Cargo Cult Economics

Are we really as enlightened as we think we are?

Has anyone else commented on the fact that the world today looks almost exactly what many people were predicting for Peak Oil ten years ago?

Maybe they weren't wrong, exactly, just early.

Back in 2012, there was a lot of concern from certain fringe quarters that everything was going to come crashing down when conventional oil output passed its peak. Preppers headed out into the countryside like good Christians awaiting the Second Coming. The more sober-headed predicted that it wouldn't be like Cormac McCarthy's The Road or Mad Max movies, but more like a slow grinding down of living standards year after year. Since then, the dire implications and worsening effects of climate change have leapfrogged ahead of even energy concerns.

Supposedly it was all just a false alarm. Everything was fine, we are told, and everyone forgot about it and moved on. It receded into the background and anyone still worried about these issues in 2022 has somehow missed the memo. But consider the world we are living in right now.

High inflation. Soaring energy prices. Unaffordable housing. Stagnant living standards. Empty shelves. Shortages of major goods. Broken supply chains. Protectionism. Disease outbreaks. A war in Europe. Land grabs by nation-states. Political unions breaking apart. Far-right parties in ascendancy. Militias brawling in the streets. Popular anger. A worldwide retreat from secular, liberal democracy, even in developed countries. Military juntas. Political repression. Anti-immigration sentiment. Failed harvests. Droughts. Financial instability. Speculative bubbles. Labor militancy. General strikes. Rising crime. Declining life expectancy. Emerging new diseases. Extreme weather events. Even nuclear war is back on the table.

If you would have asked me my worst-case scenario for civilization back in 2012, it would pretty much be exactly the scenario described above. In other words, what we are experiencing right now.

Recently the United Nations has declared that living standards have fallen for 90 percent of the world for the second year in a row: "The UN's Human Development Index has declined globally for two years in a row for the first time in 32 years amid the combined effects of climate change, the coronavirus pandemic and the war in Ukraine." Meanwhile, hunger gains are on track to be wiped out by 2030 as food insecurity rises.

Of course, there are different ways to interpret this. The standard view is that many of these things have always occurred and we're just heading through a rough patch right now. The combined "black swans" of the pandemic and the war in Ukraine are temporarily causing disruption, the thinking goes, but soon we'll be back on our regular track of everything getting better for everyone in perpetuity. Once again Steven Pinker and Nicolas Kristoff can write their annual triumphalist columns telling us losers to get over our pessimism.

But another way of looking at this is that we are entering a new phase of civilization, and that this is simply the new normal. That humanity has passed its zenith. That we are only at the threshold of a long, slow unwinding of a unique and unrepeatable era. That is, it’s not the end of the beginning, but the beginning of the end.

In this view, the long twentieth century has come to an end. It began around 1870 when living standards started rising in earnest, and ended in 2020 with the pandemic. The indices that optimists like the late Hans Rosling liked to cite have ceased going up, and have in fact been trending downward in the last several years. What strikes me most of all is that, even though there's certainly been economic instability before, the current cost of living crisis is both worldwide and persistent.

Of course, this can only be known in retrospect. It's entirely possible that this is just a hiccup, and that things will return to "normal" in the future. Or that these crises are only blips on the radar, or bumps in the road. But I'm not so sure. This time really does feel different. There's a good case to made that we're entering a new era due to the hard limits of biophysical reality, combined with climate change, combined with overpopulation, just as scientists have been warning about since the Limits to Growth came out in the 1970s and ever since. If that's the case, then conventional economic measures will not save us from our predicament.

Inflation

In this view, the reason why prices are soaring around the world is very simple: it's the stuff, stupid! There is a real world of energy and molecules separate from the world of money and finance, and the real world of energy and molecules is coming apart at the seams because we've fundamentally altered the earth's climate and depleted most of the easiest and most accessible resources in our desire for eternal growth.

Let' take just three somewhat frivolous examples I've run across recently. The first is the shortage of Dijon mustard in France ("Pardon me, would you have any Grey Poupon? But of course not!"). The reason is because it's made with a combination of white wine and ground mustard seeds, and while the French supply the wine, most of the mustard seeds come from Canada where the harvest has failed:

The reason for the mustard shortage lies far away in Canada, a country that provides a whopping 80% of the brown-grain seeds needed for the French industry. A devastating 2021 heat wave in the provinces of Alberta and Saskatchewan, blamed on climate change, halved production and left French companies scrambling to secure seed supplies.

