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Counterfeit World – Part Two – Economics

In Part One, we looked at fake news as a simulacrum – something so many stages removed that it has no connection at all with the real world.  This is not simply a matter of bias or propaganda, but something which calls into question everything we think we know and why we think we know it.  After all, if we are unable to trust external sources of information, we are reduced to our limited personal experience of the world.  We might know such basics as that putting your hand on a hot stove is an unpleasant experience, or that a particular fruit tastes nice.  But beyond those basics, our knowledge “event horizons” are severely limited.  Indeed, as stage magicians and optical illusions teach us, we cannot even trust our own senses.  This condition though, is far more serious than parlour games and theatre entertainment.  At a time when our life support systems are beginning to crumble, we need some solid ground on which to stand.  But to find this, we need to do more than simply rethink our understanding of the world, we need first to unthink it.  And nowhere is this more true than in our received understanding of the economy – the school of economics known as “neoclassical.”

The term “economics” has its origin in the ancient Greek “oikos” – family, household or estate – and “nomos” – custom or law – in effect, “household or estate management.”  And yet today, this core element of economics is almost entirely ignored.  Only in the less popular discipline of economic history do we find any consideration of what is colloquially known today as “the real economy.”  This is why, for example, those who warned that locking down the economy during the pandemic would have serious consequences, were accused of “putting profits ahead of saving lives.”  That is, economics had come to be taken as a detached, esoteric discipline concerned only with such things as banking, stock markets and money management… nothing to do with the day-to-day activities of ordinary mortals.

And yet, the economy is precisely the sum total of all of the day-to-day and month-to-month interactions – both financial and social – of the eight billion human inhabitants of planet Earth.  It is about the way in which we each seek to meet both essential needs – food, clean drinking water, clothing, shelter, etc. – and discretionary desires – foreign holidays, luxury goods, TV subscriptions, meals out, etc. – within the physical, political and social constraints we are faced with.  In large part in pre-industrial economies, much of this could be transacted without the need for money at all… not least because most human consumption was bare subsistence.  Ironically – given the extent to which Marx saw pre-industrial economies as backward – the predominant system of exchange was the closest there has ever been to Marx’s formula of “from each according to his abilities, to each according to his needs.”  It is only after the decline of the village and the growth of industrial urbanisation that previous trust-based systems of exchange broke down and formal money-based systems had to be substituted.  However, the growth of modern currency systems is also due to the increasing ability of ordinary industrial workers to consume beyond their immediate needs – something more common in the twentieth century than it had been in the nineteenth.

Modern money emerges as a measure of value.  But there is no agreement in economics as to what value actually is.  The French physiocrats came closest in the eighteenth century, when they argued that the land was the source of value – without the food grown on the land and consumed by workers and aristocrats alike, there would be no production and no economy. 

Insofar as food is a source of energy, and insofar as the plants which provided it were converting solar energy into a chemical store, then the physiocrats were merely observing the primary energy source of their day.  Classical liberals such as David Ricardo and Adam Smith did the same thing.  Except that in their day, it was human labour which appeared to be the primary source of energy in the emerging industrial economy.  Marx built on this, offering both the idea of “socially necessary labour time,” and the division between exchange and use value – synonymous with the contemporary idea of “subjective value.”  Only later in his life – the span of which corresponds with the period of intensive steam-powered industrialisation in Britain – did Marx begin to believe that all of those industrial machines might be a source of value separate from – and by implication far more powerful than – labour alone.  But since this would have nullified his political ideology, he did not pursue the idea.

As it happens, both the classical liberals and the Marxists were wrong… or rather, they were only partially correct, and then only to a trivial degree.  It was not the machinery of industry which was the source of value, it was the massive store of solar energy locked up in coal which was the primary source.  Labour, meanwhile, was an often necessary but extremely weak energy source within the industrial economy.  Had Marx understood this, his theory of surplus value would have been of far greater benefit to humanity.

Marx argued correctly that for capitalists to realise profits, there must be some input or inputs to the productive process which are paid less than the value they generate.  Since, at the time, it appeared to be the workforce which provided more value than they were paid for, this set up the politics of class struggle developed by Marx.  Moreover, since much of the politics of industrial civilisation is bound up with the eternal struggle between workers and investors over their relative shares of the profits from industry, the Marxist labour theory of value has remained plausible for many to this day.

