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An exercise in denial

One way in which someone might “fail” the Rorschach (ink blot) test, is to not see any pattern in the shapes.  “I see an ink blot” – assuming the subject is answering honestly – puts someone in a tiny minority of humans who do not impose patterns on the world around them.  Indeed, from our earliest days on planet Earth, humans have looked up at the sky and imposed, for example, a human face on the surface of the full moon, or a bear or a swan or a crab onto clusters of stars.

This was likely a survival trait – those who saw the shape of a big cat in the rustling grass outliving those who saw nothing unusual.  But like so many of those early instincts which are hard-wired into our modern brains, it turns out to be as much of a curse as a gift.  Not least, because once we are accustomed to seeing a particular pattern – like “the man in the moon” – it is very difficult to unsee it.  Moreover, herd behaviour make sit risky for anyone to challenge the received patterns, still less offer alternatives in their place.

This is why “trust the science” – literally the most unscientific thing someone can say – has so much traction.  The claim that the overwhelming majority – and especially the majority of scientists in their field – might be wrong is at odds with the way almost all of us perceive the world.  In this though, we have to take a great deal on trust.  We dare not, for example, entertain the idea that Einstein might have just made all of that relativity stuff up.  Not least because to entertain that idea would require physicists to unlearn a century of physics and then to relearn a different version… and nobody wants to do that.

In the social and historical sciences though, this is precisely what we find time and again.  Not least because most of “the science” is imbued with the politics and culture of its day.  Adam Smith’s version of an eighteenth century “free market” may make sense in an economy where the biggest threat is from capitalist cartels seeking to rig local markets, and where the state is little more than the monarch and the military.  But in an economy that requires the management of massive critical infrastructure like electricity grids, telecommunications networks, water and sewage pipelines, and mass transit systems, even the idea of a market breaks down, so that applying the idea of a “free market” looks like lunacy.

The same goes for the early Marx, whose writing began as the English coal-powered phase of industrialisation was only just beginning.  In that economy, it was all too easy to come to the erroneous belief that the growing masses of miners, iron workers and factory workers must be the source of value in the economy.  Indeed, the early Marx could even draw on Smith’s version of “labour time” to develop his concept of “socially necessary labour time.”  And so powerful was this “labour theory of value” pattern which Marx superimposed onto the economy he was living in, that some version of it is believed by billions of people to this day.

Only toward the end of his life – after Britain had been overtaken by Germany and the USA, in an economy dominated by coal-powered machinery – did Marx consider that those giant machines might also be a source of value.  Although he did not follow through on this line of thinking.  Not least because, if true, it would overturn the political conclusions of his life’s work.  And later Marxists – who wrongly saw the working class as the bedrock of revolution – had no reason to want to overturn the theory.  And so, to this day, most people assume that it is the workers who create value, while the elites appropriate it.

If, however, labour was the source of value, then our understanding of the last half-century should have been entirely different.  We could not, for example, have any conception of a post-war boom, simply because such a thing would not have come to an end.  There were some 2.8 billion workers at the beginning of the boom, and four billion when it came to an end in the early 1970s.  And yet the number of workers – almost all of them economically active – has continued to grow exponentially:

Nevertheless, we accept that “something” went wrong in the early-1970s.  Growth slowed and inflation set in.  And by the early-1980s we were in a depression which continues to haunt ex-industrial, rundown seaside, and smalltown rural Britain (and their equivalents across the western world) to this day.

This ought to have been a show-stopper.  Indeed, in 1991, sociologist Immanuel Wallerstein, argued that we urgently needed to “unthink” social science.  This though, would have meant unlearning the received beliefs and then recalculating something entirely new.  Instead, we did what humans do when patterns breakdown – we applied a patch… it was not, we were told, solely labour which was the source of value, but rather the combination of labour and technology.  So that, while it was true that the human population had continued to grow, much of the population growth was in underdeveloped and undeveloped regions where the technology was backward.  Indeed, beginning with Japan, the population growth of the developed economies was slowing.

