By David L. Brown
Economic Armageddon has arrived, and it should have been no surprise to anyone. As I wrote back on June 6, after oil prices zoomed upward, and accompanying a drawing of two sailing ships toppling from a flat Earth:
…the world economy is falling off the edge of the Earth, figuratively speaking. This is the real thing, people. As we and a few others have been trying to tell you, things are going to be different from now on, and as those figurative ships that represent the world as we have known it plunge into the abyss, an abyss where dragons may dwell, how is it going to affect we humans who have collectively created this enormous mess?
What is happening is that civilization has reached a truly historic turning point, and as with all such world-changing events, no one seems quite sure how to react. But why, you may ask, should the rules be suddenly changing?
The answer is basically easy to perceive if one has eyes with which to see. All through past history human wealth has been built on the development of natural resources. From prehistoric times civilizations rose and fell on the tides of copper, bronze, iron, gold, and more recently petroleum and uranium. The resources of land and human labor also were always at the root of wealth and so-called progress.
Until just a few decades ago, the U.S. Dollar and most other currencies were backed by hard assets, gold bars held in national reserves such as Fort Knox.
But we have entered a post-resources economy, a fact that was dramatically demonstrated by the runaway price of oil this year. That means that wealth is becoming disengaged from material assets. “Money” is no longer represented by gold or silver coins or certificates that can be redeemed for precious metals. In fact, to a very real extent “money” has become a phantom, existing only as bits and bytes in a worldwide network of computers. And that kind of “money,” my friends, requires a great deal of faith in the system and those who control it, for without faith the value of that “money” can be seen for the fleeting will-o’-the-wisp that it truly is.
Take away faith in the system and you have what has been happening during recent weeks on Wall Street and in Washington, and reflected in stock exchanges all around the world. For a few days this past week the entire house of cards looked as if it were going to fall apart, and there is no assurance that we are beyond that danger yet.
What does it mean to be operating in a post-resources economy? Obviously the cost and availability of natural resources will change the game for humanity. On another side, it means that some things that once were of great value but have declined in worth may regain their importance. Take human capital. Through most of history, economies grew and succeeded not only through exploitation of resources but also on the strong backs of human workers. Most people were farmers, and farming was a hard and labor-intensive activity. As the Industrial Revolution took place, once again human labor was a primary input, along with natural resources such as iron ore and coal.
Today in the advanced world farmers have become a tiny minority in the population, a transformation that took place in little more than a century. According to the United States Department of Agriculture, the efficiency of farm production increased from 27.5 acres per worker in 1890 to 740 acres per worker in 1990. That efficiency has no doubt climbed even higher, but there is an end in sight. Agriculture is moving head-on into the post-resources economy that is consuming the old resources-based economic models of the past.
We have discussed these changing tides in agriculture many times on this site, and I will only briefly remark on the reasons why farm production cannot continue as it has in the recent past. Modern industrial agriculture almost entirely resulted from the application of natural resources to replace human labor and land. Gas and diesel powered machinery, agricultural chemicals and fertilizer derived from petroleum and natural gas, a vast infrastructure of rail- and highway-transportation — all these are essential contributors to the growth of agriculture as it is today in the U.S. Even land itself is in limited supply and there are no virgin fields left to plow. And as those resources become scarce and the cost to produce them grows ever higher, something has to give, and it is.
These effects of the post-resources economy are plain to see in the soaring cost of food, and looming hunger and even famine in the poorer parts of the world. No amount of wishful thinking will transform the world back to what it once was. The future must be different because wealth and spiraling economic growth can no longer be based on things like cheap and abundant oil or food.
The financial problems we are facing now are a natural result of inappropriate responses to the changes that are taking place. Economic growth has always been the sine qua non of success. It was the unending drive for growth that built the world as we know it, through the aggressive exploitation of resources. A static, no-growth economy was viewed as disastrous failure. A contracting economy was defined as a recession or depression, depending on the severity.
But any rational look at the world, such as the one provided more than 200 years ago by the pioneering economist Thomas Malthus, reveals that there are physical limits that cannot be exceeded. There is only so much land, only so much coal, oil, iron ore, aluminum, or even phosphorus and potassium so vital to farm production. These are non-sustainable resources every single one, as are a host of others to boot. The result is the present house of cards which our economy has become, because when every effort is put into the drive for ever more growth even as the fundamentals fall away beneath us, the result is sure to be disaster.
In the past when wealth was measured in gold, silver, land and power, there was a relatively solid foundation for growth, although expansion could not go on forever in all times and places as demonstrated by the documented rise and fall of civilizations.
As time passed into the world we recognize today, the globe “shrank” and dire effects that once threatened individual cultures in isolation have become connected around the planet. As population growth continued to add billions of hungry mouths even as the need for human capital declined, the trouble came more clearly into focus with each passing year. The world has become one, and if collapse should come it will reach to each nation, city, town and village everywhere.
