THE CASE FER DYNAMIC DISEQUILIBRIUM.
Serendipity as mentioned before, when a chance event and astute observer come tergether, sometimes plays a part in discovery. Heh, welcome ter the 8th edishin, all you serfs and non-serfs out there.;).
Here’s a case in Matt Ridley’s book, ‘Rational Optimist, Chapter 7, ‘The release of slaves: energy after 1700.’ Matt Ridley asks us to imagine ourselves at the Vienna Industrial Exhibition of 1873. Picture a stand exhibiting a dynamo, the first electricity generator that can produce a steady current, invented by Zenobe Theophyle Gramme, his real name,) and manned by Gramme’s business partner, the equally euphoniously named Hippolyte Fontaine. One of the workmen, the story goes, makes a careless mistake, connecting wires from the dynamo to a back up dynamo, which starts spinning, in effect becoming a motor, a break through for electrical energy.
Electricity, hey, its contribution ter human welfare, as Matt Ridley says, can hardly be exaggerated. So let’s take a walk on the wild side, take a look at the case fer disequilibrium, the story of energy and human discovery, overviewed in Matt Ridley’s Chapter 7, ‘The release of slaves.’ … ( I like that. )
IN THE BEGINNING.
Once upon a time all work was done by people using their own muscles. Then came the time when some people, pharaohs ‘n such , got other people ter do the work fer them, building pyramids, digging ditches, ( serfs can vouch fer this,) trampling grapes ‘n so on.
With the Roman Empire came the age of oxen, an ox could do the work of many men, no sweat. Then, with the invention of the horse collar, oxen made way fer horse power, there by doubling man’s productivity, womens’ – not – so – much. (
In turn, with the invention of the water mill yer gettin’ the introduction of inanimate power. The Cistercian Monastic Order, no little backwater the CMO, took the water mill ter its technological zenith. Is there no end ter its versatility, crushing the grain, separating the flour from the bran … the list goes on ..
In the low countries, ‘low,’ no mountains, git it, where water power was not an option,
the wind mill was developed, not jest inspirin’ one of the comedy classics of liter-a-chure, Cervantes’ ‘Don Quixote,’ but contributin’, along with the burnin’ of peat, well peat was the major factor, ter the industrial-iz-ay-shun that enabled the Dutch’ in the 1600’s ter become the work shop of the world.
The invention of the steam engine triggered the Industrial Revolution at the end of the 18th century, but it was the shift from using current to stored solar energy that kept it going . Once fossil fuels joined in, economic growth truly took off. Matt Ridley notes the irony of economic growth only becoming sustainable when industry began to rely on non-renewable (non-green) power. Fer while renewables are self-replenishing, when they become exhausted over time, their renewal is too slow ter meet demand. And while fossil fuels, are not infinite, coal is sufficiently abundant to allow an increase of both economic activity and population ter the point where they generate sustainability without hitting a Malthusian ceiling.
MERRIE ENGLAND VERSUS SATANIC MILLS.
We’ve all heard the dismal story of how yokels were forced to leave their rural life for the crowded tenements and satanic mills of industrial towns. Point of fact, cheerless as these towns were, the rural paupers of 1700 were markedly worse off than urban paupers in 1850. In Gregory King’s Survey of the British population in 1688, 1.3 million cottagers lived on just two pounds a year and 1.2 million labourers on four pounds a year. That is, half the nation’s population lived in abject poverty. And while the division of communal land by enclosure acts, 1550 to 1800, a period of disequilibrium fer sure, dispossessed many people’s livelihoods, paid employment for labourers who shifted from low grade self sufficiency led to slightly better production and consumption. As Scottish and Irish immigrants, as well as English rural populations flocked to the textile districts, Matt Ridley says that they were ‘giving up peasant drudgery for the chance of joining the cash economy, albeit at a low wage and for hard work.’ And gradually, as wages increased, the workers in industry began to be its customers. Joseph Schumpeter observes in ‘Capitalism, Socialism and Democracy,’ (1943.) that: ‘The capitalist achievement does not typically consist of providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort.’
