Turning Point

End of the Growth Paradigm

Robert Ayres

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781134179855
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This text discusses the current basis of economic growth, concluding that it is is failing to deliver, and is actually harming our prospects for future security. Further arguments propose a possible long-term strategy for economic revival - eco-restructuring. This strategy involves a shifting away from production of goods to production of services, closing material cycles and eliminating reliance on non-renewable resources.

Chapter 1
On Possible and Impossible Futures

Introduction to Forecasting

Before plunging headlong into controversy, I want to make some (hopefully) non-controversial remarks about forecasting. It is common for writers who disparage the activity to note that prediction is difficult, ‘especially as concerns the future’.¹ Isaac Asimov’s Foundation novels feature a psychohistorian genius named Hari Seldon, who has developed a probabilistic theory of social systems. An early scene has Seldon demonstrating to a young research assistant that there is a probability of 92.5 per cent that the galactic empire will collapse into anarchy within 500 years (Asimov, 1951). The notion that any such prediction could be made from a set of mathematical symbols has always tickled my funny bone.

Anybody who has wrestled with forecasting models will share my amusement at the naïveté of the notion that future history could ever be reduced to a set of equations. We can take it for granted that 100 per cent accuracy in forecasting is impossible. Nevertheless, some important things can be said. One of them is that not all imaginable futures are possible. Some imaginable futures are simply inconsistent with the laws of nature, as far as we know them. (For instance, most of the gadgets and plots of Star Trek violate several of these laws. Unfortunately, it is not only on TV that impossible futures are taken seriously by some people.)

Of course, some possible futures are far more plausible than others. It is imaginable, but very implausible, that all the nations and peoples of the earth would decide spontaneously to disarm, live in peace with each other, and decide all disputes by referendum and a world court. There are, however, still a great many plausible but different futures. It is impossible to predict which among the many plausible ones will come to pass. On the other hand, it is the legitimate business of forecasting to select the most plausible among them for consideration, particularly as a guide to policy. In this context, there are two very different types of forecast. For symbolic reasons, I will call them ‘alpha’ and ‘omega’.²

The first type is the alpha forecast or contingent extrapolation. It is a description of the situation that will arise if present social or demographic trends, or policies, continue as currently. An important point to note is that not all contingent extrapolations lead to desirable outcomes. Some outcomes are flatly impossible. Thus the contingent extrapolation may point to a need for policy or behavioral change. In such a case, the forecast is intended to be self-denying.

An interesting example comes from the history of technology. In the early 1940s a vice-president of Bell Telephone Laboratories extrapolated the growth of demand for telephone services for several decades. Then he extrapolated the need for automated central telephone exchanges. Finally he calculated the amount of electric power needed to serve those exchanges (at the time, telephone exchanges were based on electromechanical switches). According to the story, he then noticed that demand for electric power for electromechanical telephone switching would exceed the then current forecasts of total demand for electric power for all purposes.

This was a self-denying forecast. The Bell Laboratories man saw that continued growth of the telephone system would require a new kind of switching technology that would use much less electric power than the (then) current technology. As luck would have it, there were some young physicists at Bell Laboratories who thought that a strange phenomenon in certain transition metals and alloys called semi-conductivity might point the way. Their names were William Shockley, John Bardeen and Walter Brattain. They were assigned to work on the project. The end result was the invention of the transistor, surely one of the dozen or so most important inventions since the wheel. Needless to say, demand for telecommunications has multiplied hundreds of times since then, but demand for electric power to run the telephone system is now almost unnoticeable.

The second type of forecast (omega) is an attempt to describe a desirable distant future and, working back, to delineate possible pathways to that future. It is sometimes called a ‘normative’ forecast. Such a forecast also has policy implications. Needless to say, an omega forecast is intended to be self-fulfilling, rather than self-denying. An example might be John Kennedy’s 1962 forecast that an American would land on the moon ‘before the end of the decade’. Kennedy’s forecast was a call to action. It galvanized the Congress to create NASA and to provide the funds needed. The moon landing was achieved, on time, in 1969.

Contingent Trend Extrapolations

With respect to contingent or alpha extrapolations, there is somewhat more to be said. There are three major points:

• 1) in the absence of a specific reason to think otherwise, an historical trend that is well established is much more likely to continue for a while, than not. Hence, trend extrapolations are generally the safest thing for a short-term forecasting practitioner to do.
• 2) Trends do not always continue; sometimes they cannot. Reversals do occur. (Consider the stock market, for instance.) In fact, trend reversals occur fairly often. Moreover, when trend reversals occur, it is often sudden and surprising, even though the reason for the reversal is usually quite obvious in retrospect.
• 3) Trend reversals are usually important events, sometimes worthy of headlines, whereas linear extrapolations are like old news. The real non-trivial task of a would-be forecaster is to identify likely future reversals and their implications. Unfortunately, the timing is always a major problem. Whereas it is very easy to extrapolate a trend – all that is needed is graph paper and a ruler – it is extraordinarily difficult to pinpoint the date of a turnaround. One key reason for this is that the turnaround is usually delayed by institutional inertia. When it finally comes, it is more often than not triggered by a random event. Moreover the turnaround, when it finally occurs, is quite sudden and even catastrophic.

