned, a number of philosophers and neuroscientists (including John Eccles and Karl Popper) have declared that the life-mind discontinuity presents “the hard problem of consciousness,” judged by many to be unbridgeable.

The relevance of Soddy’s dualistic economics to steady-state economics is that there are two independent sets of limits to growth: the bottom-up bio-physical and the top-down ethical-economic. The biophysical limit says real GDP cannot grow indefinitely; the ethical-economic limit says that beyond some point GDP growth ceases to be worth what it displaces, although it may still be bio-physically possible. Certainly Soddy did not speak the last word on dualism versus monism. Nevertheless, he was truly a pioneer in ecological economics, seen as the middle ground between the electron and the soul. Although no ecological economist has won the ersatz “Swedish National Bank’s Memorial Prize in Economics in Honor of Alfred Nobel,” pioneer ecological economist, Frederick Soddy, has the distinction of having won a real Nobel Prize in chemistry. That doesn’t mean that he is right about dualist economics, but I think it earns him a serious hearing.

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Capital, Debt, and Alchemy

by Herman Daly

Herman Daly“Capital,” said Nobel chemist and pioneer ecological economist Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100.” (Cartesian Economics, p. 27).

He further explained that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the perennial net revenue stream expected from the project financed, divided by the assumed rate of interest and multiplied by 100. Rather than magic growth-producing real stuff, it is a hypothetical calculation of the present value of a permanent lien on the future real production of the economy. The fact that the lien can be traded among individuals for real wealth in the present does not change the fact that it is still a lien against the future revenue of society — in a word it is a debt that the future must pay, no matter who owns it or how often it is traded as an asset in the present.

Soddy believed that the ruling passion of our age is to convert wealth into debt in order to derive a permanent future income from it — to convert wealth that perishes into debt that endures, debt that does not rot or rust, costs nothing to maintain, and brings in perennial “unearned income,” as both IRS accountants and Marxists accurately call it. No individual could amass the physical requirements sufficient for maintenance during old age, for like manna it would spoil if accumulated much beyond current need. Therefore one must convert one’s non-storable current surplus into a lien on future revenue by letting others consume and invest one’s surplus now in exchange for the right to share in the expected future revenue. But future real physical revenue simply cannot grow as fast as symbolic monetary debt! In Soddy’s words:

You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy]. (Cartesian Economics, p. 30).

In case that is a too abstract statement of a too general principle, Soddy gave a simple example. Minus two pigs (debt) is a mathematical quantity having no physical existence, and the population of negative pigs can grow without limit. Plus two pigs (wealth) is a physical quantity, and their population growth is limited by the need to feed the pigs, dispose of their waste, find space for them, etc. Both may grow at a given x% for a while, but before long the population of negative pigs will greatly outnumber that of the positive pigs, because the population of positive pigs is limited by the physical constraints of a finite and entropic world. The value of a negative pig will fall to a small fraction of the value of a positive pig. Owners of negative pigs will be greatly disappointed and angered when they try to exchange them for positive pigs. In today’s terms, instead of negative pigs, think “unfunded pension liabilities” or “sub-prime mortgages.”

Soddy went on to speculate about how historically we came to confuse wealth with debt:

Because formerly ownership of land — which, with the sunshine that falls on it, provides a revenue of wealth — secured, in the form of rent, a share in the annual harvest without labor or service, upon which a cultured and leisured class could permanently establish itself, the age seems to have conceived the preposterous notion that money, which can buy land, must therefore itself have the same revenue-producing power.

The ancient alchemists wanted to transmute corrosion-prone base metals into permanent, non-corruptible, time-resistant gold. Modern economic alchemists want to convert spoiling, rusting, and depleting wealth into a magic substance better than gold — not only does it resist corrosion, but it grows — by some mysterious principle the alchemists referred to as the “vegetative property of metals.” The modern alchemical philosopher’s stone, known as “capital” or “debt,” is not only free from the ravages of time and entropy, but embodies the alchemists’ long-sought-for principle of vegetative growth of metals. But once we replace alchemy with chemistry we find that the idea that future people can live off the interest of their mutual indebtedness is just another perpetual motion delusion.

The exponentially growing indent of debt on future real revenue will, in a finite and entropic world, become greater than future producers are either willing or able to transfer to owners of the debt. Debt will be repudiated either by inflation, bankruptcy, or confiscation, likely leading to serious violence. This prospect of violence especially bothered Soddy because, as the discoverer of the existence of isotopes, he had contributed substantially to the theory of atomic structure that made atomic energy feasible. He predicted in 1926 that the first fruit of this discovery would be a bomb of unprecedented power. He lived to see his prediction come true. Removing the economic causes of conflict therefore became for him a kind of redeeming priority.

Economists have ignored Soddy for eighty years — after all, he only got the Nobel Prize in Chemistry, not the more alchemical “Swedish Riksbank Memorial Prize for Economics in Honor of Alfred Nobel.”

Growth, Debt, and the World Bank

by Herman Daly

Herman DalyWhen I was in graduate school in economics in the early 1960s we were taught that capital was the limiting factor in growth and development. Just inject capital into the economy and it would grow. As the economy grew, you could then re-invest the growth increment as new capital and make it grow exponentially. Eventually the economy would be rich. Originally, to get things started, capital came from savings, from confiscation, or from foreign aid or investment, but later out of the national growth increment itself. Capital embodied technology, the source of its power. Capital was magic stuff, but scarce. It all seemed convincing at the time.

Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow. The World Bank understood that the limiting factor was what they called “bankable projects” — concrete investments that could embody abstract financial capital and make its value grow at an acceptable rate, usually ten percent per annum or more, doubling every seven years. Since there were not enough bankable projects to absorb the available financial capital the WB decided to stimulate the creation of such projects with “country development teams” set up in the borrowing countries, but with WB technical assistance. No doubt many such projects were useful, but it was still hard to grow at ten percent without involuntarily displacing people, or running down natural capital and counting it as income, both of which were done on a grand scale. And the loans had to be repaid. Of course they did get repaid, frequently not out of the earnings of the projects which were often disappointing, but out of the general tax revenues of the borrowing governments. Lending to sovereign governments with the ability to tax greatly increases the likelihood of being repaid — and perhaps encourages a bit of laxity in approving projects.

Where did all this excess financial capital come from? Not from savings (China excepted), but from new money and easy credit generated by our fractional reserve banking system, amplified by increased leverage in the purchase of stocks. Recipients of new money bid resources away from existing uses by offering a higher price. If there are unemployed resources and if the new uses are profitable then the temporary rise in prices is offset by new production — by growth. But resource and environmental scarcity, along with a shortage of bankable projects, put the brakes on this growth, and resulted in too much financial capital trying to become incarnate in too few bankable projects.

So the WB had to figure out why its projects yielded low returns. The answer sketched above was ideologically unacceptable because it hinted at ecological limits to growth. A more acceptable answer soon became clear to WB economists — micro level projects could not be productive in a macro environment of irrational and inefficient government policy. The solution was to restructure the macro economies by “structural adjustment” — free trade, export-led growth, balanced budgets, strict control of inflation, elimination of social subsidies, deregulation, suspension of labor and environmental protection laws — the so-called Washington Consensus. How to convince borrowing countries to make these painful “structural adjustments” at the macro level to create the environment in which WB financed projects would be productive? The answer was, conveniently, a new form of lending, structural adjustment loans, to encourage or bribe the policy reforms stipulated by the term “structural adjustment.” An added reason for structural adjustment, or “policy lending,” was to move lots of dollars quickly to countries like Mexico to ease their balance of payments difficulty in repaying loans they had received from private US banks. Also, policy loans, now about half of WB lending, require no lengthy and expensive project planning and supervision the way project loans do. The money moves quickly. The WB definition of efficiency became, it seemed, “moving the maximum amount of money with the minimum amount of thought.”

Why, one might ask, would a country borrow money at interest to make policy changes that it could make on its own without any loans, if it thought the policies were good ones? Maybe they did not really favor the policies, and therefore needed a bribe to do what was in their own best interests. Maybe the goal of the current borrowing government was simply to get the new loan, splash the money around among friends and relatives, and leave the next government to pay it back with interest.

Such thoughts got little attention at the WB which was haunted by the specter of an impending “negative payments flow,” that is, repayments of old loans plus interest greater than the volume of new loans. Would the WB eventually shrink and disappear as unnecessary? A horrible thought for any bureaucracy! But the alternative to a negative payments flow for the WB is ever-increasing debt for the borrowing countries. Of course the WB did not claim to be in the business of increasing the debt of poor countries. Rather it was fostering growth by injecting capital and increasing the debtor countries’ capacity to absorb capital from outside. So what if the debt grew, as long as GDP was growing. The assumption was that the real sector could grow as fast as the financial sector — that physical wealth could grow as fast as monetary debt.

The main goal of the WB is to make loans, to push the money out the door, to be a money pump. If financial capital were really the limiting factor countries would line up with good projects and the WB would ration capital among countries. But financial capital is superabundant and good projects are scarce, so the WB had to actively push the money. To speed up the pump they send country development teams out to invent projects; if the projects fail, then they invent structural adjustment loans to induce a more favorable macro environment; if structural adjustment loans are treated as bribes by corrupt borrowing governments, the WB does not complain too much for fear of slowing the money pump and incurring a “negative payments flow.”

If capital is no longer the magic limiting factor whose presence unleashes economic growth, then what is it?

“Capital,” says Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100” (Cartesian Economics, p. 27). He further explains that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the future expected net revenue from a project divided by the rate of interest and multiplied by 100. Rather than magic stuff it is an indent, a lien, on the future real production of the economy — in a word it is a debt to be repaid, or alternatively, and perhaps preferably, to not be repaid but kept as the source of interest payments far into the future.

Of course debt is incurred in exchange for real resources to be used now, which as Soddy says cannot be used again in the future. But if the financed project can extract more resources employing more labor in the future to increase the total revenue of society, then the debt can be paid off with interest, and with some of the extra revenue left over as profit. But this requires an increased throughput of matter and energy, and increased labor — in other words it requires physical growth of the economy. Such growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not. It is now generally recognized that there is too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about growth. We never expected that growth itself would begin to cost us more than it was worth, making us poorer, not richer. But it did. And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?