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Nationalize Money, Not Banks

by Herman Daly

Herman DalyIf our present banking system, in addition to fraudulent and corrupt, also seems “screwy” to you, it should. Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the byproduct of private lending and borrowing? Is that really an improvement over being a by-product of private gold mining, as it was under the gold standard? The best way to sabotage a system is hobble it by tying together two of its separate parts, creating an unnecessary and obstructive connection. Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at little or no cost? And why should seigniorage (profit to the issuer of fiat money) go largely to the private sector rather than entirely to the government (the commonwealth)?

Is there not a better away? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements on demand deposits. Time deposits (savings accounts) would have zero or minimal reserve requirements and would be available to lend to borrowers. The change need not be abrupt — we could gradually raise the reserve requirement to 100%. Already the Fed has the authority to change reserve requirements but seldom uses it. This would put control of the money supply and seigniorage entirely with the government rather than largely with private banks. Banks would no longer be able to live the alchemist’s dream by creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements for demand deposits.

Banks cannot create money under 100% reserves (the reserve deposit multiplier would be unity), and banks would earn their profit by financial intermediation only, lending savers’ money for them (charging a loan rate higher than the rate paid to savings or “time-account” depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a time account depositor (and not available to the depositor during the period of the loan), thereby re-establishing the classical balance between abstinence and investment. With credit limited by saving (abstinence from consumption) there will be less lending and borrowing and it will be done more carefully — no more easy credit to finance the leveraged purchase of “assets” that are nothing but bets on dodgy debts.

Why are private banks controlling this public utility? Photo credit: Steve Rhodes

Why are private banks controlling this public utility? Photo credit: Steve Rhodes

To make up for the decline and eventual elimination of bank-created, interest-bearing money, the government can pay some of its expenses by issuing more non interest-bearing fiat money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, driving the price level up. As soon as the price index begins to rise the government must print less and tax more. Thus a policy of maintaining a constant price index would govern the internal value of the dollar.

The external value of the dollar could be left to freely fluctuating exchange rates. Alternatively, if we instituted Keynes’ international clearing union, the external value of the dollar, along with that of all other currencies, could be set relative to the bancor, a common denominator accounting unit used by the payments union. The bancor would serve as an international reserve currency for settling trade imbalances — a kind of “gold substitute.”

The United States opposed Keynes’ plan at Bretton Woods precisely because under it the dollar would not function as the world’s reserve currency, and the U.S. would lose the enormous international subsidy that results from all countries having to hold large transaction balances in dollars. The payments union would settle trade balances multilaterally. Each country would have a net trade balance with the rest of the world (with the payments union) in bancor units. Any country running a persistent deficit would be charged a penalty, and if continued would have its currency devalued relative to the bancor. But persistent surplus countries would also be charged a penalty, and if the surplus persisted their currency would suffer an appreciation relative to the bancor. The goal is balanced trade, and both surplus and deficit nations would be expected to take measures to bring their trade into balance. With trade in near balance there would be little need for a world reserve currency, and what need there was could be met by the bancor. Freely fluctuating exchange rates would also in theory keep trade balanced and reduce or eliminate the need for a world reserve currency. Which system would be better is a complicated issue not pursued here. In either case the IMF could be abolished since there would be little need for financing trade imbalances (the IMF’s main purpose) in a regime whose goal is to eliminate trade imbalances.

Returning to domestic institutions, the Treasury would replace the Fed (which is owned by and operated in the interests of the commercial banks). The interest rate would no longer be a target policy variable, but rather left to market forces. The target variables of the Treasury would be the money supply and the price index. The treasury would print and spend into circulation for public purposes as much money as the public voluntarily wants to hold. When the price index begins to rise it must cease printing money and finance any additional public expenditures by taxing or borrowing from the public (not from itself). The policy of maintaining a constant price index effectively gives the fiat currency the “backing” of the basket of commodities in the price index.