Average income, in the early stages of the Industrial Revolution was already rising, and by 1850 was 50% above its 1750 level. And while, in many parts of the world, muscle power and slave labour were still a way of life, gradually, more and more of the goods people made were made with fossil energy and increasing numbers of people were freed from the tyranny of hard labour.
OLD KING COAL.
While efficiency in the coal industry didn’t contribute significantly at the beginning of the Industrial Revolution, when cotton production was king, it was coal that kept it going, fuelling the so called second revolution of the 1860’s when it might have met the same fate that had earlier overtaken Holland. Some of the British coal fields were close to the surface and close enough to navigable water ways to be cheaply transported.
By 1870 the burning of coal in Britain was generating as many calories as would have been expended by 850 million labourers By 1930, Britain was using 68 times as much coal as it had used fer heating in 1750, and was now making electricity and gas with it as well.Today, the average person on the planet consumes power at the rate of 2,500 watts, or, to put it another way, uses 600 calories per second. More than 80% of that comes from burning fossil fuels, the rest from nuclear and hydro,( renewables are mere asterisks on the chart.) To maintain you in your current lifestyle without fossil fuels, depending where you live, would take the muscle power of between 360 and 660 slaves claims Matt Ridley.
Where do we go from here? Nasim Taleb and Philip Tetlock, in Taleb’s ‘The Black Swan Ch10, ‘The Scandal of Prediction,’ have shown that humans ain’t good at predictin’, but history demonstrates that we are good at inventin’ so future energy problems are likely to be solved in unexpected ways. One thing’s likely, we’ll do better if guvuhmint doesn’t try ter run the show. They ain’t good at it. Look at how they’re trying ter steer the economy into food – water – land – consuming so called ‘green’ renewables. To supply the US with its current power demand would require solar panels the size of Spain, wind farms the size of Kazakhstan or hydro dams with catchments one third larger than all the continents put together. Biofuels production is already taking up roughly 5% of the worlds crop land when we need more food, not less, ter feed growing populations. And ethanol production is a hideously water- consuming process, fer negative greenhouse benefit. Tsk! Keep guvuhmints out of it.
So in the case fer dynamic disequilibrium and economics, let’s take a look at Schumpeter and Keynes.
KEYNES AND SCHUMPETER, STASIS VERSUS CREATIVE DESTRUCTION.
While I was rereading Schumpeter’s famous ‘ Capitalism, Socialism and Democracy,’ I came across a paper by Peter F. Drucker, ( ‘S&K,’1983) comparing the theories of the two most influential economists of the 19th century, John Maynard Keynes and Joseph A. Schumpeter. I found Peter Drucker’s paper so insightful that I’m presenting an over- view largely in his words:
Schumpeter and Keynes, born in the same year, were radically different in their view of economic reality. These differences are highly important to an understanding of today’s economic world.
Keynes, for all that he broke with classical economics operated within its framework. He was a ‘heretic,’ rather than an infidel. Economics for Keynes was the equilibrium economics of Ricardo which dealt with a closed and static system For Keynes the key question was ‘How can one maintain an economy in balance and stasis?’
Keynes saw the main problems of economics as the relationships between the ‘real economy’ of goods and services and the ‘symbol economy’ of money and credit; the relationship between individuals and firms and the ‘macro-economy’ of the nation -state: and finally the question of whether production, ( supply,) or consumption, (demand,) provided the driving force of an economy. Asking the same questions as Ricardo, Keynes audaciously turned the answers upside down. In Keynes’ system, money and credits are ‘ real’ whereas goods and services are dependent on the so called ‘symbol economy.’ The macro-economy, the economy of the nation state is everything with individuals and firms having neither power nor influence to direct the economy or counter its force: economic phenomena, capital formation, productivity and employment are functions of demand.
Peter Druckner observes, that as Schumpeter knew 50 years ago, every one of Keynes’ answers is incorrect or valid only within very narrow margins. Take, for instance, Keynes’ key theorum that monetary events, government deficits, interest rates credit volume and volume of money in circulation – determine demand, and with it, economic conditions. This assumes, as Keynes stressed, that the turn over of money velocity is constant and not able to be changed by individuals or firms, which is shown by Schumpeter to be untrue. Whenever tried, Keynesian economic policies, or Friedman’s version of Keynesian economics, have been defeated by the micro-economy unpredictably, and without warning, changing the turnover velocity almost overnight. Druckner illustrates the point with a Federal Reserve’s recent purposeful attempt to control the economy by controlling the money supply. This was largely defeated by consumers and businesses, optimizing self interest, shifting deposits into money market funds and liquid assets, finding ways to beat the system, like the black market in the Soviet bloc.
