The Wealth of Nature

Economics as If Survival Mattered

John Michael Greer

• Publisher: New Society Publishers
• Year: 2011
• Print ISBN: 9780865716735
• eBook ISBN: 9781550924787
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The Wealth of Nature proposes a new model of economics based on the integral value of ecology. Building on the foundations of E.F. Schumacher's revolutionary "economics as if people mattered", this book examines the true cost of confusing money with wealth. By analyzing the mistakes of contemporary economics, it shows how an economy centered on natural capital-the raw materials that support human life-can move our society toward a more productive relationship with the planet that sustains us all.

The Wealth of Nature suggests public policy initiatives and personal choices that can help alleviate the economic impact of peak oil. These strategies must address not only financial concerns, but the issues of resource depletion and pollution as well. Examples include:

• Adjusting tax policy to penalize the use of natural nonrenewable resources over recycled materials
• Placing public welfare above corporate interests
• Empowering individuals, families, and communities by prioritizing local, sustainable solutions
• Building economies at an appropriate scale.

Profoundly insightful and impeccably argued, this book is required reading for anyone interested in the intersection of the environment and the economy as we enter the twilight of the Age of Abundance .

THE FAILURE of ECONOMICS

IMAGINE FOR A MOMENT that you are on board a sailing ship in the middle of the ocean. You wake in the middle of the night with an uneasy feeling, as if trouble is brewing. You get dressed and go on deck. It’s a clear night with a steady wind, and you can see some distance over the water; as you glance off to starboard, though there is no land in sight, you are horrified to see waves crashing over black jagged rocks not far from the ship, setting the sea afoam.

You hurry aft to the midship bridge to warn the crew members on watch, and find the first mate and several other crew members sitting there, calmly smoking their pipes and paying no attention to the rocks. When you ask them about the rocks, they deny that any such thing exists in that part of the ocean, and insist that what you’ve seen is an optical illusion common in those latitudes. One of the crew members takes you into the chart room and shows you a chart with the ship’s progress marked on it. Sure enough, there are no rocks anywhere near the ship’s course, but as you glance over the chart you realize that there are no rocks marked anywhere else, either, nor any reefs, shoals or other hazards to navigation.

You leave the chart room, shaking your head, and glance at the compass in the binnacle. This only increases your discomfort; its needle indicates that magnetic north ought to be off the port bow, but a glance up at the sky shows the Little Dipper dead astern. When you mention this to the crew members, though, they roll their eyes and tell you that you obviously haven’t studied navigation. You leave the midship bridge and walk forward, looking ahead to see where the ship is going, and sure enough, the pale gleam of rough water around rocks shows up in the distance.

It would be comforting if this scenario was just a nightmare; unfortunately, it mirrors one of the most troubling realities of contemporary life. The metaphoric charts and compass used nowadays to guide most of the important decisions made by the world’s nations come from the science of economics, and the policy recommendations presented by economists to decision makers and ordinary people alike consistently fail to provide useful guidance in the face of some of the most central challenges of our time.

This may seem like an extreme statement, but the facts to back it up are as close as the nearest Internet news site. Consider the way that economists responded — or, rather, failed to respond — to the gargantuan multinational housing boom that imploded so spectacularly in 2008, taking much of the global economy with it.¹ This was as close to a perfect example of a runaway speculative bubble as you’ll find anywhere in recent history. The extensive literature on speculative bubbles, going back all the way to Rev. Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, made it no challenge at all to recognize that the housing boom was simply another example of this species. All the classic symptoms were present and accounted for: the dizzying price increases, the huge influx of amateur investors, the giddy rhetoric insisting that prices could and would keep on rising forever, the soaring rate of speculation using borrowed money and more.

