Dialogues : How to meet our common future?

Tulasi Tawari shared a very stimulating article conceptualizing a framework on “creation of wealth” and “transfer of wealth”. To see the article (click here) or open attachment. Since it has implications for pressing national & international issues and crises, it requires wider reading and discussion. I share my response below. Both Tulasi and I would like to have contributions from everyone.

six_roles—six_types_of_economies.docx

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Studying your article let loose the demons I pretend don’t exist or are fenced in until such time one has found ways of dealing with them. Number of people in different walks of life, albeit still a small minority, are finding ways of solving problems facing us in areas they have chosen to prioritise. Thus we have tireless and innovative activists in Climate change mitigation, habitat conservation, food security, protecting natural resources as commons, health care, renewable energy, organic farming, common education system, universal access to opportunities, good governance, anti-corruption crusaders, human rights defenders,  green technologies, entrepreneurship development, community’s capacity building, and so on. All of them prescient in their fields in sensing dangers, advocating change, and offering solutions to redress them. Yet, together there is no overall vision of how the new world will look like and how it will influence individual’s life, which is mostly benchmarked on “standard of living” in USA that serves as a role model to exceedingly large number of ‘educated’ people around the world. The grave danger of current exponential growth model breaking down at the boundaries imposed by finite world is sensed instinctively by many, but no one knows when. Possibility that it may happen in next few decades builds enough panic to trigger knee-jerk reactions. But absence of an alternative, persuasive, & workable model may be the greatest impediment to move our collective mode of existence on a sustainable path by having majority of world constituency to own it. Is such model feasible a priori? It is also possible that such model will result out of collective actions in different fields, and fragmented as these may look now, they alone will ultimately but slowly result in a coherent vision of whole. But I sense that we may not have the luxury of time then to do the course correction.

By your entry statement “The purpose of money is to measure value-addition in any business activity”, I understand that Money is a medium of exchange of goods & services, and quantum of money at any given moment ideally should equal the quantum of goods and services produced in the economy. Therefore it follows that incremental money supply should correspond to incremental rise in goods and services produced. If this statement of yours is treated as an axiom, then you have brilliantly pinpointed the six roles played by Humans as Homo-Economictus. When I joined industry as a young Management graduate, I found it baffling that Lawyers, CAs and MBAs commanded so much premium in almost all organizations when compared to Product and process Designers, R & D engineers, Fire & Hazard engineers, or in those times almost non-existent Environmental engineers. But then it became clear that former breed is capable of saving or earning literally tens of millions of rupees for their ever greedy employers through sleight of hand by taking advantage of legal loopholes or by changing depreciation methods or treating capital account expenses as revenue expenditure. In India literally hundreds of thousands of litres of coconut oil (leader Parachute brand) is sold annually to women for making their hair long, bouncy and lustrous, successfully promoted by lovely models floating and tossing around their gorgeous hair. Yet, one will never hear the word “Hair Oil” uttered once – it is always the magic of ‘pure coconut oil’. Why? Simply to avoid payment of excise duty that is levied only on hair oils. So all those roles of speculators, manipulators, parasites that you have cited have been very much alive and kicking side by side with what you describe as true value creators. But there are considerations that to my mind force us out of the framework you have enunciated. Ideally, the lessons that your framework forces upon us should have been learnt and followed some 50 years back. Had that happened universally, world economy would have been materially smaller, but sustainable, equitable, and more life-friendly. The 50 years of profligacy in developed countries has destroyed any cushion or buffer that would have been available otherwise.  I now broach those “cushion destroyers” below.

I start with a fundamental problem you yourself have identified : “Manipulation of Money Can Destroy a Nation or Society”. What both Stamp and Douglas talk about is in whom is the power to create money vested? It is the banking system or more specifically the central banks that are held squarely guilty of letting their security printing presses amok and of creating paper money out of nowhere save except the paper & ink. This happened especially rapidly during the last two decades.  A corollary to that power is the ‘ability’ of money to earn more money or interest. If that ability is destroyed while leaving power to create money intact, even then banking collapses because the opportunities for spread arbitrage between interest paid on deposits and interest earned on lending vanish. Without this magic of “money making more money” nobody will be willing to trade goods or services for money. Even the surplus earned by any factor of production loses the attraction of parking it in money. One sees this happen regularly in hyperinflation scenarios, when people de facto return to gold standard (abolished by Nixon in USA sometime towards 1971, and eagerly followed by rest) by investing in gold. Gold is virtually indestructible and sufficiently rare to have kept production of paper money in check until latter was de linked with former. Capitalism is foundationally a monetised system, and so long as capital’s claim on interest remains untouched it has to be expansionary in nature even if quantum of goods and services produced remains constant. Shark has to move constantly to be able to breathe & therefore live; and capitalism has to grow constantly to be able to service interest and therefore to survive. In Chris Martenson’s (http://www.chrismartenson.com/crashcourse) words capitalism is predicated upon ‘Future is always larger than Present’. Question is if monetising of debt or in other words its claim on future labour is abolished, then what mechanisms could replace exchanges of goods and services?