If only we could accelerate the technological development of the wider world, then we would surely see an explosion in the value created as eight or even ten billion humans harnessed the power of modern technology in an increasingly globalised economy.  And so, we encouraged development around the world, with the huge populations of China and India leading the charge.  Thus, the growth of the Chinese and Indian economies over the last two decades should have ushered in a new golden age of prosperity.  But that isn’t what happened.  Even before the 2008 crash, the western economies had struggled to maintain a decent growth rate.  After the crash, they barely grew at all.  And in the post-lockdown economies, growth has gone into reverse.

But even now, when it ought to be obvious to all that neither labour nor technology is the source of value, economists and pundits reach for more patches to try to repair our increasingly threadbare understanding of how the economy works.  So it is that this morning, Jonty Bloom at the BBC poses the question:

“Why is technology not making us more productive?

“We are often told that we are in the midst of a technological revolution.  That business and the world of work continue to be transformed and improved by computers, the internet, the increased speed of communication, data processing, robotics, and now – artificial intelligence.

“There is only one small problem with all this – none of it seems to show up in the economic data. If all this technology really is making us all work faster and better, there is precious little evidence.

“Between 1974 and 2008 the UK’s productivity – the amount of output you get per worker – grew at an annual rate of 2.3%. But between 2008 and 2020 the rate of productivity growth collapsed to around 0.5% per annum.  And in the first three months of this year, UK productivity was actually down 0.6% on a year earlier.

“It is a similar picture in most other Western nations. In the US, productivity growth between 1995 and 2005 was 3.1%, but it then fell to 1.4% from 2005 to 2019.  It feels like we are continuing to go through a huge period of innovation and technological advancement, but at the same time, productivity has slowed to a crawl. How can you explain this apparent paradox?”

The two patches Bloom reaches for are, first – the last refuge of every social scientist – we are not measuring it properly.  Our productivity data is analogue while the world has apparently become digital… so that, as the digital services economy grows, the material economy which is measured by GDP begins to shrink, giving the impression of decline.  However, according to Jason Hickel at Resilience:

“This sounds reasonable on the face of it. But services have grown dramatically in recent decades, as a proportion of world GDP — and yet global material use has not only continued to rise, but has accelerated, outstripping the rate of GDP growth. In other words, there has been no dematerialization of economic activity, despite a shift to services.

“The same is true of high-income nations as a group — and this despite the increasing contribution that services make to GDP growth in these economies. Indeed, while high-income nations have the highest share of services in terms of contribution to GDP, they also have the highest rates of resource consumption per capita. By far.

“Why is this? Partly because services require resource-intensive inputs (cinemas and gyms are hardly made out of air). And partly also because the income acquired from the service sector is used to purchase resource-intensive consumer goods (you might get your income from working in a cinema, but you use it to buy TVs and cars and beef).”

The millions of Europeans who struggled to heat their homes last winter were not enjoying a digital renaissance, they really were struggling.  This is because the falling growth found in the GDP data is an artifact of a real decline in prosperity across the western world.  And so, those seeking to patch up the received labour and technology theory of value must turn to the second proposition offered by Bloom:

“The other argument is that the current technological revolution is happening, but just more slowly than we expect.

“Nick Crafts is emeritus professor of economic history at the University of Sussex Business School. He points out that the huge sea changes in economic performance we tend to think of as having happened almost overnight, actually took decades, and the same may well be happening now.

“’James Watt’s steam engine was patented in 1769,’ he says. ‘Yet the first serious commercial railway, the Liverpool to Manchester line only opened in 1830, and the core of the railway network was built by 1850. That was 80 years after the patent.’”

This though, is just another version of the failed Big Tech mantra:

  • It is only a prototype
  • It will improve
  • It is inevitable.

Watt’s steam engine was not intended to power locomotion, but to increase the efficiency of the older Newcomen beam engines used in coal mining. In 1802, Richard Trevithick – the true inventor of steam locomotion – was able to incorporate Watt’s steam engine into the first locomotive, just 28 years before the first passenger railway opened.  By which time a series of cheap and easy productivity improvements to both locomotives and railway tracks had been made, which at least gave the – wrong as it turned out – impression that railways would be profitable.

Far more important than the minds of engineers though, were the material economic drivers of demand for faster and more efficient transport in an industrialising economy.  The beginning of the age of steam owes far more to the growing abundance of low-cost coal and steel in a country which secured its wealth by selling the products of industry to its Empire and to the wider world.  Without these, Watt and Trevithick might have gone the same way as Philippe LeBon D’Humberstein or François Isaac de Rivaz… men who patented gas-fired internal combustion engines decades before Colonel Drake drilled the first oil well in Pennsylvania.