By 2005, accordingly, a good many people outside the economics profession were commenting on parallels between the housing bubble and other speculative binges. By 2006 the blogosphere was abuzz with accurate predictions of the approaching crash, and by 2007 the final plunge into mass insolvency and depression was treated in many circles as a foregone conclusion — as indeed it was by that time. Keith Brand, who founded the lively Housing–Panic blog in 2005 to publicize the approaching disaster, and kept up a running stream of acerbic commentary straight through the bubble and bust, summarized those predictions with a tag line that could serve as the epitaph for the entire housing frenzy: “Dear God, this is going to end so badly.”²

Yet it’s a matter of public record that among those who issued these warnings, economists were as scarce as hen’s teeth. Rather, most economists at the time dismissed the idea that the housing boom could be what it patently was, a disastrous speculative bubble. Nouriel Roubini, one of the few exceptions, has written wryly about the way he was dismissed as a crank for pointing out what should have been obvious to everybody else in his profession.³ For whatever reason, it was not obvious at all; the vast majority of economists who expressed a public opinion on the bubble while it was inflating insisted that the delirious rise in real estate prices was justified, and that the exotic financial innovations that drove the bubble would keep banks and mortgage companies safe from harm.

These comforting announcements were wrong. Those who made them should have known, while the words were still in their mouths, that they were wrong. No less an economic luminary than John Kenneth Galbraith pointed out many decades ago that in the financial world, the term “innovation” inevitably refers to the rediscovery of the same small collection of emotionally appealing bad ideas that always lead to economic disaster when they are applied to the real world.⁴ Galbraith’s books The Great Crash 1929 and A Short History of Financial Euphoria, which chronicle the repeated carnage caused by these same bad ideas in the past, can be found on the library shelves of every school of economics in North America, and anyone who reads either one can find every rhetorical excess and fiscal idiocy of the housing bubble faithfully duplicated in the great speculative binges of the past.

If the housing bubble were an isolated instance of failure on the part of the economics profession, it might be pardonable, but the same pattern of reassurance has repeated itself as regularly as speculative bubbles themselves. The same assurances were offered — in some cases, by the same economists — during the last great speculative binge in American economic life, the tech-stock bubble of 1996–2000. Identical assurances have been offered by the great majority of professional economists during every other speculative binge since Adam Smith’s time. More than two hundred years of glaring mistakes would normally be considered an adequate basis for learning from one’s errors, but in this case it has apparently been insufficient.

The Illusion of Invincibility

The problem with contemporary economics can be generalized as a blindness to potential disaster. This can be traced well outside the realm of bubble economics. Consider the self-destruction of Long Term Capital Management (LTCM) in 1998.⁵ LTCM was one of the first high-profile hedge funds, and made money — for a while, quite a bit of it — by staking huge amounts of other people’s funds on complex transactions based on intricate computer algorithms. It prided itself on having two Nobel laureates in economics on staff. Claims circulating on Wall Street during the firm’s glory days had it that LTCM’s computer models were so good that they could not lose money in the lifetime of this universe or three more like it.

Have you ever noticed that villains in bad science fiction movies usually get blown to kingdom come a few seconds after saying “I am invincible”? Apparently the same principle applies in economics, though the time lag is longer. It was some five years after LTCM launched its computer-driven strategy that the universe ended, slightly ahead of schedule. LTCM got blindsided by a Russian foreign-loan default that many other people saw coming, and failed catastrophically. The US government had to arrange a hurried rescue package to keep the implosion from causing a general financial panic.

Economists are not, by and large, stupid people. Many of them are extraordinarily talented; the level of mathematical skill displayed by the number-crunching “quants” in today’s brokerages and investment banks routinely rivals that in leading university physics departments. Somehow, though, many of these extremely clever people have not managed to apply their intelligence to the task of learning from a sequence of glaring and highly publicized mistakes. This is troubling for any number of reasons, but the reason most relevant just now is that economists play a leading role among those who insist that industrial economies need not trouble themselves about the impact of limitless economic growth on the biosphere and the resource base that supports all our lives. If they turn out to be as wrong about that as so many economists were about the housing bubble, they will have made a fateful leap from risking billions of dollars to risking billions of lives.