In the 1920s the leading academic economists, Frank Knight of Chicago and Irving Fisher of Yale, along with others including underground economist and Nobel Laureate in Chemistry, Frederick Soddy, strongly advocated a policy of 100% reserves for commercial banks. Why did this suggestion for financial reform disappear from discussion? The best answer I have found is that the Great Depression and subsequent Keynesian emphasis on growth swept it aside, because limiting lending (borrowing) to actual savings (a key feature of 100% reserves) was considered too restrictive on growth, which had become the big panacea. Saving more, even with the intent to invest more, would require reduced present consumption, and that too has been deemed an unacceptable drag on growth. As long as growth is the summum bonum then we will find ways to borrow against future wealth in order to finance the present investment needed to maximize growth.

Why would full reserve banking not crash on the rock of the growth obsession again, as it did before? One answer is that we might recognize that aggregate growth today increases unmeasured illth faster than measured wealth, thereby becoming uneconomic growth. How can loans be repaid out of the net illth they generate? Should we not welcome full reserve banking as a needed financial restraint on growth (uneconomic growth)? Another answer is that, thanks to financial meltdowns, the commercial banks’ private creation of money by lending it at interest has now become more obvious and odious to the public. More than in the 1930s, fractional reserve banking has become a clear and present danger, as well as a massive subsidy to commercial banks.

Real growth has encountered the biophysical and social limits of a full world. Financial growth is being stimulated ever more in the hope that it will pull real growth behind it, but it is in fact pushing uneconomic growth — net growth of illth. Quantitative easing of the money supply does nothing to counteract the quantitative tightening of resource limits on the growth of the real economy.

The original 100% reserve proponents mentioned above were in favor of aggregate growth, but wanted it to be steady growth in wealth, not speculative boom and bust cycles. One need not advocate a steady-state economy to favor 100% reserves, but if one does favor a steady state then the attractions of 100% reserves are increased. Soddy was especially cautious about uncontrolled physical growth, but his main concern was with the symbolic financial system and its disconnect from the real system that it was supposed to symbolize. As he put it: “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].” Wealth has a physical dimension and is subject to physical limits; debt is a purely mathematical quantity and is unlimited.

How would the 100% reserve system serve the steady-state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures — for example the leveraging of stock purchases with huge amounts of borrowed money (created by banks ex nihilo rather than saved out of past earnings) would be severely limited. Down payment on houses would be much higher, and consumer credit would be greatly diminished. Credit cards would become debit cards. Long term lending would have to be financed by long term time deposits, or by carefully sequenced rolling over of shorter term deposits. Equity financing would increase relative to debt financing. Growth economists will scream, but a steady-state economy does not aim to grow, for the very good reason that aggregate growth has become uneconomic.

Second, the money supply no longer has to be renewed by new loans as old loans are repaid. A continuing stream of new loans requires that borrowers expect to invest in a project that will grow at a rate greater than the rate of interest. Unless that expectation is sustained by growth, they will not borrow, and in a fractional reserve system the money supply will shrink. With 100% reserves a constant money supply is neutral with respect to growth; with fractional reserves a constant money supply imparts a growth bias to the economy.

Third, the financial sector will no longer be able to capture such a large share of the nation’s profits (around 40%!), freeing some smart people for more productive, less parasitic, activity.

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy.

Fifth, with 100% reserves there is no danger of a run on a bank leading to a cascading collapse of the credit pyramid, and the FDIC could be abolished, along with its consequent moral hazard. The danger of collapse of the whole payment system due to the failure of one or two “too big to fail” banks would be eliminated. Congress then could not be frightened into giving huge bailouts to some banks to avoid the “contagion” of failure because the money supply is no longer controlled by the private banks. Any given bank could fail by making imprudent loans in excess of its capital reserves (as opposed to demand deposit reserves), but its failure, even if a large bank, would not disrupt the public utility function of money. The club that the banks used to beat Congress into giving bailouts would have been taken away.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation. Also it in effect provides a multi-commodity backing to our fiat money.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big surpluses and deficits. U.S. consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance of payments lending unnecessary, fluctuating exchange rates (or Keynes’ international clearing union) would greatly shrink the role of the IMF and its “conditionalities.”