This too, gives us an insight into why the 1930s and the 1980s proved to be such dismal economic decades.  In 1913 – the year British coal production peaked – exponential coal-powered coal production came to an end, and was followed by sixteen years of “bumpy,” near stagnant production:

This, despite the increased coal production required to fight the First World War.  Although, of course, the picture is obscured because of the massive explosion of oil-powered coal production after the Second World War, and more recently after China’s inclusion into the western global economy:

To understand why this might be a problem, we have to understand that – even in the 1920s – the monetary system was debt-based.  As Nobel Prize-winning chemist turned economist, Frederick Soddy was to explain in the aftermath of the 1929 crash:

“Before the [First World] War it was considered ‘safe’ for the banker to keep some £15 per £100 of cash against deposits. That is, for every £100 deposited £15 of cash sufficed for the small cash demands, most of the depositors’ purchasing power being exercised by cheque. We may take this 15 per cent for purpose of illustration only. It is doubtful if as much has been necessary for a very long time.

“Now the whole secret of the system is contained in the fact that when a bank creates a loan and lends £100 to a borrower, to do so it need only have £15 of its depositors’ money, or whatever the ‘safe’ ratio may be…

“The borrowers have to deposit with the bank acceptable collateral securities, which, if they default, the bank can sell, or try to sell, to recoup itself. But such securities are usually not sold. The bank charges interest upon the fictitious loan. At the modest 5 per cent bank rate the interest on £566 is £28 per year, which is, it must be admitted, not a bad return on £100 which the original ‘depositor’ has not lent.

“If the truth were known it would probably be found that this estimate is altogether too modest.  At least since, if not before, the War the figures suggest rather a 7 per cent ‘safe’ limit than 15 per cent. On this basis a client depositing £100 of cash in current account enables the bank to loan £1,330, which at 5 per cent brings in £66 per annum…

“Purely fictitious money, which the nation has not authorised the issue of, is fictitiously lent without anyone giving it up, and then creates perfectly genuine deposits and legal claim upon the community’s market for the supply of wealth, indistinguishable in every respect from those the nation has authorised.”

Economic growth is built-in, because without it the interest cannot be repaid, and so the entire financial economy falls into ruin.  But the point of Soddy’s Wealth and Debt was to explain how growth – that is, the addition of value to the economy, aka “productivity” – is itself the product of energy:

“Still one point seemed lacking to account for the phenomenal outburst of activity that followed in the Western world the invention of the steam engine, for it could not be ascribed simply to the substitution of inanimate energy for animal labour. The ancients used the wind in navigation and drew upon water-power in rudimentary ways. The profound change that then occurred seemed to be rather due to the fact that, for the first time in history, men began to tap a large capital store of energy and ceased to be entirely dependent on the revenue of sunshine. All the requirements of pre-scientific men were met out of the solar energy of their own times. The food they ate, the clothes they wore, and the wood they burnt could be envisaged, as regards the energy content which gives them use-value, as stores of sunlight. But in burning coal one releases a store of sunshine that reached the earth millions of years ago.

“Then came the odd thought about fuel considered as a capital store, out of the consumption of which our whole civilisation, in so far as it is modern, has been built. You cannot burn it and still have it, and once burnt there is no way, thermodynamically, of extracting perennial interest from it. Such mysteries are among the inexorable laws of economics rather than of physics. With the doctrine of evolution, the real Adam turns out to have been an animal, and with the doctrine of energy the real capitalist proves to be a plant. The flamboyant era through which we have been passing is due not to our own merits, but to our having inherited accumulations of solar energy from the carboniferous era, so that life for once has been able to live beyond its income. Had it but known it, it might have been a merrier age!”

Soddy draws the contradiction between material wealth, which can only grow in line with the energy available to the economy, and debt which, with compound interest, continues to grow exponentially.  What happened in the late 1920s is that an investor class which had grown accustomed to exponential coal production growth, came to believe that the returns on their financial investments – which were someone else’s debt – could also continue to grow exponentially.  But as the growth in coal production slumped and – less obviously – as the energy cost of producing the coal grew, as is happening today, it became impossible to grow the “real” – energetic and material – economy any further.  The result, when the bubble finally burst, was a collapse in living standards across the economy.

