Tuesday, January 18, 2005

the contraction paradigm


in the year 1972 a booklet was published by the club of rome with the title ' the limits to growth ' - and the phrase later came into general use.

the idea that there were ' limits to growth ' was a powerful one whose time had come. it was further stimulated by the oil crises of the 1970s and it consisted of a recognition of this general truth :

- that exponential growth, within a finite system such as the earth, was not indefinitely sustainable.

in the years that followed considerable strides were made, for example, in the area of vehicle fuel economy. economic growth resumed. the fossil fuel energy component of each unit of production was progressively reduced. thus those who predicted ever rising energy prices got a lesson in basic economics, and a second lesson in the technical ingenuity which capitalist man can come up with when put under pressure.

but the fuel economies that we learned to make, cannot hide the fact that the availability of the fossil fuel energy on which our industrial civilisation has been built, has now finally arrived at a plateau. from here there is nowhere to go but steadily down the reverse slope. civilisations rise and fall with their energy supplies - slaves, grain, timber, coal, oil, gas, or whatever. and money is no substitute for energy.

forty per cent of our energy comes in the form of oil, but oil comprises more like ninety per cent of fuel for transport - upon which trade, and thus the prosperity of the globalised economy, is built. oil, and to a lesser extent gas, is a convenience energy. the alternative and renewable sources of energy that green thinkers now advocate, are, in the main, ways of producing electricity, not of fuelling internal combustion engines.

thus we may face a future in which transport becomes very expensive, even while domestic electricity from renewable resources becomes more freely available.

three other major factors also face us in the immediate future -

first, the population of the world is still in a period of explosive growth, even while most resources are in decline. thus wages in general are likely to fall against commodities. thus it will take more hours to earn a gallon of fuel, than it has done for many years past.

secondly, there is an explosion of knowledge, and countries who take up the low wage manufacture of basic goods cannot be expected to remain stuck with those products, but will progress rapidly to be rival producers of more sophisticated items.

thirdly, as capacity increases and wages decline, there is likely to be a general decline in prices - a steady deflation. if this were to develop into general overcapacity and stagnation, it would quickly become apparent that the present consumption of goods in the world includes a higher proportion than ever before of luxury and consumer items. in other words the proportion of consumption that a prosperous family can forego - in the event of e g the breadwinner or one of the breadwinners becoming unemployed - is greater than at any time in history. there is thus unprecedented potential for retrenchment and for further contraction.

during the period of expansion over the last century or more, which has proceeded with only brief interruptions, an expanding money supply appropriately reflected the expanding economic activity. on the whole, anyone who borrowed over these years found repayment easy. a gradual inflation was the appropriate financial vehicle for this general global economic expansion.

equally, if we have now in fact reached the brink of contraction, gradual deflation and a gradual shrinking of the money supply would be the appropriate new environment. but if attempts to expand the money supply were to continue at a time when economic activity was contracting, the condition known as ' stagflation ' is all that would result.

also, just as the accumulation of capital by borrowing was the wise course under inflation - so the accumulation of capital by saving is appropriate as prices and wages begin to contract and as asset prices, such as property values, fall. between the former age of the borrower, and the coming age of the saver, falls a hiatus. a window of opportunity for financial upset and financial famine.

the ' contraction paradigm ' is just that - a paradigm, not a prophecy or forecast. it is a piece of contingency planning whose time will come - whether or not contraction is imminent right now. it is a template upon which to bolt appropriate plans for living in a deflationary and contracting economic environment.

the ' contraction paradigm ' is a rival and a criticism of the ' sustainable development ' paradigm - which in effect tries to say that economic growth and population growth can continue, provided that certain alternative technologies and a general wealth redistribution are undertaken immediately. the ' sustainable development ' paradigm purports not to value economic growth - and yet seems to regard the ending of economic growth as a threat to be avoided by the making of certain monetary arrangements and urgent technical changes. it promises to spread prosperity more widely and thinly, even as prosperity is inevitably contracting.

such promises usually amount to ' geldofism ' - that is to say posing in front of the starving and advocating greater global sharing, while becoming mysteriously more affluent oneself. this is a branch of show business, not of economics or politics. such people are 'princess dianas ' or establishment tarts. the bold bono of u2 is another example.

* * *

the vision of the ' sustainable growth ' paradigm stops short at the financial precipice that it sees opening up beneath its feet.

the ' contraction paradigm ' on the other hand, passes over this peak and offers a clear view of the landscape on the other side.

unlike growth, contraction is sustainable. contraction in population means that although overall resources decline - per capita resources can continue to hold steady, if not actually increase.

advocates of sustainable growth may enquire how the decline in population will be engineered - but it is for them to explain how explosive population growth can be continued in the absence of the necessary corresponding growth in not just oil and gas, but also topsoil, groundwater, climate stability, biodiversity, and all of the other staples of life upon earth.

the truth or falsity of this vision is not the question. the contraction paradigm is a useful tool for thinking about a possible future. it does not fudge the issues. it has a firm basis in the concept that -

' nature is the mother of all economies.'

and another in the concept that - ' nature is always in balance.'

thirdly it is based in the concept that fantasies of centralised global economic control, ignoring the diverse realities of life in a spherical and cyclical biosphere, are just that - fantasies.

although the recognition of the plateau or the peaking of oil production is the immediate stimulus for the formulation of the contraction paradigm - there are several other potential ' limits to growth ' which could equally come into play. these would apply even if, for example, relatively limitless reserves of oil and gas were suddenly found under the antarctic ice, or in some other unexpected location.

the manner of the creation of money is not here considered particularly important.

money in capitalist systems is lent into existence by banks. it can equally be said to be borrowed into existence. capital is created by an agreement to repay. money is also created by circulation, as well as by the sheer volume of it in existence. if consumers do not spend, lenders cannot lend. we are told that the issuers of fiat currency get a free ride at the world's expense, but money is not just spent once - we do not hear much about the many subsequent rides. in the days of dowries, it was said that ' the same £1000 married off every farmer's daughter in kerry.' ( i e each recipient groom used it to marry off one of his sisters ).

ideally money is a measure, not a commodity. if the control of ' fiat' currency is exercised irresponsibly, advantages accrue to the issuers of the currency and equal and opposite disadvantages accrue to everybody else. this is the classic scenario of currency debasement. if a currency begins to fail as a measure of economic effort then people turn to other measures and ' bad money drives out good.' people seek whatever is to hand that they feel can be relied upon to hold its value.

currency debasement carries within it the seeds of its own cure.

it does not matter much who is currently exercising the ' fiat ' or who aspires to take their place. money is a lubricant in an economy, and to consider it as a commodity or a privelege is the beginning of loss of trust, and of every kind of social and economic trouble.

the coming of contraction amounts to a major turning point in economic and industrial history. the road may turn back to expansion again - that we cannot now predict - but many who have come to take the broad road of expansion for granted, will be braking late and violently as their personal financial vehicles enter the narrow boreen of economic contraction.

at that point they will all have suddenly adopted ' the contraction paradigm' and this paradigm, like the growth paradigm before it, will begin to generate self reinforcing effects.



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