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27 Apr 2009

An Economics Addition to ‘The Transition Handbook’

dutchhbkThe Dutch edition of the Transition Handbook has now been published, you can download pdfs of the chapters here.  The story of how it was translated is great, 50 people across the region who wanted a Dutch version came together and collaboratively translated it.  At the last minute, they wondered if it might be possible to include a short new section about economics, so as to make it more up to date.  With the considerable help of Peter Lipman, Jules Peck, Ciaran Mundy and Steph Bradley, here it is.  Feel free to print it out and stick it in page 36 of your Transition HandbookECONOMIES IN TRANSITION – Money needs growth and growth needs energy.

“Since the first edition of the Transition Handbook was published, huge and far-reaching changes have begun unfolding in the world economy. For many, they are seen as the outcome of the end of the age of cheap oil, the inevitable result of the inability of a global economy addicted to oil unable to get its fix, and in particular a result of the oil price spike of July 2008, with speculators escalating oil to a high of $147 a barrel, a price at which, quite clearly, the world economy as we know it is unable to function.

A useful place to start in an exploration of what exactly is happening to the global economy, in particular in the light of how it relates to peak oil and climate change, is with a look at what are the assumptions we have made thus far about the economy. Do they still hold after the events of recent months? Did they ever actually make sense in the first place? What are the assumptions about the economy and the financial system, as well as about the basic resources, both natural and cultural, on which we have based our decisions for the last 50 years – are they still valid? Chris Martenson, author of the Crash Course, puts it thus;

“Here’s how it all sums up. There are some knowns. We know that energy is the cause for all growth and complexity. We know that surplus energy is shrinking. We know that the age of cheap oil is over. And we know that because of this, oil costs will consume an ever-greater proportion of our total budget. And because of these knowns, there are some risks. There is the risk that our exponential money system will cease to operate in a world of declining energy surplus. It might simply not be suited to the task. And there is the risk that our society will be forced to become less complex. If you really think about it, that is a very loaded sentence right there.”

Chris Martenson http://www.chrismartenson.com/

Our assumptions, in brief, have been as follows;

  • economies can grow forever, that every year we will trade more, make more money, produce and consume more goods and reach more customers to sell them to
  • this indefinite economic growth and the raw materials needed to make ever more goods will always be available cheaply, and that the energy required to make them will always be available, cheaply
  • we will always be able to access cheap credit, and that we can borrow from the future on the assumption that the future will be richer, more technologically adept and more solvent than the present
  • the UK can move from being a society with a manufacturing base and a diverse and resilient agriculture, to having an economy based on services and knowledge, or as comedian David Mitchell puts it, “ringtones and lattes”
  • the value of our homes would increase in the long run, and that we could use them as cash dispenser machines, and so the more houses we built, the more people could borrow huge sums, forever
  • somehow all that extra economic growth and ‘progress’ will give us more flourishing lives and communities and the only likely alternative is poverty, unemployment and a break-down in law and order

Clearly these assumptions are now highly questionable.

The issue of economic growth being something that can happen forever, has for many years been a completely unquestionable dogma, to raise the idea that economic growth might not be feasible in a lower energy world was to commit heresy; some would argue that it was partially rooted in the idea that the masses must remain occupied physically and psychologically if order in society is to be maintained. Now, however, more and more people are starting to openly challenge this orthodoxy.

Speaking recently at the launch of a ground-breaking report by the Sustainable Development Commission, Prosperity Without Growth?, Professor Tim Jackson said “questioning growth is deemed to be the act of lunatics, idealists and revolutionaries, but question it we must. The myth of growth has failed us. It has failed, spectacularly, in its own terms, to provide economic stability and secure people’s livelihoods”. The report concluded “the narrow pursuit of growth represents a horrible distortion of the common good and of underlying human values. The market was not undone by rogue individuals or the turning of a blind eye by incompetent regulators. It was undone by growth itself”.

So what is money, and where does it comes from? In 1920 Josiah Stamp, President of the Bank of England and the UK’s 2nd richest man said “The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin….if you want to continue to be slaves of the bankers and pay the cost of your own slavery, then let the bankers continue to create money and control credit.”