For Schumpeter, the basic fallacy was an assumption underlying Keyne’s key question, the assumption that the healthy, the ‘normal economy is an economy in static equilibrium.’ Schumpeter held that a modern economy is always in dynamic disequilibrium. Schumpeter’s economy is not a closed system like Newton’s universe – or Keynes’ ‘macro-economy’. It is forever growing and changing and is biological rather than mechanistic in nature. If Keynes was a ‘heretic,’ says Bruckner, Schumpeter was an ‘infidel.’
WELCOMING TO THE FORUM AN OUTSIDER AND A PARIAH.
Classical economicists and Keynes considered innovation to belongs outside the system of economics like earthquakes, climate or war. Schumpeter insisted that, on the contrary, innovation, entrepreneurship that moves resources from old and obsolete to new and more productive employments, is the very essence of economic development. Schumpter’s view of innovation with his creative destruction is the only theory that explains and legitimises the function of profit in the economy. Profit is no longer surplus value stolen from the workers, on the contrary, it is the only source for workers and of labour income. No one but the innovator makes a genuine profit, and the innovator’s profit is always short lived. Innovation’s creative destruction makes yesterday’s capital equipment and capital investment obsolete. The more an economy progresses, the more capital formation it will need. So profit is the cost of staying in business, the cost of a future in which nothing is predictable except that today’s profitable business will be tomorrow’s white elephant.
As soon as one shifts from the axiom of an unchanging self contained economy to Schumpeter’s dynamic, growing, changing economy, what is called ‘profit’ becomes a moral imperative. A question of whether there is enough profit, capital formation to defray the costs of the future and a question of what is the minimum profit needed to maintain jobs and to create new ones.
Relating to the above is a problem identified by Schumpeter during World War1, with government mobilization of liquid wealth through taxation. In the year just before the end of WW1, Schumpeter published ‘The Tax State,’ arguing that the modern state, through the mechanisms of taxation and borrowing, has acquired the power to shift income, and through ‘transfer payments,’ control the distribution of the national product. To Schumpeter, this power was not Keynes’ magic wand to achieve social justice and economic progress, but an invitation to irresponsibility, because it eliminated all economic safeguards against inflation. In the past, the inability of the state to tax or borrow more than a small proportion of the country’s wealth had made inflation self-limiting, now the only limit against inflation is political self-discipline.
Political self-discipline? Sigh. I don’t think so. Think buying votes, people-pressure on the public purse. When people fail ter recognise they’re killin’ the goose that lays the golden egg, well, like Schumpeter prophesied, inflation could destroy both democracy and the capitalism that through a process of dynamic disequilibrium, raised human standards of living in Western industrialized nations and brought about an end to famine and livin’ on the littoral. Hmm … Jest hope Schumpeter’s not good at predict-shun.
An extract from Sophocles ‘Antigone,’ his tragic and salutary reminder, that humans, while kinda’ wonderful, are fallible. Avoid hubris.
Chorus: Wonders are great on this earth, and the greatest of these
Is man, who rides the ocean and takes his way
Through the deeps, through wind-swept valleys of perilous seas
That surge and sway.
He is master of ageless Earth, to his own will bending
The immortal mother of gods by the sweat of his brow,
As year succeeds to year, with toil unending
Of mule and plough …
Hunting the savage beast from the upland rocks,
Taming the mountain monarch in his lair,
Teaching the wild horse and the roaming ox
His yoke to bear.
The use of language, the wind-swift motion of the brain
He learnt; found out the laws of living together
In cities, building him shelter against the rain
And wintry weather.
There is nothing beyond his power. His subtlety
Meeteth all chance, all danger conquereth,
For every ill he hath found its remedy,
Save only death.
Thank you serfs and good night.