With regard to the issue of timing, consider the ‘oil shock’ of 1973-1974. It occurred because domestic US oil production peaked in 1969-1970 and began to decline. Imports began to rise sharply, and the strategic importance of the Persian Gulf rose in parallel. But these things, in themselves, might not have caused a crisis. The triggering event that brought the Arab world together was the third Arab-Israeli war in 1973, which prompted the Arab oil embargo. The embargo was effective because of the lack of reserve capacity in the US or elsewhere in the world.

How accurately could the timing of the oil shock have been predicted? The best answer to that is that none of the concerned government agencies, major independent forecasting groups, or the oil companies themselves, did foresee it. Only one major oil company, Shell, considered it to be a plausible future scenario in the sense I have used above. Shell, unlike the others, did some strategic contingency planning based on the possibility of something like the events that actually occurred. Shell gained substantially on its competitors thanks to this coup, and now ranks as the world’s most successful oil company. (Curiously, Shell’s systematic use of scenario analysis for strategic planning has spawned several successful consultancies. But no other large firm, to my knowledge, has actually attempted to do the same thing.)

Many past forecasters have identified likely turnarounds, but failed to predict the timing accurately. I doubt that I could do better. A predicted turnaround with a date attached (such as the many predictions of the end of the world or the second coming of Christ) is an almost certain failure. But a linear trend extrapolation that fails to foresee a turnaround is a far greater failure, at least in my view. If a predicted event occurs early or late but somewhere near the predicted time, and for the reasons proposed, the forecast should be graded as a qualified success.

Cycles

Cycles are to be distinguished from discontinuities, but both are important in the forecasting business. A cycle is an oscillatory phenomenon analogous to the pendulum of a clock, the rise and fall of the tides, the waxing and waning of the moon, or the progression of the seasons. In all of these cases, the cyclic motion is driven by gravitational forces (generated by large masses) acting on much smaller masses. Since the masses involved are unchanging, the motion is very predictable. The analogy with economic and other cycles in the social sphere is far from perfect, because the forces involved are much more complex. Nevertheless, some of the economic relationships are orderly enough to produce a quasi-regular behavior. The relationship between retailers’ inventories and orders to manufacturers for re-stocking is the classic example. When inventories are high, orders fall, and vice versa. This is the so-called ‘business cycle’ of four to five years, a well-studied phenomenon in economics.³

Some observers have attempted to explain the so-called Kondratieff inflation/deflation cycle of about 50 years. During the rising part of the cycle, economic activity accelerates and commodity prices rise. During the declining part of the cycle, activity slows and commodity prices fall. The cycle has repeated itself several times since 1780 or so (at least in the UK and the US) and the deflationary period tends to end with a war.

Speculation on this topic peaked a few years ago – as the fiftieth anniversary of the Great Depression of 1932 passed, more or less uneventfully – but has since died down. Other observers have gone so far as to try to explain wars in terms of sunspot or climate cycles. However, while there may be some correlation between general economic conditions and/or general climatic conditions and the probability that a local conflict will become violent, such deterministic schemes have never proved to be accurate guides to the future. Given the complexity and uncertainty of the ex post explanations for most macro-economic phenomena, as well as wars, it is not plausible that they should be related to each other in any simple way.

Having said this, however, I should add that there are nevertheless some good reasons for taking the Kondratieff cycle seriously. It is not that the cycle itself is a reliable basis for forecasting. But the mechanisms that drove the cycle – more or less – are probably still operating. Here I acknowledge the existence of a number of competing theories, none of which has dispatched the others. However, my own view of the Kondratieff cycle emphasizes two key features. One is the fact that from the late eighteenth century on, the cycle closely followed the succession of major energy and power technologies. First came the rise of coal and mobile steam power, which peaked in the mid-nineteenth century. Then came the rise of steam-electric power and hydrocarbon fuel based on internal combustion engines. During this period coal was largely displaced by petroleum. Natural gas, in turn, began to take a large share of the energy market in the middle of this century. Nuclear power, of course, entered the picture in the 1960s. These technological shifts had enormous ramifications throughout the economic system.

The other key feature of the past Kondratieff cycles is that the end of the declining phase and the beginning of the rising phase seems to be characterized by a cluster of technological innovations, whereas the period of peak activity and most rapid growth is also a period of relatively sparse technological innovation. The logical explanation for this may be something along the following lines:⁴ after a period of innovative activity, investment is attracted into speculative ventures and new products. This period corresponds to the bottom of the cycle. As these new products and services begin to develop momentum in the marketplace, they also attract capital into capacity expansion. The period of rapid capacity expansion is a period of strong growth, easy market entry, high employment and gradually rising commodity prices (as shortages develop). This is the rising phase of the Kondratieff cycle.