To dismiss such sound policies as “extreme” in the face of the repeatedly demonstrated colossal fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. The fact that this idea is hardly discussed today, in spite of its distinguished intellectual ancestry and common sense, is testimony to the power of vested interests over good ideas. It is also testimony to the veto power that our growth fetish exercises over the thinking of economists today. Money, like fire and the wheel, is a basic invention without which the modern world is unthinkable. But today out-of-control money is threatening to “burn and run over” more people than both out-of-control fires and wheels.

Uneconomic Growth Deepens Depression

by Herman Daly

Herman DalyThe US and Western Europe are in a recession threatening to become a depression as bad as that of the 1930s. Therefore we look to Keynesian policies as the cure, namely stimulate consumption and investment—that is, stimulate growth of the economy. It seemed to work in the past, so why not now? Should not ecological economics and steady-state ideas give way to Keynesian growth economics in view of the present crisis?

Certainly not! Why? Because we no longer live in the empty world of the 1930s — we live in a full world. Furthermore, in the 1930s the goal was full employment and growth was the means to it. Nowadays growth itself has become the goal and the means to it are off-shoring of jobs, automation, mergers, union busting, importing cheap labor, and other employment-cutting policies. The former goal of full employment has been sacrificed to the modern ideology of “growth in share holder value.”

Growth has filled the world with us and our products. I was born in 1938, and in my lifetime world population has tripled. That is unprecedented. But even more unprecedented is the growth in populations of artifacts — “our stuff” — cars, houses, livestock, refrigerators, TVs, cell phones, ships, airplanes, etc. These populations of things have vastly more than tripled. The matter-energy embodied in these living and nonliving populations was extracted from the ecosystem. The matter-energy required to maintain and replace these stocks also comes from the ecosystem. The populations or stocks of all these things have in common that they are what physicists call “dissipative structures” — i.e., their natural tendency, thanks to the entropy law, is to fall apart, to die, to dissipate. The dissipated matter-energy returns to the ecosystem as waste, to be reabsorbed by natural cycles or accumulated as pollution. All these dissipative structures exist in the midst of an entropic throughput of matter-energy that both depletes and pollutes the finite ecosphere of which the economy is a wholly contained subsystem. When the subsystem outgrows the regenerative capacity of the parent system then further growth becomes biophysically impossible.

But long before growth becomes impossible it becomes uneconomic — it begins to cost more than it is worth at the margin. We refer to growth in the economy as “economic growth,” — even after such growth has become uneconomic in the more basic sense of increasing illth faster than wealth. That is where we are now, but we are unable to recognize it.

Why this inability? Partly because our national accounting system, GDP, only measures “economic activity,” not true income, much less welfare. Rather than separate costs from benefits and compare them at the margin we just add up all final goods and services, including anti-bads (without subtracting the bads that made the anti-bad necessary). Also depletion of natural capital and natural services are counted as income, as are financial transactions that are nothing but bets on debts, and then further bets on those bets.

Also since no one wants to buy illth, it has no market price and is often ignored. But illth is a joint product with wealth and is everywhere: nuclear wastes, the dead zone in the Gulf of Mexico, gyres of plastic trash in the oceans, the ozone hole, biodiversity loss, climate change from excess carbon in the atmosphere, depleted mines, eroded topsoil, dry wells, exhausting and dangerous labor, exploding debt, etc. Standard economists claim that the solution to poverty is more growth — without ever asking if growth still makes us richer, as it did back when the world was empty and the goal was full employment, rather than growth itself. Or has growth begun to make us poorer in a world that is now too full of us, and all our products, counted or not in GDP?

Does growth now increase illth faster than wealth? This is a threatening question, because if growth has become uneconomic then the solution to poverty becomes sharing now, not growth in the future. Sharing is frequently referred to as “class warfare.” But it is really the alternative to the class warfare that will result from the current uneconomic growth in which the dwindling benefits are privatized to the elite, while the exploding costs are socialized to the poor, the future, and to other species.