The mistaken idea of “a good war” – one which brought people together and ushered in a new round of economic growth – was part of the mythology which emerged out of the Second World War.  Certainly, the depression which plagued the western economies in the 1930s, was reversed during the war, and was followed by the unprecedented 1953 to 1973 post-war boom.  It wasn’t though, war which drove the recovery, but another three-letter word: oil!

It was oil – or rather the absence of it – which motivated Germany to invade Russia in 1941.  And it was the failure to hold the oil fields in the Caucasus which ultimately doomed them to defeat… not least because the demand for oil to power the American war industries opened up the energetic and material potential of the North American continent.  In the course of the war, US oil fields provided six in every seven barrels of oil consumed.  So that, when the Americans landed in Normandy in June 1944, all of their divisions were motorised, compared to just ten percent of the German divisions facing them.

It was this growth in cheap and abundant oil which fuelled the post-war boom, once the initial repair of war damage was completed:

More energy-dense and more versatile than coal, the age of oil saw as much output and trade in those magical twenty years than in the entire coal age which preceded them.  And yet, oil production suffered the same fate as coal before it.  Once all of the big and easy deposits had been tapped into, the energy cost of oil began to rise, and production began to falter.

The first shock – in October 1973 – was partially artificial… merely the former colonies insisting upon a fairer price for their oil.  But by the end of the decade, the era of exponential oil growth was over.  And less obviously, the energy cost of energy began to rise remorselessly.

Technological improvement – in the broadest sense of the term – was the response.  Debt-based fiat currencies were let loose in an attempt to fuel further growth, even as manufacturing was offshored to places with lower wages and fewer regulations in an attempt to hold wages down.  But few of the technologies of the modern world – including the digital ones – are really new.  As physicist Tom Murphy has shown, much of it would be recognisable to someone in the USA of the 1950s:

“Look around your environment and imagine your life as seen through the eyes of a mid-century dweller. What’s new? Most things our eyes land on will be pretty well understood. The big differences are cell phones (which they will understand to be a sort of telephone, albeit with no cord and capable of sending telegram-like communications, but still figuring that it works via radio waves rather than magic), computers (which they will see as interactive televisions), and GPS navigation (okay: that one’s thought to be magic even by today’s folk). They will no doubt be impressed with miniaturization as an evolutionary spectacle, but will tend to have a context for the functional capabilities of our gizmos.

“Telling ourselves that the pace of technological transformation is ever-increasing is just a fun story we like to believe is true. For many of us, I suspect, our whole world order is built on this premise.”

Just as all of the cheap and easy energy sources have already been used, so all of the cheap and easy technological productivity improvements have also been used up.  This was precisely where the coal-powered economy was in the late 1920s.  And had it not been for the arrival of oil, the 1929 crash would have marked the beginning of the end of industrial civilisation.  Oil though, has provided us with another century to fail to unlearn the old myth about labour and technology being the source of value in an industrial economy.

The reason why the land speed record for a steam locomotive is still held by Mallard at 126mph in 1938, is not because we could not squeeze an additional mph or so out of a steam engine, but because the cost of doing so is too high while the benefits are infinitesimal.  The same is true of oil age technologies today.  There is a reason nobody is offering commercial supersonic flight anymore… and it isn’t because we forgot how to do it.  Rather, like Mallard in the steam age, Concorde was so complex and so expensive to operate that it required a big state subsidy.

Energy was always the true driver of growth in the economy.  The technology/productivity that pundits like Bloom imagine is going to ride to the rescue in the future, was only ever a means of leveraging as much of the energy available to us for useful work (exergy) while minimising the amount lost as waste heat.  But this is a once-and-done process.  Now that all of the economically viable improvements have been made, only an alternative – more energy dense and cheap – energy source can save the day… and currently, no such energy source exists.

The digital “fourth industrial revolution,” which pundits like Bloom await with bated breath, is just a fairytale… An exercise in denial to help avoid acknowledging that most of us are poorer than we were twenty years ago, that our life support systems are beginning to fall apart, and that nobody is offering a credible means of reversing the process of decline.

As you made it to the end…

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