Thus it’s urgent to talk about the reasons why the economic mainstream has so often been unable to anticipate the downside. Like most of the oddities of contemporary life, this blindness to trouble has many causes. Two important ones result from peculiarities in the profession of economics as presently practiced; a third and more important reason is rooted in the fundamental assumptions that professional economists apply to the challenges of their field. The first two deserve discussion, but it’s the third that will lead into the central project of this book: the quest for economic insights that will help make sense of the challenges of industrial society’s future.

The first of the factors peculiar to the profession is that, for professional economists, being wrong is usually much more lucrative than being right. During the run-up to a speculative binge, and even more so during the binge itself, many people are willing to pay handsomely to be told that throwing their money into the speculation du jour is the right thing to do. Very few people are willing to pay to be told that they might as well flush their life’s savings down the toilet, even — indeed, especially — when this is the case. During and after the crash, by contrast, most people have enough demands on their remaining money that paying economists to say anything at all is low on the priority list.

This rule applies to professorships at universities, positions at brokerages and many of the other sources of income open to economists. When markets are rising, those who encourage people to indulge their fantasies of overnight unearned wealth will be far more popular, and thus more employable, than those who warn them of the inevitable outcome of such fantasies; when markets are plunging, and the reverse might be true, nobody’s hiring. Apply the same logic to the future of industrial society and the results are much the same: those who promote policies that allow people to get rich and live extravagantly today can count on an enthusiastic response, even if those same policies condemn industrial society to a death spiral in the decades ahead. Posterity pays nobody’s salaries today.

The second of the forces driving bad economic advice is shared with many other contemporary fields of study: economics suffers from a bad case of premature mathematization. The dazzling achievements of the natural sciences have encouraged scholars in a great many fields to ape scientific methods in the hope of duplicating their successes, or at least cashing in on their prestige. Before Isaac Newton could make sense of planetary movements, though, thousands of observational astronomers had to amass the raw data with which he worked. The same thing is true of any successful science: what used to be called “natural history,” the systematic recording of what Nature actually does, builds the foundation on which later scientists erect structures of hypothesis and experiment.

Too many fields of study have attempted to skip these preliminaries and fling themselves straight into the creation of complex mathematical formulas, on the presumption that this is what real scientists do. The results have not been good, because there’s a booby trap hidden inside the scientific method: the fact that you can get some fraction of Nature to behave in a certain way under arbitrary conditions in the artificial setting of a laboratory does not mean that Nature behaves that way when left to herself. If all you want to know is what you can force a given fraction of Nature to do, this is well and good, but if you want to understand how the world works, the fact that you can often force Nature to conform to your theory is not exactly helpful. Theories that are not checked against the evidence of observation reliably fail to predict events in the real world.

Economics is particularly vulnerable to the negative impact of premature mathematization because its raw material — the collective choices of human beings making economic decisions — involves so many variables that the only way to control them all is to impose conditions so arbitrary that the results have only the most distant relation to the real world. The logical way out of this trap is to concentrate on the equivalent of natural history, which is economic history: the record of what has actually happened in human societies under different economic conditions. This is exactly what those who predicted the housing crash did: they noted that a set of conditions in the past (a bubble) consistently led to a common result (a crash) and used that knowledge to make accurate predictions about the future.

Yet this is not, on the whole, what successful economists do nowadays. Instead, a great many of them spend their careers generating elaborate theories and quantitative models that are rarely tested against the evidence of economic history. The result is that when those theories are tested against the evidence of today’s economic realities, they fail.

The Nobel laureates whose computer models brought LTCM crashing down in flames, for example, created what amounted to extremely complex hypotheses about economic behavior, and put those hypotheses to a very expensive test, which they failed. If they had taken the time to study economic history first, they might well have noticed that politically unstable countries often default on their debts, that moneymaking schemes involving huge amounts of other people’s money normally implode and that every previous attempt to profit by modeling the market’s vagaries had come to grief when confronted by the sheer cussedness of human beings making decisions about their money. They did not notice these things, and so they and their investors ended up losing astronomical amounts of money.