Finally, I eagerly submit that even if we limit quantitative physical throughput (growth) it should still be possible to experience qualitative improvement (development) thanks to technological advance and to ethical improvement of our priorities. I think therefore we should urge policies to limit the quantitative growth of throughput, thereby raising resource prices, in order to increase resource efficiency, to force the path of progress from growth to development, from bigger to better, and to stop the present folly of continuing uneconomic growth. A policy of quantitative limits on throughput (cap-auction-trade) will also block the erosion of initial resource savings resulting from efficiency improvements (the rebound effect or Jevons paradox). In addition the auction will raise much revenue and make it possible to tax value added (labor and capital) less because in effect we will have shifted the tax base to resource throughput. Value added is a good, so stop taxing it. Depletion and pollution, the two ends of the throughput, are bads, so tax them. If you are a technological optimist please have the courage of your convictions and join us in advocating policies that give incentive to the resource-saving technologies that you believe are within easy reach. You may be right — I hope you are. Let’s find out. If you turn out to be wrong, there is really no downside, because it was still necessary to limit throughput to avoid uneconomic growth.

Economic Growth, Obesity, and the Creed of Greed

by Garry Egger

Who’s right? Gordon Gekko (greed is good) or Tim Jackson (prosperity without growth)? It should be a simple question, but the answer is not so clear.

Perhaps Gordon Gekko’s position was over the top, even in his day — it takes a sort of blindness to conclude that greed is good, but back then, it did have a purpose. Greed played a role in how we got to where we are. And not just the big house and car, but the best health of any human beings throughout history. And after all, isn’t health and human well-being what economics is all about?

Still, the question remains: does the philosophy of greed and the system of economic growth (a system to which we’ve tied our aspirations) produce the health and well-being we’re after? To find an answer, it’s useful to examine the early days of the industrial revolution. Economist-philosophers of that era, from Adam Smith down to John Stuart Mill, figured that a growing economy was a productive one. And a growing economy requires more people, more production, and more consumption. Individual acquisitiveness was one way of getting this, so greed worked as a serviceable means for driving economic growth.

The system hit a glitch in the 1930s during the Great Depression, but John Maynard Keynes helped sort things out. He suggested that individual greed could be propped up, when needed, by public pooling. The growth model took off like an adolescent at a booze party, with the strength of his parent’s admonition to “be careful” inversely correlated to the fun to be had.

Early admonitions about the economic growth party came from the parents of the system. John Stuart Mill, in the Principles of Political Economy (1848), warned that once the work of growth was done, a stationary economy would ensue. And he viewed the transition to such an economy as a positive development for humanity. Keynes himself, in 1930, said we may need a growth-based system (propped up by greedy behavior) for up to 100 years, but after that, we could look forward to better times in a system driven by our more virtuous character traits.

Of course, the most prominent warnings about growth were issued by Thomas Robert Malthus. His admonitions about overpopulation were akin to telling the party-going adolescent to stay at home and read a book.

A simple and logical definition of growth is “maturation till maturity.” And these early economic “parents” were trying to guide the young economy through the maturation process. In more recent times, however, their guidance has been ignored. The rapacity-building economic framework of the Chicago School has prevailed. The overall economic plan has morphed into continuous growth, and warnings about the dangers of too much growth have been swept away.

Gordon Gekko himself may indeed have been wringing the last juice out of the growth lemon in 1987, before leaving us sucking on the bitter sub-prime-lending rind. Now left with a troubling combination of economic and environmental problems, perhaps we should reconsider the warnings.

Even so, big-picture discussions about the continuing usefulness of economic growth are rare. In the absence of such discussions, governments are doing their best to revive a dying system. In 2008, the New Scientist was the only mainstream publication to question growth, tackling controversial issues such as immigration, population stabilization, and reduction of both production and consumption.

The concept of reducing carbon footprints (to address climate change), especially in the Western world, has received some attention in the media. But a reduction from about 20 tonnes of CO2 per person per year to 15 tonnes (a big enough task in itself), would be totally negated by a 50 percent population increase. And an increase in population is not only predicted, but encouraged, at least in Australia where policies exist to grow population through both immigration and domestic births.

Many people who work in the health industry can build a strong case for questioning economic growth. Obesity and diabetes represent a health crisis of epidemic proportions. Some mistakenly believe that tackling this epidemic is a simple issue of individual restraint, but it’s a side-effect of the system. Growth in personal size (obesity) is the collateral damage from continuous pursuit of growth in economic size.