While capital is being used profitably for capacity expansion, it is less available for riskier long-run ventures, so the rate of innovation slows down. But eventually, markets become saturated, barriers to entry are high, and the dominant firms merge and consolidate to protect their profits by forming oligopolies or cartels. At this stage of the cycle, economic expansion slows down and unemployment rises. The deflationary period begins. But paradoxically, thanks to disinvestment in older sectors, there are funds available for riskier ventures with higher profit potential. The present appears to be such a time. (However, the new ventures being financed currently are mostly old businesses relocating in East Asia). Thus, as the economy slows down, a new period of innovative activity begins, setting the stage for a new period of growth.

Obviously there is nothing predetermined about the rate of adoption of important technological innovations or the size of the markets created thereby. Some products or services can grow more or less indefinitely, through successive generations of improvements, without exhibiting any apparent market saturation effect. The telephone, the automobile and the airplane would be examples, although the automobile market does appear to be saturated in North America and Western Europe. Other new products or processes may penetrate and saturate their markets within a few years. The transistor did that. Still others, such as Bessemer steel or the fax machine, may be overtaken and displaced before ever reaching their full market potential. Still, it is not unreasonable to view the Kondratieff cycle as an average over a fairly large cluster of innovations arriving at different times, being adopted at different rates and spanning territories of different sizes. Yet the sum total of all these wavelets does not necessarily add up to a slowly but steadily rising tide. The tide does rise, but superimposed on it is a big wave with a long wave length and surprisingly regular behavior.

Discontinuities

As a simple analog of a cycle is the swinging of a pendulum, a simple analog of a discontinuity is a collapse or crash of some sort. Human history is full of examples.

Earthquakes can cause enormous destruction. The most famous in Western Europe was the earthquake that destroyed Lisbon in 1755, killing 30,000 people in that city alone. The San Francisco earthquake of 1906 resulted from a major slippage of the San Andreas fault which passes through the city; only about 3000 people were killed, but the earthquake was followed by a fire that destroyed the city completely, causing damage valued at US$400,000,000. Recently, destructive earthquakes have hit both Los Angeles and Kobe, in Japan.

Volcanic eruptions occasionally compete with earthquakes in violence. The Cretan civilization was probably destroyed by an explosive volcanic eruption on the island of Santoro in the Aegean and the tidal waves that followed it. The destruction of Pompeii, near Mount Vesuvius, in AD 79 is an example that happens to have left a record. Floods are also not to be neglected; there are several candidates for Noah’s legendary flood, one being the flooding of the Red Sea due to rising sea levels from the melting of the ice caps somewhere around 6000 BC. Another scenario, that has recently been supported by independent geological evidence, is that the Black Sea formerly occupied a much smaller area but that rising sea levels from the glacial melt-down filled it up to its present contours in the course of a few hundred years, flooding much valuable coastal land in the process. This would have been enough to start several tribes, possibly including the Magyars, off on a search for new lands.

Asteroids and comets also occasionally penetrate the atmosphere and hit the Earth. An extraterrestrial object of some sort entered the Earth’s atmosphere and caused an extremely violent explosion in 1908, in a remote part of Siberia called Tunguska. It left hundreds of square kilometers of forest flattened. The consequences if such an object had hit a major city, or even a heavily populated agricultural area, can only be imagined.⁵

Social catastrophes often have had natural, or partly natural, causes. The Black Death of the fourteenth century is an example of a natural phenomenon with profound social consequences. The population of some parts of Europe was devastated, resulting in labor scarcity, rising wages in towns and more freedom for peasants, at least in the West. The Irish potato blight and famine of the 1840s was accompanied by a typhus epidemic; the population of Ireland was cut in half, while hundreds of thousands of Irish emigrated to the USA and Canada. The 1919 influenza pandemic may have killed as many people as the precedi...

Table of contents

• Cover
• Half Title
• Copyright
• Title
• Contents
• List of Tables, Figures and Boxes
• List of Acronyms and Abbreviations
• Preface
• CHAPTER 1 On Possible and Impossible Futures
• CHAPTER 2 Drivers of Change
• CHAPTER 3 The Coming Economic Crisis of the West
• CHAPTER 4 Wild Cards: Russia, China, India and Islam
• CHAPTER 5 Technology, Progress and Economic Growth
• CHAPTER 6 More on Jobs
• CHAPTER 7 The Growth Illusion
• CHAPTER 8 Equity, Poverty and the Coming Social Crisis
• CHAPTER 9 Economic Growth Versus the Environment
• CHAPTER 10 Eco-Restructuring for Sustainability
• CHAPTER 11 The Government Role
• CHAPTER 12 International Development Issues
• CHAPTER 13 The Economic Growth Paradigm
• CHAPTER 14 The Free Trade Paradigm
• CHAPTER 15 National Debt and National Wealth
• APPENDIX: Monetary Flows and Conservation of Money
• BIBLIOGRAPHY
• INDEX