In fact though, in modern Western economies, more and more of the money in the financial system has been lent into existence by a wide range of institutions, not just banks. If you buy furniture on credit, money is created. What does that mean? Quite simply, there’s more money in the system which can be used to buy things – most of which have to be made from something, somehow, somewhere. Whether for business, personal loans or mortgages the same principle applies. The lenders assume that in order to repay any loans with interest the vast majority of customers will use the money to generate more wealth than they had to begin with. They also assume that if anything goes wrong, they’ll be able to take possession of assets the customer has (house, land, car …) to cover the value of the loan plus the interest and their costs.

It is important to understand that the relationship is not an equal one between most lenders and their debtors. Increasing lack of equity is a key driver of the bubble of consumerism. Studies by currency think-tank MonNeta show that even in Germany, one of the only nations in the world historically to have a positive balance sheet, 80% of the population pay out twice as much interest each year as they receive from any investments they have. Of the remainder, 10% are in balance and only 10% of the population are net beneficiaries (receiving the interest paid by the 80% net payers). In 2004 those 80% paid 1bn Euros every day to the 10% at the top of the tree. In the UK the figures are even higher due to the much higher levels of mortgage debt. The fortunate few who end up with a huge surplus of cash then look for ever more people to lend their money too, inflating the system.

As the recent credit crunch has demonstrated, this is a gamble, an especially dangerous gamble when the lenders have little connection or understanding of the people and organisations borrowing the money and where debt and securities are traded across international markets. That danger is compounded when the world’s reserve currency, the US dollar, has been floated free of any connection to the physical reality ever since Nixon came off the gold standard in 1971. For ever more transactions today, no trust is required at the personal level, no human relationship is developed and money exchanged has no loyalty to the community in which it is spent; the re-building of trust between people and businesses in the future will be central to re-localised economies.

There is another fundamental problem that goes to the heart of creating sustainable communities with a dependence on growth economics. If everyone is borrowing money and legally bound to repay with interest, then the economy must continue to grow overall to enable that repayment; otherwise the system starts to creak and strain (as we are seeing in the current financial crisis). Economic growth is historically very closely linked with increased use of energy. In fact, fossil fuel based development changed economics radically, away from manual and land based productivity to one based primarily on energy flow rates and associated ownership of technology and information. Economic models that were successful on the upward half of the energy mountain will prove to be completely inappropriate for coming down the other side.

This connection between economic activity and energy may seem less obvious in countries like the UK where our manufacturing base has declined, but the increased energy (and CO2 emissions) our lifestyles require is displaced to countries that manufacture our goods for us, China being the obvious example. So, the financial system we all use means we are locked in to ever-increasing dependence on affordable energy, which, as we have seen, cannot be taken for granted.

Chris Martenson again puts it well in the Crash Course: “Our economy must grow to support a money system that requires growth, but is challenged by an energy system that can’t grow, and both of these are linked to a natural world that is rapidly being depleted.”

The Transition model assumes a re-localisation of life and work due to the end of cheap fuels for food production, transport and energy generation, but today almost everyone is part of a globalised economic system highly dependent on imports. Politicians and business leaders have recently distanced themselves from the worst extremes of the weakly regulated financial activities, but whether it’s credit crunch, energy crunch or climate crunch the biggest employment crisis ever seen is already unfolding across international boundaries.

Fantasy about how much wealth we have as individuals and as nations encourages massive over spending and over exploitation of limited resources such as oil, and also leads us to believe that faced with the current financial difficulties, the best response is to throw money at it. The UK Government’s bailout of the banks and of the car industry exemplifies the application of inappropriate thinking, the belief that the thinking that got us into the problem can get us out again. Yet while the price of food, housing and public services has escalated, for the poorest, there is often too little of the official currency available. Now we are faced with a collapse of the banks and national currencies. Everyone will feel the cost of products rising from food to fuel and services, presenting a great challenge.

The abrupt paralysis of growth dependent, debt based consumer economics, leaves the financial system hollowed out. With peak oil and climate change hot on the heels of the credit crunch, what will be the consequences for millions of people working in shopping malls and the vast array of services that have grown up around unsustainable consumption? What surprised some peak oil analysts was that the world reached peak demand before it reached peak supply, the impact of July 2008’s high oil prices was such that the world had was forced to reduce its demand.