Health data from the last 200 years convincingly show that economic growth has a tipping point, beyond which costs accrue more quickly than benefits. Health improved dramatically over this period, but in recent years the improvements have been drying up. We don’t yet have the cure for cancer that was promised 30 years ago. And contrary to expectations, doctors see fewer cases of depression when economic growth slows down, as in the aftermath of the global financial crisis.

From the perspective of a health practitioner, Tim Jackson’s philosophy has supplanted Gordon Gekko’s. For an economy that has reached maturity, greed is bad. We stand at the start of a new era, in which we must capitalize on the past benefits of growth and make the transition to a steady state economy.

This transition doesn’t mean an end to human development. On the contrary, we need to enhance our cultural and economic institutions to create a truly sustainable economic system. Doing so will test our capacity for adaptability more than anything else since leaving the trees. It will also leave a few traditional economists still dangling from the branches.

Garry Egger is a professor of health and applied sciences at Southern Cross University in Australia.  He is also the author, with Boyd Swinburne, of Planet Obesity: How We Are Eating Ourselves and the Planet to Death.

A New View of Work

by Christian Williams

Many of us have been raised according to the “Protestant work ethic.” That is to say, we were encouraged to work hard and thus become a successful and productive member of society. But what if this advice is wrong? As the economy reaches and breaches the limits to growth, working long hours causes market failures, giving weight to the idea that governments should intervene to reduce average working hours.

In the “empty world” of the past, hard work was a public good with few negative externalities on society. In today’s “full world,” work has become a common-pool resource, vulnerable to over-exploitation. In the absence of social or cultural norms to take care of this common-pool resource, governmental intervention is the best option for preventing market failure and encouraging an optimal amount of work. Unfortunately, our work ethic is worsening the situation.

Doesn't a shorter work week seem like a good idea?

Technological development over the past few centuries has allowed for a combination of reduced hours of work and increased consumption. Indeed, these are the only options for dealing with higher labor productivity (and labor productivity has consistently risen) while still maintaining high employment rates. But as the economy hits the limits to growth, the option to maintain employment through further increases in consumption becomes unavailable, meaning that work sharing becomes necessary. But OECD statistics reveal that over the past three decades there has been very little reduction in the amount of time people spend at work. Instead, consumption has risen drastically while unemployment has remained unacceptably high. If governments in high-consuming nations shift their focus from economic growth to wider sustainability objectives, they will quickly see that there are many benefits of a shorter work week.[1]

Here are some of those benefits:

  • Energy consumption would decrease, especially energy spent on getting to and from work;
  • Resource consumption would decrease as people trade some of their wages for more time;
  • With extra time, people could make more sustainable lifestyle choices (e.g., bike, walk, exercise, eat well, garden etc);
  • People would have more time for family and friends, less stress and better health;
  • Fewer people would be unemployed, and they could make an easier transition to retirement;
  • There would be more time for democratic participation, education, and exploration of other avenues to personal and community enrichment;
  • A better-rested workforce is likely to be more productive;
  • Both employers and employees could take advantage of more flexible employment circumstances.

Despite these and other potential benefits, we need a stronger case to justify government intervention. And that case begins with the recognition that “free” labor markets are far from free. Employees, even if they are aware of the benefits of working less, are often unable to reduce their working hours. Previous work time reductions have not originated through individual choice, but through strong union influence or state legislation, such as the Ten Hours Act (1847) in the UK or the Fair Labor Standards Act (1938) in the U.S. Juliet Schor and other scholars have suggested that a rising imbalance of power between employers and employees over recent decades has led people to work longer hours than they would otherwise choose. Most workers simply can’t ask their boss for a four-day week.[2] Other analysts have suggested that the power of marketing has led people to spend above their means and then work more to pay their debts. Furthermore, in times of economic crisis, people feel anxious about losing their jobs. Such anxiety can drive them to work harder to protect themselves, resulting in a work intensification that contributes to the tragic “jobless recovery.”