Russia's invasion of Ukraine also plays a role. Though the two countries are big mustard seed producers as well, they mainly grow the much milder, yellow mustard seed, popular in places like Germany and Hungary, but generally not the brown seeds, or "brassica juncea," used in classic Dijon mustard.

In mustard-loving France, a shortage of condiment is nothing to sneeze at (DW)

Meanwhile the reason olive oil prices are rising is because of the failure of the olive harvest in places like Spain, which has also suffered from extreme drought and heat waves:

...devastated by its worst drought ever recorded, Spain's so-called "green gold" is becoming rarer. This year's yield is down by around a third already - and there's still no sign of rain. At the Interóleo factory in Jaén, a province that generates half of all Spanish oil, pumps spurt it into glass and plastic bottles, which pass along the conveyor belt to be labelled "product of Spain".

But the plant, which exports to countries including the UK, is seeing production plummet and prices soar, exacerbating the global food crisis.

"Shoppers are already paying a third higher than last year - but the drought will increase that even more," says Juan Gadeo, the head of the cooperative, who believes this vital sector for Spain is now in danger.

Spain's olive oil producers devastated by worst ever drought (BBC)

And the staple of Korean food, Kimchi, has also fallen victim to poor harvests leading to shortages and rising prices.

Normally, kimchi manufacturers secure necessary food materials before the summer season comes. However, unfavorable weather conditions including a heat wave and heavy rain affected local farms since July and kimchi makers have failed to secure enough supplies of cabbage and radishes. This trend is likely to continue as bad weather conditions have hindered farmers from planting new cabbage from late August to early September.

Kimchi supply hit by cabbage shortage (Korea Times)

Now these are just three somewhat random examples, picked more for their cultural cachet than their economic value. Imagine a world of France without mustard, Spain without olive oil and Korea without Kimchi! But I'm confident if you care to look you can find countless other examples of all sorts of commodities being at least somewhat affected by droughts, storms, floods, fires, hurricanes, heat waves, cold snaps, and everything else that comes with a changing climate. And that's not even taking into account socioeconomic issues like oligopoly and financial speculation.

It's not just crops, though. Droughts and extreme weather even affect electricity generation, leading to higher energy prices. For example, droughts have disrupted hydroelectric power generation around the world: "This year, droughts made more frequent and severe by rising temperatures have caused the biggest drops in hydropower generation recorded for decades."

Can hydropower withstand a future of extreme weather? (DW)

And nuclear energy, supposedly the silver-bullet to fix the energy crisis, is not immune, either:

The two main categories of climate disruptions broke down into thermal disruptions (heat, drought, and wildfire) and storms (including hurricanes, typhoons, lightning, and flooding).

In the case of heat and drought, the main problem is the lack of cool-enough water—or in the case of drought, enough water at all—to cool the reactor. However, there were also a number of outages due to ecological responses to warmer weather; for example, larger than usual jellyfish populations have blocked the intake pipes on some reactors.

Storms and wildfires, on the other hand, caused a range of problems, including structural damage, precautionary preemptive shutdowns, reduced operations, and employee evacuations.

In the timeframe of 2010 to 2019, the leading causes of outages were hurricanes and typhoons in most parts of the world, although heat was still the leading factor in Western Europe (France in particular). While these represented the most frequent causes, the analysis also showed that droughts were the source of the longest disruptions and thus the largest power losses.

Nuclear power’s reliability is dropping as extreme weather increases (Ars Technica)

As our ability to generate electricity drops, it's clear that prices must rise. Since energy is the lifeblood of everything we do, its costs are incorporated into everything leading to generalized inflation.

Then there is the fact that nothing happens without labor, especially in formerly industrial economies now built around services. Labor has been in short supply the last couple of years due to a combination of reduced migration, lower birth rates, retirement of Baby Boomers, and an increased rate of death and disability due to the pandemic (for example, issues such as Long Covid keeping people out of the workforce).