When growth cannot be based on resources, and “money” is a phantom fiction requiring massive faith for its very existence, the table has been laid for a bitter feast indeed. And that is where we find ourselves today, in September, 2008. As I wrote back in June, in the essay quoted above and titled “Black Friday, a Day to Remember”:
But all of this comparison with history raises the really important question of our time: Can we now in the wake of Black Friday expect a reenactment of The Great Depression that followed Black Thursday?
Well, we probably can, as hinted by the Wall Street reaction to the spurt in oil prices today [the Dow had dropped by 400 points]. The world economy has been built like a vast and intricate machine, but on the shaky foundation of cheap and abundant oil. These are simple and irreconcilable facts: The world runs on oil, and the world is running out of oil. What to do? Chicken Little would know how to act, but based on recent experience his frantic warnings would not be heeded. For too long, those in positions to change the course of the world have refused or at least failed to do so, until now it is, well, to say “too late” is perhaps a bit of British understatement.
In the wake of what I termed Black Friday, the day oil spurted to an unprecedented price, I was focused on the so-called Black Gold, and for a very good reason. Petroleum lies at the very heart of the world economy. It can be found in almost everything we buy, eat, or use. In our economy, it is as oxygen is to air, a fundamental and necessary element. Economies have grown only as oil production increased and only so long as petroleum remained not only plentiful but cheap as well. Oil was the foundation stone of the growth that became the watchword of progress, and that foundation stone is no longer sound.
And we are quite ill-prepared to face the new post-resources world that is crashing down upon us. As I wrote in my essay of June 6, “…we are staring the post-Petroleum Age square in the face and we’re like the guy who came to a gunfight with a water pistol.”
There has been a lot of talk about climate change, about dependence upon imported oil, about population growth and other seemingly unrelated subjects. Well, here is a news bulletin: All of these are part of the same thing, the looming transformation of the Earth from the go-go growth of the old resources-dependent economic model to the new reality of a post-resources world. In terms of its impact on the world’s economy, this on-going transformation is like an earthquake on an unimagined scale, a hurricane with power to sweep everything away before it, perhaps even analogous to the meteor that ended the Age of Dinosaurs. The unpleasant truth is that the old economy is stumbling to an end. It soon will disappear and to be replaced by … what?
The answer to that question remains to be seen because it could go in several different directions. In the worst case scenario, humanity will continue to attempt to lurch ahead in the same old ways, stumbling into the unknown with out-dated knowledge and tools. The result is likely to be disastrous, and not just for future standards of living. The very existence of humanity may be at stake should the foundations of civilization collapse. Such a calamity is not beyond possibility, particularly in view of the impending four-way collision between declining resources, failing financial infrastructure, possibly catastrophic climate change, and human numbers that have ballooned far beyond the ability of the Earth to sustain them.
Those who would increase their wealth are discovering that dealing in phantom “money” can be a risky business indeed. It is a basic human failing to presume that things will continue to get better and better, and it is from such flawed reasoning that economic bubbles are created. From the “Tulipmania” in 17th century Holland to the present sub-prime mortgage disaster, when entranced by the lure of greed people bet on the future with far too much optimism. The problem becomes even more serious when rules are relaxed and “investment” is allowed to run amok in a misguided effort to create “growth”. That happened in the 1920s, leading to the Great Depression. It happened in the 1990s, leading to the Tech Stock Crash. And it has been happening today, leading to … well, we will have to wait and see.
One thing is very clear, and that is that current events are sending us a strong signal that we need to think long and hard about our financial systems, about how to deal with a post-resources economy, and about whether growth should still be considered a sound goal of economic activity. It is my instinct that the new world that emerges (if things do not go completely awry) will be vastly different from that of the past. Some obvious points of departure include the need to rapidly back away from the resource-driven model and seek to find sustainable substitutes. Expansionist strategies must be replaced by contractionist models. The trend must be to smaller, decentralized activity, much as humans lived together in the past.
A new form of “money,” perhaps based on the actual contributions of each individual to society in a barter-type economy, must replace the phantom “wealth” of electronic bits and bytes. The throw-away consumer-driven economy must be junked in favor of lasting, basic values. Many of us must return once more to a closer relationship with Nature, living near to the land that sustains us, taking personal responsibility for ourselves and our neighbors.
That is a very different kind of world than the one we know. Whether it is even possible to get there from here is a serious question. Our future is so uncertain that only the most optimistic might bet on a positive outcome. One thing is certain, and that is that we do not have a choice in this. The transformation to a post-resources world is happening, whether we like it or not. It is quite literally the result of implacable forces of Nature, forces that are beyond the grasp of mere humans.
And in the end those forces will remake the Earth without notice of our existence and with no concern whatsoever for the continuation of our species. Like rebellious children, humankind has set itself against Mother Nature. If we are to survive at all, we must make peace and beg Her forgiveness. Only when we live once again in balance with the environment from which we sprang can we maintain a place on this, our very own Planet Earth.