If people will not or cannot choose to work less, what are the implications? Society suffers from three market failures:

  1. We have an overworked workforce, resulting in social costs from broken families to higher healthcare costs.
  2. We have a large, disenfranchised group of people who can no longer find work, a breach of their human right to work (Article 23 of the Universal Declaration of Human Rights).
  3. Long hours contribute to greater production and, in turn, consumption, with a larger ecological burden being placed on future generations and other species.

These failures are the result of a rush to secure a share of a depleting common-pool resource. But as the amount of work becomes increasingly scarce, it is natural that people try to maintain and enhance their share — a “tragedy of the commons” scenario as described by Garrett Hardin. We can’t deal with this tragedy using outdated, empty-world tactics. In the empty world, we responded to technological improvements by increasing consumption. Moving forward, we must either learn to work less and be content with an excess of leisure, or reject the technological innovations that replace human labor — that is, reject the focus on efficiency and labor productivity.

To ensure that we do not contribute to the impending tragedy, we must all aim to work less. This also requires a social overhaul of the work ethic, and a new respect for idleness and leisure. Keynes, writing some eighty years ago, saw that adjusting to a life of leisure was the primary challenge for coming generations (us), as opposed to meeting basic needs as had been the challenge for all of human history. “To those who sweat for their daily bread, leisure is a longed-for sweet — until they get it”.[3] Personally, a shorter work week sounds fine to me.

[1] See for example, the report from the New Economics Foundation in the UK titled 21 Hours.

[2] For an interesting discussion on individual labor supply curves and hypotheses, see David George (2000): “Driven to Spend: Longer Work Hours as a Byproduct of Market Forces” in Working Time: International Trends, Theory and Policy Perspectives, (eds.) Lonnie Golden and Deborah Figart, Routledge, London. George refers to Schor’s book The Overworked American (1991) among others.

[3] Keynes, John M., 1963, “Economic Possibilities for our Grandchildren” in Essays in Persuasion, (first published 1930), W. W. Norton & Co., New York.

Christian Williams recently completed a Master’s in Sustainable Development at Uppsala University (Sweden). His thesis focused on the shorter work week as part of a transition towards a steady state economy, including a case study and political analysis from New Zealand. If you would like an electronic copy of his thesis (with a more comprehensive version of the above argument), please contact him by email.

Geo-engineering or Cosmic Protectionism?

by Herman Daly

“We are capable of shutting off the sun and the stars because they do not pay a dividend.” — John Maynard Keynes, 1933

Herman DalyFrederic Bastiat’s classic satire, “Petition of the Candlemakers Against the Sun“, has been given new relevance. Written in 1845 in defense of free trade and against national protectionism in France, it can now be applied quite literally to the cosmic protectionists who want to protect the global fossil fuel-based growth economy against “unfair” competition from sunlight — a free good. The free flow of solar radiation that powers life on earth should be diminished, suggest some, including American Enterprise Institute’s S. Thernstrom (Washington Post 6/13/09, p. A15), because it threatens the growth of our candle-making economy that requires filling the atmosphere with heat-trapping gasses. The protectionist “solution” of partially turning off the sun (by albedo-increasing particulate pollution of the atmosphere) will indeed make thermal room for more carbon-burning candles. Although this will likely increase GDP and employment, it is attended by the inconvenient fact that all life is pre-adapted by millions of years of evolution to the existing flow of solar energy. Reducing that flow cancels these adaptations wholesale — just as global warming cancels myriad existing adaptations to temperature. Artificially reducing our most basic and abundant source of low entropy (the solar flux) in order to more rapidly burn up our scarcer terrestrial source (fossil fuels), is contrary to the interests both of our species and of life in general. Add to that the fact that “candles”, and many other components of GDP, are at the margin increasingly unneeded and expensive, requiring aggressive advertising and Ponzi-style debt financing in order to be sold, and one must conclude that “geo-engineering” the world for more candles and less sunlight is an even worse idea than credit default swaps.