Catering sector struggles to recruit (DW)

For all of recent memory, employers were able to just assume the existence of a large pool of desperate and disposable labor willing to work for whatever paltry wages employers offered because they had no other choice. No more. Now wages are starting to rise, which is a good thing in my opinion after stagnating for literally decades (while the returns to capital continued to increase). Labor militancy is rising, with strikes that were unimaginable just a few years ago (for example, UPS, Amazon and Starbucks). Finally labor is standing up for itself instead of lying prostrate before capital. It was bound to happen sooner or later, and the long-delayed reckoning is finally here. But increased labor costs also contribute to inflation, even if they're long overdue.

Recently, a looming strike of railroad workers would have potentially crippled the transport of goods within the United States, leading to even more empty shelves and spot shortages. The strike was narrowly averted at the eleventh hour, but labor unrest will certainly continue in the near future jeopardizing supply chains and output. Reading the complaints of railroad workers, you can see the effects of four decades of neoliberal policies on workers' basic rights:

Railroad workers will now be able to take unpaid days off for doctor’s appointments without being penalized, and they won’t be penalized if they are hospitalized. Previously, workers would lose points under the attendance systems at BNSF and Union Pacific railways, and they could be disciplined if they lost all their points...

The rail industry has aggressively cut costs everywhere and shifted its operations to rely more on fewer, longer trains that use fewer locomotives and fewer employees. The unions said the remaining workers, particularly engineers and conductors, were on call 24-7 because of jobs cuts and could hardly take any time off under strict attendance rules.

Tentative labor deal averts threat of nationwide rail strike (AP)

In Britain, however, rail workers have indeed gone on strike. Meanwhile in France:

OilPrice.com @OilandEnergy

Diesel and petrol stations in France are running out of fuel, according to an industry union, as a refining strike takes its toll.

oilprice.comGas Stations in France Running On Empty As Strikes Enter Fourth Day | OilPrice.comDiesel and petrol stations in France are running out of fuel, according to an industry union, as a refining strike takes its toll

Abused and maltreated labor pushed to the brink seems endemic in just about every sector of the post-pandemic economy, from elementary school teachers, to health care professionals, to food service workers. Subreddits like antiwork and workreform on Reddit tell daily horror stories of employees being asked to do the work of several people without additional compensation and with inadequate resources and support. Beleaguered workers are resigning left-and-right or “quiet quitting.”

These factors are all global in scope, which is why the inflation rate is rising simultaneously eveywhere in world right now. There is no place that's not affected. In the Eurozone, inflation is expected to be ten percent—the highest ever recorded. In the UK, some are predicting an eye-watering 18-20 percent. In the U.S., people are freaking out over 8-9 percent. Even Japan's famously low inflation rate has ticked up to over 2 percent for the first time in decades. It feels like the entire modern world system is in crisis and falling apart before our very eyes.

What is the response of authorities to this epic crisis of civilization?

Raise interest rates.

That's it. That's all.

Cargo Cults

Hopefully I don't have to convince you that fiddling with an interest rate is not going to make it rain, produce more olive oil or cabbage, cure Covid, end the war in Ukraine, end lockdowns in China, fix the supply chain, lower oil prices, put power plants back online, mend labor relations, or anything else for that matter. You know, all the things that are actually causing inflation worldwide!

That's the core message of this post. Inflation is fundamentally caused by actual real world conditions, and not because of "government money printing" or interest rates or any such nonsense.

The answer proffered by neoliberal economists and politicians seems to me like the modern equivalant of the cargo cults of the South Pacific.

If you're not familiar with cargo cults, they were popularized by Marvin Harris's popular anthropology book, Cows, Pigs, Wars and Witches. Cargo cults were chiliastic religious movements that formed in Melanesia in the aftermath of contact with technologically advanced societies.

They especially took off after the War in the Pacific. Air bases were constructed practically overnight by the Allies to assist with the war effort, and huge amounts of military supplies were airlifted in. Many of these provisions wound up in the hands of the natives who celebrated their windfall. Then it ended as quickly as it began. The cargo planes went home, never to return.

