The Hurricane Effect

Part One: The Money-Material Correlation

James Johnston, Guest Author

A hurricane is a dynamic system. Heat, air and water create pocket thunderstorms that come together and gather strength in a powerful spiral effect, destroying whatever isn’t prepared for it on land.

A hurricane is gathering strength in the global economy, as a self-reinforcing spiral of debt, money and materials hurls toward us, with most of us obliviously lying on the beach in our bathing suits and shades on, assuming the calm weather will last indefinitely.

This is the first in a two-part editorial, where I will examine the correlation between money and material throughput in the Canadian economy as a case study. Today, I focus on the correlation between income and throughput, and in part two, I’ll explore how debt plays a role in creating the economic hurricane effect.

To understand why we’re sitting complacently in the path of an oncoming hurricane, it’s important to recognize the difference between conventional economic wisdom and economic facts. Conventional wisdom suggests that money doesn’t represent a unit of material. Services will take the place of resource extraction industries over time, ‘dematerializing’ the economy by ‘decoupling’ material input from wealth production – eventually improving environmental outcomes. The hope for realizing this ideal is reflected in its number of synonyms, including the value-added, ethereal, knowledge-based and post-industrial economy. You’ve heard them all before.

But this hasn’t really happened in Canada.

What do real estate and oil have in common?

In the 21st century, Canadian economic growth has been rooted in real estate and oil production. Canada has a resource-based economy, even though almost three-quarters of Canadians have jobs in services like real estate, which have little or nothing to do with resources. In fact, only 5-6% of Canadians actually work in the primary sector, where resources are extracted. Yet the country has one of the highest ecological footprints on the planet, partly due to international demand for its oil and minerals.

Over time, the volume of materials that circulates through the Canadian economy hasn’t changed much despite improvements in intensity (material used per unit of income). As a result of this peculiar structure, Canadians have become a nation of extractor-investors, with the remainder of people working in a manufacturing sector centered around transportation equipment, which has been struggling to remain competitive for the last decade.

Services have become a top-heavy trophic layer in the economic structure, with material throughput remaining roughly the same over time despite modest and constant population growth. According to Brian Czech’s trophic theory, the tertiary sector sits atop the secondary sector, which sits atop the primary sector. The three sectors are mutually dependent, imitating the same trophic structure of an ecosystem. Resources flow from one sector to the other in an entropic thermodynamic process, which subjects them to the laws of irreversibility and path-dependence. In other words, material and immaterial economies can’t be considered separate from one another. It’s more like a top-heavy layered cake which, miraculously, doesn’t fall over.

Money-material correlation

Herman Daly writes that “ecological economics sees this coupling as by no means fixed, but not nearly as flexible as neoclassical believe it to be – in other words, the ‘dematerialization’ of GNP and the ‘information economy’ will not save growth economics” (Daly, 2007). So I tested the idea. I compared materials use (used domestic extraction), with income (gross domestic product) to analyze trends in the Canadian economy over the last quarter century.

And what I found was that – for the data available – the coupling of aggregate materials and aggregate inflation-adjusted income in Canada seems pretty tight. Take a look for yourself:

A case of chicken vs. egg?

What does this strong coupling of income and throughput mean? One thing’s for sure: conventional economics doesn’t do a very good job of explaining what’s happening in the Canadian economy. Dematerialization might describe modest intensity gains, but it certainly doesn’t mean ‘decoupling’ or sector substitution the way some economists like to pretend.

When people talk about ‘growth’ in Canada, they really do mean material growth – more stuff – and all the consequent repercussions for large-scale environmental problems associated with high throughput, including climate change, interference with the nitrogen cycle and biodiversity loss. We know from publications like the Stern report that the long-term costs associated with the status quo are unduly high and will eventually force a decline in production due to system feedback.