The inability of economics to produce meaningful predictions has become proverbial even within the profession. Even so mainstream an economic thinker as David A. Moss, a Harvard Business School professor and author of the widely quoted and utterly orthodox A Concise Guide to Macroeconomics, warns:

Unfortunately, some students of macroeconomics are so confident about what they have learned that they refuse to see departures at all, preferring to believe that the economic relationships defined in their textbooks are inviolable rules. This sort of arrogance (or narrow-mindedness) becomes a true hazard to society when it infects macroeconomic policy making. The policy maker who believes he or she knows exactly how the economy will respond to a particular stimulus is a very dangerous policy maker indeed.⁶

Yet this understates the problem by a significant margin, because a great many of the pronouncements made these days by economists are not merely full of uncertainties; they are quite simply wrong. The quest to turn economics into a quantitative science in advance of the necessary data collection has produced far too many elegant theories that not only fail to model the real world, but consistently make inaccurate predictions. This would be bad enough if these theories were safely locked away in the ivory towers of academe; unfortunately this is far from the case nowadays. Much too often, theories that have no relation to the realities of economic life are used to guide business decisions and government policies, with disastrous results.

The Failure of Markets

The third force driving the economic profession’s blindness to the downside is more complex than the two just discussed, because it deals not with the professional habits of economists but with the fundamental assumptions about the world that underlie economics as practiced today. Perhaps the most important of those is the belief in the infallibility of free markets. The Wealth of Nations popularized the idea that free market exchanges offered a more efficient way of managing economic activity than custom or government regulation. The popularity of Adam Smith’s arguments on this subject has waxed and waned over the years; it may come as no surprise that periods of general prosperity have seen the market’s alleged wisdom proclaimed to the skies, while periods of depression and impoverishment have had the reverse effect.

The economic orthodoxy in place in the Western world since the 1950s, neoclassical economics, has made a nuanced version of Smith’s theory central to its approach to market phenomena. Neoclassical economists argue that, aside from certain exceptions discussed in the technical literature, people make rational decisions to maximize benefits to themselves, and the sum total of these decisions maximizes the benefits to everyone. The concept of market failure is part of the neoclassical vocabulary, and some useful work has been done under the neoclassical umbrella to explain how it is that markets can fail to respond to crucial human needs, as they so often do. Still, as already pointed out, neoclassical economists have consistently failed to foresee the most devastating examples of market failure, the speculative booms and busts that have rocked the global economy to its foundations, or even to recognize them while they were happening.

This is not the only repeated failure that can be chalked up to the discredit of the neoclassical consensus. Social critics have commented, for example, on the ease with which neoclassical economics ignores the interface between economic wealth and power. Even when people rationally seek to maximize benefits to themselves, after all, their options for doing so are very often tightly constrained by economic systems that have been manipulated to maximize the benefits going to someone else.

This is a pervasive problem in most human societies, and it’s worth noting that those societies that survive over the long term tend to be the ones that work out ways to keep too much wealth from piling up uselessly in the hands of those with more power than others. This is why hunter-gatherers have customary rules for sharing out the meat from a large kill, why traditional mores in so many tribal societies force chieftains to maintain their positions of influence by lavish generosity and why those nations that got through the last Great Depression intact did so by imposing sensible checks and balances on concentrated wealth.

By neglecting and even arguing against these necessary redistributive processes, neoclassical economics has helped feed economic disparities, and these in turn have played a major role in driving cycles of boom and bust. It’s not an accident that the most devastating speculative bubbles happen in places and times when the distribution of wealth is unusually lopsided, as it was in America, for example, in the 1920s and the period from 1990 to 2008. When wealth is widely distributed, more of it circulates in...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• CONTENTS
• INTRODUCTION: A GUIDE FOR THE PERPLEXED
• 1. THE FAILURE OF ECONOMICS
• 2. THE THREE ECONOMIES
• 3. THE METAPHYSICS OF MONEY
• 4. THE PRICE OF ENERGY
• 5. THE APPROPRIATE TOOLS
• 6. THE ROAD AHEAD
• AFTERWORD: SMALL IS BEAUTIFUL
• NOTES
• BIBLIOGRAPHY
• ABOUT THE AUTHOR