In truth though, the impact of human labour in an industrial economy has always been trivial.  Without the technology of industry, the best human labour alone might have provided would have been something akin to the western Roman Empire, and would more likely have resulted in something closer to Anglo-Saxon England… agrarian and backward.  But the technology of the industrial age was only made possible by the – largely forced through depletion – switch from wood to more energy-dense coal… particularly in Great Britain which was fortuitously sat upon an energy store in the form of coal as great as Saudi Arabia’s oil energy content.

It is energy, not – primarily – labour, which is the input to the productive process which is paid far less than the value it generates.  A barrel of oil, for example, costing just $80 to produce, provides the equivalent work to 4.5 years of human labour.  That is, based on the 2022 US average wage, for just $80 we receive $253,890 worth of work in return.

Around the world, every day we convert the energy locked up in some 100 million barrels of oil into a combination of useful work and waste heat.  And a similar amount of energy from coal and gas is also converted, along with smaller amounts from hydropower and nuclear, together with tiny amounts using non-renewable renewable energy-harvesting technologies.  And modern currency has emerged as a mechanism – a representation of the real – for mediating all of this activity.

It used to be that money – in the form of coins – was precious metal, which was itself a mere claim on the future economy.  Later, banknotes – as a claim on precious metal – emerged as a more convenient form of currency.  Even these though, came to be complemented with more convenient cheques and bankers’ drafts.  And in the modern world, cards, chips and digital transfers have emerged as even more convenient means of facilitating the transfer and conversion of energy which lies at the heart of the economy.  Currency then, is itself a simulacrum… so what is economics?

Missed by most of us – at least prior to the 2008 crash – was the fact that economists were entirely unaware of what currency is and where it comes from.  As Steve Keen was to explain:

“It may astonish non-economists to learn that conventionally trained economists ignore the role of credit and private debt in the economy – and frankly, it is astonishing.  But it is the truth.  Even today, only a handful of the most rebellious of mainstream ‘neoclassical’ economists – people like Joe Stiglitz and Paul Krugman – pay any attention to the role of private debt in the economy, and even they do so from the perspective of an economic theory in which money and debt play no intrinsic role.  An economic theory that ignores the role of money and debt in a market economy cannot possibly make sense of the complex, monetary, credit-based economy in which we live.  Yet that is the theory that has dominated economics for the last half-century.”

Currency then, a mere representation of the real economy – initially using precious metals, but today no more than an interconnected series of electronic bank ledger books – does not factor into the mathematically exquisite but entirely ungrounded econometric models – the simulacrum of a simulacrum – used by economists.  And it is upon these models that both common-sense understanding – as delivered by the establishment media – and economic policy – the tertiary simulacrum – have been built.

This is one reason why, for example, having undermined global supply chains and driven up the cost of energy to the European economies, politicians and central bankers are left blaming the ensuing crises on such things as people retiring too early, workers asking for pay rises, and businesses attempting to cover their rising costs.  It is also why, despite growing currency shortages, central bankers are still committed to interest rate rises which are likely to trigger a collapse far greater and far more widespread than the 2008 version.

Unfortunately, as we discovered during and in the aftermath from the pandemic, even natural sciences have become politicised to an extent which forces us to mistrust even that research published in scientific journals.  Nevertheless, the requirement for objective research at least forces a degree of contact with the real world.  The same cannot be said of economics, which is based solely on models of a financial economy which is merely a simulacrum – often a seriously distorted one – of the real economy… a real economy which is increasingly coming back to bite us for the erroneous decisions we have been making on the back of those detached economic models.

As I ruefully suggested in The Consciousness of Sheep, with access to a seemingly infinite supply of cheap energy and resources during some 300 years of industrial civilisation, like the adherents of some obscure religion, economists could come up with whatever nonsense they wanted to, and people in the real world would find a way of making it work.  But now that energy is no longer cheap, and the resources available to us are depleting rapidly, the need to unthink economics is becoming existential.  Rather than the current simulacrum, we desperately need a new science of the economy, properly grounded in the real world of energy, resources and physical limits.  Instead, as we shall see in Part Three, the ruling technocracy is bent upon a further flight into the realms of utopian technofantasy – seeking to replace Planet Earth itself with a hyperreal digital simulacrum.

As you made it to the end…

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