The second implication is more of a chicken vs. egg question. What drives the trend? Money or stuff? Well that’s complicated. I’m going to go out on a limb and guess that it’s not just money, and it’s not just stuff. It’s a little bit of both, underlined by socio-cultural factors that we can’t put on a tidy graph.

Although we can’t easily isolate what drives the cycle, we can more easily isolate what keeps it from slowing down: debt. Debt is the key component that binds the thunderstorms together into a massive whirling super-storm. The way the finance system is set up, we couldn’t stop the cycle even if we wanted to.

To be continued…

Guest Author

James Johnston has a MPhil in Land Economy from Cambridge University.

BP: Beyond Probablilities

BrianCzechAs much as I intended to cover the pending designation of GNP National Monument in Montana, that will have to wait until next time.  This week, there’s just no way a Daly News contributor could fail to focus on British Petroleum and the Deepwater spill.

Punctuated environmental disasters like Bhopal, Chernobyl, and Deepwater have a lot in common with ongoing, insidious disasters like climate change, biodiversity loss, and pollution in general.  The insidious disasters are so tightly linked to economic growth you couldn’t separate them with a BP “top-kill” pump.  But so are the punctuated disasters.  And, as with the insidious disasters, the linkage of punctuated disasters to economic growth is never pointed out in the mainstream media.

The connection has to be pointed out, with emphasis and often, or we can forget about economic policy reform toward a steady state economy.  Instead, naïve (or unscrupulous) politicians and economists will call for more economic growth in order to fund all the hapless responses like hair-booms, deepwater robots, and top-kills.

The linkage between economic growth and environmental disaster probably seems obvious or at least intuitive to people such as our CASSE signatories, but we’ve learned that it is far from obvious to many economists, businessmen, politicians, and others who haven’t thought about it in these terms.  So let’s think about it a bit…

Image by PDXCreative

Environmental accidents include a long, long list of leaks, spills, collapses, collisions, breaks, explosions, fires, derailments, and other wrecks and mishaps to match the variety of economic endeavors from which they stem.  Here we are focused on accidents in the energy sector for two reasons.  First, these accidents tend to be some of the most disastrous.  Second, they are the most inevitable.

The first point is fairly obvious; the second point bears elaboration.  Why are energy sector accidents most inevitable?

While economic growth may not absolutely require, say, diamond mining with all its environmental and social costs, economic growth absolutely requires the use of more energy.  Diamond mining may be an optional sector in a growing economy; the energy sector is not.  Such is the trophic structure of the economy.

So economic activity requires energy, and a growing economy requires more energy.  Next, it doesn’t take a rocket scientist to understand that the probabilities of energy sector accidents increase with – you got it – the level of activity in the energy sector!  And gambling with the energy sector is no Saturday jaunt to the tribal casino, where you might hit the jackpot and make an escape.  We’re talking about national and global economies – tens of thousands of oil wells, thousands of coal mines, hundreds of nuclear plants, etc. – operating 24/7 and into the long run.

That means the “probabilities” play out!

So it’s not a matter of whether disasters will occur.  And there’s no question they will devastate ecosystems, blow by blow (they’re disasters, remember?).  At this point, we’re BP: Beyond Probabilities.  For all practical and policy purposes, disasters and devastation are certain.  The only issue is how many disasters and how much devastation.  These amounts are certainly a function of economic growth.

So when they ask for ideas on what can be done about Deepwater or future such disasters, tell them to think of the big picture for a change and realize there’s just no techofix to the probabilities playing out.  The only real way to lessen the damage our grandkids will inherit is to start putting the brakes on this runaway economy.  That entails macroeconomic policy reform, not technofixes, and consumer care, not consumer “confidence.”

A steady state economy, even at the current dangerous size, would probably be the single greatest thing this generation could accomplish.  The next generation may have to work on putting the economy in reverse for awhile, until it fits within the planet’s capacity for disasters.  We need to lower the level of economic activity, starting with the energy sector, because in the long run, probabilities play out.