The indigenous peoples knew nothing of the complex global geopolitics that had led to their home temporarily becoming a forward operations base for the world's major industrial powers. They wondered what had happened. To summon back the planes, they cleared landing strips in the jungle and constructed hangars and control towers out of bamboo and thatch. They lit bonfires on the beach. They performed rituals imitating the actions of the soldiers and pilots they had observed in hopes of once again summoning planes filled with cargo from beyond the horizon:

The scene is a jungle airstrip high in the mountain of New Guinea. Nearly are thatched roofed hangars, a radio shack, and a beacon tower made of bamboo. On the ground is an airplane made of sticks and leaves. The airstrip is manned twenty-four hours a day by a group of natives wearing nose ornaments and shell armbands. At night they keep a bonfire going to serve as a beacon. They are expecting the arrival of an important flight: cargo planes filled with canned food, clothing, portable radios, wrist watches, and motorcycles. The planes will be piloted by ancestors who have come back to life.

Why the delay? A man goes inside the radio shack and gives instructions into the tin-can microphone. The message goes out over an antenna constructed of string and vines: "Do you read me? Roger and out." From time to time they watch a jet trail crossing the sky; occasionally they hear the sound of distant motors. The ancestors are overhead! They are looking for them. But the whites in the towns below are also sending messages. The ancestors are confused. They land at the wrong airport.

Waiting for ships or planes to bring dead ancestors and cargo began a long time ago. In the earliest cults the coastal people watched for a big canoe. Later, they watched for sails. In 1919 cult leaders searched the horizon for traces of smoke from steamships. After World War II, ancestors were expected in LST's troop carriers, and Liberator bombers. Now they're coming in "flying houses" that rise higher than airplanes.

Cows, Pigs, Wars, and Witches, pp. 133-134

Another example might be the Ghost Dance of the Plains Indians, which were ceremonies held by various tribes which their prophets claimed would, "reunite the living with spirits of the dead, bring the spirits to fight on their behalf, end American westward expansion, and bring peace, prosperity, and unity to Native American peoples throughout the region." (Wikipedia) When harvests failed in medieval Europe, the resolution was often sought in hunting out witches and putting them to death.

We think of these as particularly amusing examples of the misunderstanding of cause and effect and not perceiving the ultimate causes of things. We laugh at these "primitive" people and their silly, childlike beliefs.

But are we really any different???

Why do we believe manipulating symbolic tokens will end droughts and bring back a stable climate? Or fix supply chain bottlenecks? Or mend the fractious relationship between employers and labor? Or end political infighting? Or break up monopolies? Or end the war in Ukraine which has thrown energy and commodity markets into chaos? Or make oil prices decline and bring hydroelectic power stations back online?

Cost of living: What do Covid, war and drought have to do with my bills? (BBC)

The western United States is the driest it's been in 1,200 years. Europe has been hit by its worst drought in 500 years. The heatwave in China this summer is the most severe ever recorded in the world.

Interest rates are going to fix this?

The only way to fix those things is, you know, to actually fix those things! But that seems to be beyond the capability of modern industrial societies everywhere in the world. The fifty-year neoliberal war on government's ability to tackle problems has taken its toll. Instead, we just fiddle with the money supply and assume that the Invisible Hand will somehow solve all our problems because we’ve seemingly lost the capability to act collectively in any other way.

To me, it looks like the exact same pattern of thinking exhibited by the followers of the cargo cults of the South Pacific, with neoliberal economics as the modern equivalent. We dont understand that dollars are merely symbols representing real resources, and that prices are going up because those resources are simply not there! No amount of symbol manipulation is going grow crops without water or create electricity from nothing.

Instead, the real goal seems to be crippling living standards so that employees can no longer bargain for higher wages and become steadily poorer while high profits are maintained.

We're told, for example, that the reason for inflation is because employees just have it too good. That wages are rising too fast and those rising wages are driving up inflation. Or it was all that pandemic money—a whopping few thousand dollars in total. But that can't be the case. See this:

Inflation Has Outpaced Wage Growth. Now It’s Cutting Into Spending (WSJ):

Spending also rose over the past year, and like with wages, it was outpaced by inflation. Americans are spending more because of high prices, but adjusted for inflation, they are actually consuming less.

Worker pay isn’t keeping up with inflation (Axios):

For all the hype that wage growth has received this year, pay isn’t keeping up with price growth. Real earnings, or wage growth less inflation, turned sharply negative the last two months, after eeking [sic] out gains over the summer, consumer price data out Friday show.