Why then do some important and intelligent people advocate geo-engineering? As the lesser evil compared to absolutely catastrophic and imminent climate disaster, they say. If the American Enterprise Institute has now stopped offering scientists money to write papers disputing global warming, and in fact has come around to the view that climate change is bad, then why have they not advocated carbon taxes or cap-auction-trade limits? Because they think the technical geo-fix is cheap and will allow us to buy time and growth to better solve the problem in the future. One more double whiskey to help us get our courage up enough to really face our growth addiction! Probably we are irrevocably committed to serious climate change and will have to bear the costs, adapt, and hasten our transition to a steady state economy at a sustainable (smaller) scale. Panicky protectionist interventions by arrogant geo-engineers to save growth for one more round will just make things worse.

At the earthly level I am no free trader, and neither was Keynes, but “shutting off the sun and the stars” to protect the fossil fuel economy is carrying protectionism to cosmic extremes. Reality has overtaken satire.

The Full Seas Act and the College of the 21st Century

by Brian Czech

Brian Czech PhotoIf we aren’t living in an “educable moment,” then we must be dumber than a doggone boot.  Financial collapse, fiscal crisis, skyrocketing gas prices, global warming, revolutions in crowded countries, unemployment all around… let’s graduate from the College of the 21st Century and recognize the old kindergarten lessons about limits to growth were right after all.  All that stuff they handed us later about perpetually growing the “information economy” was like a loosy-goosy high school course conceived by some ideological school board.  Sometimes it takes a hard-core college course to get back to reality, and now we’re all enrolled whether we like it or not.

We just can’t have a perpetually growing population, perpetually growing consumption, or perpetually growing economy.  To think there is no limit to growth on a finite planet (Earth comes to mind) is equivalent to thinking we could have a stabilized economy on a perpetually diminishing planet.  In other words, we could gradually squish the $70 trillion global economy into one continent, then one nation, then one city… you get the picture.  It’s becoming an “information economy,” right?  So eventually we could squish it into your blackberry, leaving the rest of the planet as a designated wilderness area!

Have you ever heard anything so ludicrous?  Yet it’s precisely, mathematically as ludicrous as thinking we could have a perpetually growing economy on Earth.

All this means we can’t have perpetually growing employment, either.  In fact, to strive for perpetually more jobs on a finite planet is to ensure growing unemployment.  (At least it can’t be “perpetually” growing unemployment, because it can’t get higher than 100%.)

So let’s get down to the brass tacks of amending the Full Employment Act before we flunk Sustainability 101.

The Employment Act of 1946 was amended as the Full Employment and Balanced Growth Act of 1978.   The original and amended versions are commonly referred to as the “Full Employment Act.”  Among other things, the Full Employment Act calls for “full employment and production,” “increased real income,” and “balanced growth.”  By “balanced,” Congress was calling for economic growth under conditions of general equilibrium.  This means an economy growing in concert; an efficiently allocating, circular flow of money with no big eddies of unemployment.

Now let’s look at the assumptions used to underwrite the Full Employment Act.  One obvious assumption post-World War II would have been population growth.  With a growing population, full employment requires economic growth (growing GDP).  Given the assumption of population growth, then, the goal of the Full Employment Act can be interpreted as a policy for full employment and economic growth.

Of course the other highlight (or lowlight) of the historical context was the Great Depression, during which unemployment not only devastated society, but shocked the pants off neoclassical economists.  Pursuant to an arcane theory called “Say’s Law,” they thought the production of goods would be automatically met with the consumption thereof, so they didn’t believe in a sustained or lengthy period of unemployment.  They didn’t believe in macroeconomic tinkering, either.  Then John Maynard Keynes the Brit changed all that with his General Theory of Employment, Interest, and Money.  They called it the “Keynesian revolution” and that’s how we got into deficit spending to “stimulate the economy.”

Fast-forward to our educable moment of financial collapse, fiscal crisis, skyrocketing gas prices, global warming, endangered species, revolutions in crowded countries, unemployment all around, and we see that we need another kind of economic revolution.  We need a steady state revolution to move from the old, unsustainable goal of economic growth to the new, sustainable goal of a steady state economy.  We need to heed the steady state economics of Herman Daly like we heeded the general theory of Keynes.

It took 32 years for the original Employment Act to take on the unsustainable baggage of the Full Employment and Balanced Growth Act.  It’s been 32 years since then; time again to retool.  We need to draw up a Full and Sustainable Employment Act, which will have the advantage of a useful acronym, “Full SEA.”  Soon enough it will be known as the “Full Seas Act” to remind us that the “rising tide lifts all boats” metaphor is officially defunct.  There’s no more water to rise the tide, and only so many boats can fit.

