A fifty year old, born in 1970, would have come of age in the years after the financial “Big Bang” which cemented in place the neoliberal global economy. Its architects – the administrations of Ronald Reagan and Margaret Thatcher – were in their second terms; having seen off the left wing attempt to reinstate a Keynesian post-war consensus that had broken down in the face of the oil crises of the 1970s.
By the time our erstwhile 50 year old had reached voting age, the only options on the ballot paper (besides a protest vote for a minor party) were two versions of neoliberalism. Although the governments of Clinton and Blair appeared to involve a swing to the political left, the reality was that they served to turn neoliberal globalism into the new orthodoxy. Anyone who disagreed with the project to financialise and globalise any and all aspects of society – whether on the left or the right – was cast to the lunatic fringes. “Things,” to borrow from Blair’s campaign song, “could only get better.” Why would anyone want change?
Even as the Big Bang reforms were being implemented, life – at least as measured by GDP and material possessions – was a great deal better than it had been in the grim days of the 1970s. As Ian Jack reflected in the Guardian a few years ago:
“I had the idea… when I was walking through a London square around the time of the City’s deregulatory ‘Big Bang’ and Peregrine Worsthorne coining the phrase ‘bourgeois triumphalism’ to describe the brash behaviour of the newly enriched: the boys who wore red braces and swore long and loud in restaurants. Champagne was becoming an unexceptional drink. The miners had been beaten. A little terraced house in an ordinary bit of London would buy 7.5 similar houses in Bradford. In the seven years since 1979, jobs in manufacturing had declined from about seven million to around five million, and more than nine in every 10 of all jobs lost were located north of the diagonal between the Bristol channel and the Wash. And yet it was also true that more people owned more things – tumble dryers and deep freezers – than ever before, and that the average household’s disposable income in 1985 was more than 10% higher than it had been in the last days of Jim Callaghan’s government.
As an example, in the late 1970s, households needed to apply to the state for permission to have a telephone installed. And even if permission was given, it was often for a party line shard with one or more neighbours. By 1986, British Telecom had been privatised, mobile phones were becoming more popular and the first desktop computers were finding their way into people’s living rooms. Just a few years later modems and internet accounts would become commonplace, paving the way for the modern Internet Age.
But the new consensus was built around two unsustainable pillars – debt and oil. Jack understood this:
“Social peace had been bought by tax cuts and welfare benefits, and these had been largely enabled by government income from North Sea oil that by the mid-1980s was delivering the Treasury 10% of its revenues…”
Following her election in 1979, Thatcher had unleashed a massive private debt bubble:
While private banks rushed to loan ever more currency into existence, building societies bribed their members to allow them to convert to banks in order to get their snouts into the neoliberal trough. Meanwhile, the advocates of the new – monetarist-based – economics continued to claim that excess public debt was the problem. The reality was that both Keynesian and Monetarist (and, indeed, Marxist) economics are fundamentally flawed because they fail to understand energy. State currency creation in the aftermath of World War Two generated a period of spectacular economic growth. The years 1953 to 1973 saw as much economic and trading activity as the 150 years which preceded them. So long as the “real economy” continued to grow, states could issue as much new currency as they pleased… so long as the real economy continued to grow.
Growth, of course, has to come from somewhere. In essence, some input to the productive process must provide more in return than it costs. For classical liberal and Marxist economists, that something was labour power. In reality, human labour is but a sub-set of the true source of value and growth; and a pretty puny one at that. Energy – particularly the fossil fuel energy harnessed by industrial machinery – is what has driven the real economy since the mid-eighteenth century. In the years since, as humanity has unlocked almost all of the accessible coal, gas and oil deposits on the planet, industrialisation has spanned the planet.
Currency creation – whether by the state or private banks – though, depends upon a particular kind of growth. Because both – the state arguably by choice – create currency with interest attached, the real economy must grow exponentially. There are only two ways in which this can be achieved:
- Deploy increasing quantities of energy into the economy
- Use technology to make the use of energy more efficient.
Both are extremely powerful. There is a huge difference between Trevithick’s 1804 steam locomotive trundling down the Taff Valley at walking pace (and having to be pulled back up by horses) and the sleek Mallard hitting 126mph on the East Coast Mainline in 1938. The same technological gulf can be seen in the difference between the Wright Flier and the supersonic Concorde. Nor does technology simply refer to the machinery. Henry Ford’s production line is as much a technology as a jet engine. So too, of course, is the distribution of manufacturing industry to regions of the globe that offer cheaper labour and fewer regulations.