A moment's reflection will show why it's impossible for wage growth to drive inflation that outpaces wage growth. To accept this would be to argue that increasing wages can lead to a decline in living standards—an absurd proposition. That is, people can spend so much that they actually end up consuming less than before in real terms. Ridiculous!

While it's possible that some portion of inflation may be caused by rising wages, clearly excess spending by consumers would not cause suppliers to raise prices so high as to cause people to actually spend less in the aggregate, absent some other factor. Those factors include the stories I documented above.

While MMT gets a bad rap, it is the only major economic theory that actually takes real resources into account while recognizing that money is really an accounting fiction designed to accomplish goals in the real world of stuff. Economists of the MMT school have said that raising interest rates without understanding the root causes of inflation (just like the cargo cultists not understanding the reason why cargo planes land) is likely to inflict harm, and perhaps even more harm than good. You might even need to spend more money, for example, on infrastructure to eliminate supply chain bottlenecks, and reducing employment is not likely to quell labor unrest, especially for employees who haven't seen real wage growth in decades.

For example, Stephanie Kelton has long argued for a more nuanced approach that takes into account the varying sources for inflation and targets specific measures to specific causes, as opposed to the blunt force approach of hiking interest rates, which will make it harder for people and businesses to access credit. If inflation is caused by bad harvests, for example, or rising energy prices, it's hard to see how a constriction of credit can fix this. And rising interest rates lead to higher interest payments which means more income for creditors, which could even potentially exacerbate inflation. As this Reddit comment put it, “while raising rates can slow down inflation, it does so by first increasing inflation via interest payments so much that it creates a recession. It is also not even guaranteed to stop it in a timely fashion. It’s like trying to stop your car by crashing it into a wall that might not even be there; its just a bad idea.”

Instead, enthralled in the grip of Friedmanite monetarism, neoliberal economists see inflation as caused exclusively by "too much money." It's magical thinking on a grand scale.

The Odds of a Bad Outcome are Rising

Mark Blyth has expressed similar doubts on his podcast:

This goes back to the long run discussion we've been having about how we should think about inflation. There's a new Chicago Fed paper that's out which basically says, if you compare Europe and the United States, Europe is entirely food and fuel. Really bad, hot summer, crop failures, effects of Ukraine on basic cereals, gas shortage because of Russia, oil price spike. Very, very hot weather leads to too warm rivers in France so they can't cool the nuclear power plants, so they need to shut them down so there's no electricity, so the price goes up. That's the European story.

And the American story—I used to say this as a joke, that inflation was caused by everyone being on Zoom and looking behind them all at once and saying 'We need to replace that couch.' It turns out it's true! The largest single driver of U.S. inflation from '21 to ‘22 was consumer durables, which were in short supply because of Covid-damaged supply chains.

And why are we raising interest rates? What does interest rates have to do with any of this? This isn't a wage-price spiral. Real wages are down again. But at the same time, [there's that] really big jobs number. So we're raising interest rates to induce a recession and you get the largest monthly jobs gain in, whatever, over a year at least. So it's a very, very weird and mixed period.

The real goal, in my opinion, is to preserve the power of capital vis-a-vis labor by increasing unemployment and inducing recession. Recessions are always good for wealthy, who can buy up assets at fire sale prices. The rest of us, as is always the case under neoliberal capitalism, don't matter in this equation. We are disposable.

Buckle up, America: The Fed plans to sharply boost unemployment (CBS)

Conclusion

Collectively we are just as deluded about the true causes of our prosperity as those South Pacific islanders sitting on the beach waiting for flying houses piloted by their ancestors to come back. Economists, who are the high priests of our modern secular religion, are the equivalent of shell-bedecked natives talking into tin-can receivers attached to vines from their bamboo control towers.

We, as a society, don't understand that what ultimately drives economic growth and higher living standards is energy, and the energy gradient powering industrial civilization has gone into terminal decline. And this has occurred simultaneously with anthropogenic climate change which has brought to an end ten thousand years of climatic stability during which all of human civilization has unfolded. And both of these have occurred alongside the exponential growth of the human population, from under two billion in 1900 to over 8 billion and rising in 2022, leading to massive environmental degradation. Combine that with an economic system that is utterly dependent on perpetual, never-ending growth and you've got a recipe for disaster. Symbol manipulation by technocrats can no more bring back prosperity for the masses than building runways and control towers in the jungle can summon cargo planes.