In many parts of the world, a once burgeoning construction sector has come to a standstill and propping up more unsustainable development is no answer even if it were feasible. How bad is it likely to get? We can only guess, but in the meantime the people and businesses in transition can map out a more resilient locally networked future economy. The trick is going to be how to create business models that are viable now in our current paradigm, in such a way that they will be also able to thrive in an almost unimaginably different one.

Given that thus far, national governments seem to be still wedded to the belief that ‘fiscal stimulus’ (i.e. throwing money at the problem and hoping it will go away) will work, it falls to those at the more local level to start considering their own responses and solutions. How the economic contraction will unfold in particular regions, towns and villages is best considered by the people and communities affected. Can we help build a new economics that has equity, environmental sustainability and human well being as its core objectives? It could mean more regional and localised businesses, focused on the area’s natural strengths. Where can communities find investment to develop new skills more relevant to a zero fossil fuel future? While many employers struggle with the realities of the credit crunch and peak oil, which types of businesses in the region could expand?

At the macro level, there already are solid ideas to ground such an approach. Work by Peter Victor in Managing Without Growth demonstrates that even now, broad economic policies aimed more specifically at delivering well-being for people in Canada could deliver high employment, healthcare for all and leave the world more intact for the next generation. Victor concludes however that presently this would be politically impossible unless it came from a grass roots movement. Herman Daly’s work on Steady-State Economics aims to maximize equitable qualitative economic development and deliver to real needs of people and planet, rather than the current maximizing quantitative economic growth, simply creating ‘wants’ and ‘stuff’. Transition initiatives can demonstrate how such a society could work and how it would feel on the human scale. This bottom up support and living demonstration for the work of visionaries like Daly show at the local level the power and resilience of the alternatives which we can start creating now.

If you would like to explore the relationship between economics and Transition further, a great place to start is the Economics Crash Course training, held the day after the Transition Network conference based on Chris Martenson’s work.

Comments are now closed on this site, please visit Rob Hopkins' blog at Transition Network to read new posts and take part in discussions.

8 Comments

[...] of success of the continuing drive towards growth at a time when we face an energy crunch.http://transitionculture.org/2009/04/27/an-economics-addition-to-the-transition-handbook/ Posted by Richard | Comments (0) Trackbacks Trackback specific URI for this entry No [...]

Bernd Ohm
28 Apr 1:24pm

Rob, great and well-needed piece (which I aim to translate for the German TT blog), but I have a little criticism: according to Wikipedia, the Josiah Stamp quote is not sourced. Do you think you could rewrite the paragraph without using the quote? It is usually found on conspiracy web sites, which does not aide TT’s credibility. Thanks for considering this.

Leo Brodie
29 Apr 3:56am

Well done! I think it makes sense to add this section to the handbook, since the fragility of our economic system has become so obvious after the original publication.

May I suggest that it doesn’t need to be so UK centric. For example, in the sentence “The UK Government’s bailout of the banks and of the car industry…” — take out “UK” and the sentence fits perfectly over here in the States.

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Rowena
2 May 10:32pm

As a student of economics 20 years ago, there always seemed to be two big problems for the natural world and our economic understanding of what we are up to on the planet.

1) Intertemporal myopia (wonderful phrase meaning literally intergenerational shortsightedness – we tend to view the present as ‘the most important’ and to overborrow from the future to live better now)

2) the correct ‘pricing’ of the enviroment and the competing priorities and protections of the rights of people, plants, animals and planet.

Many economists and politicians have for years been saying that GDP/ GNP ie growth measurements are a fairly poor way to indicate wellbeing and ‘wealth’ and that ‘balance sheets’ of natural and other assets are much more sensible measurements. the New Economics Foundation nef have done some good work in this area.

Lots of people are working internationally on 2), but I think 1) is much harder to crack unless there is very much more spiritually humble acceptance of ourselves in the great scheme of things.

Sadly the idea of ‘passing on an inheritance’ has come under very bad press (I would say from ‘socialists’ but we can argue about this one), but this ethos with a less personal facet and a wider concept of ‘inheritance’ is one part of the solution.

Glad to see this debate and well done to those collaborative Dutch people for kicking it off.

[...] Apart from the primer, Hopkins wrote a Handbook that expands on the entire Transition Culture (incidentally also the name of his website). He also collaborated on the recently published Transition Timeline and the Economics Addition to the Transition Handbook. [...]