The Full Seas Act will clarify that there is a limit to population and economic growth, and therefore a limit to employment.  Within the act, “increased real income” will be amended to “sustainable real income.”  “Balanced growth” will be replaced by “sectoral balance” or “efficient allocation of resources.”  Language will be added to describe that the goal of sustainable, full employment requires stabilization of population and per capita production and consumption.  Pursuant to the goal, the Full Seas Act will establish some commonsense educational programs toward stabilizing population and the ecological footprint of the economy.

The Full Seas Act will also call for an annual Report to the President on Population, Production, Consumption, and Capacity (RPPCC) to help monitor how unsustainable our economy is getting.  With population data from the Census Bureau and production data from the Bureau of Economic Analysis, our slim new Bureau of Population and Consumption (BPC) will be calculating our ecological footprint to determine how sustainable our GDP is.  The President will help us matriculate from the College of the 21st Century by summarizing the RPPCC in the annual state of the union address.

Now some might say, “What planet are you on??”  They think a BPC, an RPPCC, and the Full Seas Act are figments of a futuristic imagination.  Well I’m right here on a finite planet called Earth, feet firmly on the ground and living in an educable moment of financial collapse, fiscal crisis, skyrocketing gas prices, global warming, revolutions in crowded countries, and unemployment all around.

What planet are you on?

A Smarter Planet?

Herman Daly“We are capable of shutting off the sun and the stars because they do not pay a dividend.” — John Maynard Keynes, 1933

Let’s build a smarter planet.” This is IBM’s inspirational slogan, intoned as a benediction at the end of their 2010 advertisements. They do not say, “Let’s make a smarter adaptation to our planet Earth, out of which we were created and by which we are sustained.” It is the planet that is insufficiently smart, not its evolutionary prize-winning, big-brained, star tenant.

What makes IBM think that the planet is dumb? Well, obviously the mentally challenged Earth does not know how to keep on accommodating our continual economic growth, so we must redesign it with that remedial instruction in mind. For example, our growth requires fossil fuels, but when we burn a lot of them the resulting atmospheric CO2 slows down the radiation of heat back to outer space, heating up the stupid planet and causing dumb climate change. It would be easier to radiate heat energy out and make more thermal room for necessary fossil fuel burning if only we had less solar energy coming in. So a smarter planet would have a higher albedo to reflect more of that troublesome incoming solar radiation. Blasting light-reflecting particles of sulfur into the stratosphere or troposphere should raise the planet’s IQ a great deal.

This sophisticated planet-smartening pedagogy is known as geo-engineering. It will cheaply re-engineer the planet to allow BP to feed the sacred flame of economic growth by drilling deeper holes in more precarious places to pump more oil. That in turn will supply NASA with the resources to build more rockets, thereby to fulfill our cosmic destiny to escape this terminally dumb planet and build a really smart one from scratch in a better location. Scientists have long realized that geo-engineering and other retrofitting measures, while necessary to buy time for building up evacuation capacity, cannot be the final solution for a congenitally moronic planet. And if meanwhile an occasional oil spill reduces the photosynthetic capacity of life in the Gulf of Mexico — well, we have just seen that our silly planet already allows in too much solar energy, so if we reduce that inflow we will not have to trouble ourselves with converting it into food energy. Furthermore when NASA, BP, and IBM finish building our new smart planet, it will contain a new and smarter Gulf of Mexico.

To sum up, by serving only the interests of the growing economy, global corporations like IBM are providentially led, as if by an invisible hand, to also build a smarter planet! Of course, unlike Adam Smith, they do not really believe in any deistic providence with its invisible hand that converts private greed into public good. They know from modern science that random mutation plus natural selection explains everything, and that free will and purpose are illusions. But some of these illusions have survival value and must be persuasively advertised to secure support from the tax-paying masses (science is expensive) — at least until IBM, BP, and NASA have finished building a planet so smart that its inhabitants can safely be dumb robots.