In 1971 US oil production – which had fueled the global switch from steam (coal) to oil in the decades after World War Two – reached its peak. As oil prices began to rise, currency printing began to cause inflation. US deficit funding of the Vietnam War and the Cold War had already raised European fears of inflation; resulting in the brief spectacle of French and German destroyers ferrying American gold reserves across the Atlantic. Nixon ended that when he took the dollar off the gold standard; effectively passing the inflation back to the Europeans. But the crisis didn’t end there. Middle Eastern and North African oil deposits had always been more expensive to produce than US oil. With the US no longer able to control global oil prices, the OPEC states took the opportunity to cut supplies and increase prices. Although partially artificial, the oil shock of 1973 triggered a supply-side inflationary crisis that orthodox demand-side economics neither understood nor offered solutions to.
Whereas unemployment – which was widely believed to have caused the rise of fascism and Nazism in the 1930s – had been public enemy number one in the post-war years, inflation took over the mantle in the mid-1970s. Instead of seeing the slowdown in energy growth as the cause of inflation, monetarists argued that inflation was a product of over-employment caused by states creating too much currency. Curbing inflation, they argued, required that a natural rate of unemployment be maintained. In the late 1970s, this required states to cut public spending, shrink the money supply and stand up to trade unions and other vested interests when they sought pay increases.
The medicine was harsh. In the UK more than two million high-paying semi-skilled jobs were destroyed between 1979 and 1982; driving wages down and apparently crushing inflation out of the system. Except that the influx of newly opened oil deposits from the North Sea, the North Alaskan Slope and the Gulf of Mexico did as much to squash inflation as economic reforms which in reality merely transferred currency creation from the state to private banks. Adding new energy to the mix – even energy that is more expensive (in energy cost terms) than the energy it replaces – is by far the easiest means of ushering in a new round of growth in the real economy.
With oil income restored the USA and – especially – Britain, governments could further financialise economies run by private banks and underwritten by government bonds guaranteed with oil revenues. It mattered not – they told us – that whole industries were offshored to Asia and Latin America. So long as the financial economies were able to act as bankers to the world, the populations of the USA, the UK and Europe could enjoy cheap imports funded by currency printed out of thin air. What could possibly go wrong?
One of the few times when I have found myself in agreement with Donald Trump was the occasion when then candidate Trump referred to the US economy as a “big ugly bubble.” So it was. The bubble had almost burst when in 2008 banking industry insiders realised that they were all sat on worthless paper backed by future real world economic growth that was simply never going to put in an appearance. Almost all of the planet’s large oil deposits are past their peak – the North Sea peaked in 1999 – and drilling and fracturing the source rock provides insufficient energy return to keep the real economy growing. The post-2008 “solutions” – quantitative easing and near zero percent interest rates – have kept the financial economy on life support for far longer than anybody expected. However, every time the central banks have attempted to turn off the life support, the patient has gone into cardiac arrest. Meanwhile it is only the highly dubious Chinese data that indicates some real economy growth; and even that had been stalling in recent years.
The nationalist populism that has swept the western states in recent years is an attempt to find a solution to the impossibility of further neoliberal growth. With insufficient surplus energy, however, the dream of bringing entire industries “home” and of making countries great again is no more than a pipe dream. Whether we like it or not, many of the things that we have taken for granted for several decades are going away. The complexity which allows everything from advanced oncology to self-driving cars and global supply chains depends upon a growing supply of low(ish) energy-cost energy to survive:
For this reason, by the beginning of 2020, the global economy as we have known it since the mid-1980s was no more than a derelict shell waiting for a wrecking ball to arrive to put it out of its misery. That wrecking ball might have been anything from political insurgency to failed harvests or from solar flares to currency collapses. That it happens to be a pandemic virus is no more than an accident of fate. Nevertheless, while the current focus is on the effects of the virus and the various strategies that states are applying to try to mitigate them, the real crisis has yet to fully appear. Only on the fringes do we see:
- Airlines going bust for lack of passengers
- Manufacturers laying off workers for lack of parts
- Chemists and pharmaceutical companies warning of shortages of medicines and precursor chemicals
- Distributors warning retailers that goods will soon cease to be available
- Supermarkets and retail chains introducing rationing to prevent “panic buying” of goods that are in short supply.
As with the oil shock in 1973, governments and central banks face a supply-side shock that they can do little about. Central banks can pump as much liquidity into the banks and the stock markets as they choose, but people can’t take out loans to buy goods and services that don’t exist anymore. In the same way, states can conjure up billions of pounds, euros and dollars to fund healthcare and critical infrastructure; but they cannot conjure thousands of trained doctors, nurses or nuclear power plant operators into existence.
For the moment, the over-50s are believed to be the main victims of Covid-19. In the long run, though, it will be the under-50s who face the greatest trauma. When the dust finally settles – as it inevitably will – some form of industrial civilisation will continue. It will likely be far less material and more energy-constrained than anything experienced by people under 50. Indeed, it may only be those who can remember the privations of the 1930s and the war years who will have a memory of such an economy. For the under 50s, however, everything that appeared solid is now crumbling to dust.
As you made it to the end…
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