A notion I almost find intractable to define is intrinsic “Value” of anything.  Value is often interchangeably used with “Price” and confused with it. They are as separate as Mass is distinct from Weight in physics. What turns Mass into Weight is the force of gravity, which is dependent upon the size of the body most proximate. Similarly Value is converted into Price based on type & strength of the frame of reference of evaluator. It is also necessary to differentiate between different categories of values : Survival Value (air, water, food, clothing, shelter, sex, informal education, healthcare), Convenience value (formal education, transport, home appliances, or labour saving devices in general), fraternising value (family, community, freedom), recreation value (sports, music, dance, paining,) exchange value (liquidity, durability, desirability), control value (power over resources, weapons, institutions), and snob value (Art, rare historical objects). These categories are neither immutable nor exclusive, and someone may find another way of classifying them. What is important here is that by categorising value we realise its appeal may vary from persons to persons depending upon their economic, political, or spiritual circumstances. Monetising has collapsed these distinctions into the singularity of “price exchange” based on “free market” mediated “supply-demand” matrix. Neither are the markets free nor do demand or supply reflect actual needs or capabilities. At best what we have are their managed variants. For example, demand for education in India is huge in view of sizeable number of illiterate people, but it is artificially deflated because of more basic survival needs interfering with formal education and low standard used for defining what constitutes literacy. Additionally, people lament about the poor “quality” of educators and education in our country, but rarely seeing beyond the obvious. The quality is poor because the criteria of what constitutes education have been set ridiculously narrowly and lowly. Once that has gained currency, anyone who may deliver the “load” through rote to unsuspecting children qualifies as a teacher. By reducing the “quality of education demand”, one has devalued “supply of educator” to a level where their salaries are priced ridiculously low. Consequently, one finds quality of people attracted to teaching jobs unacceptable. Examples of Supply side manipulation to keep prices artificially high are evident through many cartels operating in various commodities and products markets. Assessing “Value” thus through the “price it finds” is indeed an abomination that needs to be rejected outright for two reasons. First, it debases “Value”. Secondly, it distorts “Priorities”. So what better mechanisms can one have to establish the true value of things based on sustainability, inclusiveness, and greatest common good?

The “pyramid & inverted pyramid” scheme of few people controlling and consuming maximum resources has now run into the wall of declining and ageing populations in developed countries alongside the profligacy in spending beyond one’s means especially in US. For historical reasons US currency came to be accepted as global reserve currency in the aftermath of WW-II. Most trade (including most important of all – Oil) is carried out in dollars. Therefore, dollars are where realizations from sale of goods & services get mostly parked – i.e. in US Banks. So, US always has “money”, though not earned by her, to spend.  This has removed the final constraint on Federal Reserve in creating dollars out of thin air as there is no fear of turning dollars worthless because rest of the world, especially China & Japan, continue to build “dollar reserves” (well, it has worked till now. Magnitude 9.0 temblor, tsunami, and nuclear crisis may suddenly change everything for Japan). Quantitative easing I & II put simply mean that just let the US mint run unchecked 24×7. Since Chris Martenson (http://www.chrismartenson.com/) has discussed this issue so admirably, it need not hold us here. But what needs elaboration is that era of cheap energy, particularly fossil fuel oil that has enabled developed countries to enjoy “standard of living” on a scale unprecedented in human history, has ended. US consumes some 20 million barrels per day or roughly 68 barrels/day/1000 persons (all 2007 figures). Even if we peg that demand for whole world to say 29 barrels/day/1000 persons that Italy consumes, it would still mean we need to find 203 million barrels per day for everyone to enjoy “standard of living” like developed countries. International Energy Agency has acknowledged last year that conventional peak oil at roughly 80 million barrels per day is already behind us. Even with unconventional oil (tar sands, coal to liquid fuels) and natural gas liquids added we are unlikely to go beyond 95 million barrels per day until 2035.

 

 

 

 

 

 

 

 

Source : IEA (http://www.energybulletin.net/stories/2010-11-11/iea-acknowledges-peak-oil)

So where is additional oil going to come from? Even if energy substitution with nuclear (of highly questionable nature), solar thermal/ photovoltaic, or wind energy is made possible; these could never replace the versatility of oil that gave us chemicals, fertilizers, plastics, bitumen. Even if innovation in technology brings about efficiencies and reduced wastages; it is no substitute for energy source. Same logic applies to almost all the natural resources from iron/ copper/ bauxite/ manganese/ rare earth ores, to potash/ sulphur/ rock phosphate, to even such a basic thing as fresh water. The rich in content and easy to access resources – the so called low lying fruits – are long over or fast getting there. What resources remain are either poor grade and difficult to extract or would require sacrificing whatever perennial forests, and vital but fragile eco-systems that are still left. So while supply is tightening, the demand is hardening fuelled by consumption in “emerging economies”. That is one reason why commodities are sky rocketing. Somewhere, something, is going to collapse, and that would imply re-emergence of crisis of confidence very quickly on the back of one triggered by Wall Street that followed Dot.Com bubble, which in turn followed “savings & loans” crisis of eighties. Quickened pace of lurching from one crisis to another, and the cheap money policy adopted by Federal Reserve to cure it are together going to bust dollar sooner than later. That means future will have to be smaller than the present requiring paradigm shift in all human endeavours, but more importantly in agriculture and logistics.  The “global village” is going to expand into “remote continents”. That would mandate making supply chains short rather than long, growing and consuming locally, and reducing complexity in logistics. It won’t be feasible to move food or feed or chemical fertilizers over long distances. It would mark death of energy and input intensive “modern farming”. In most of Asia and Africa, organic agriculture would have to move from the world of fashion to mainstream.

Lastly, all natural systems are cyclical & recursive (feedback) in nature and call for delicate balance, regeneration, and interdependence. Linear model of economy that we have been pursuing is open ended & extractive. It has gone on like this for too long. Nature probably has no more capacity left to accept and digest any more anthropomorphic insults. Exponential growth cannot happen in a finite world. Some worry that we are probably past the course correction point. There is a business model that allows one to raise capital for use today by discounting all future cash flows to net present value or what is also called reverse mortgaging. It appears to me that we may have already reverse mortgaged the future of all generations to come. But that doesn’t mean we do nothing. In fact we need to act now and in a concerted fashion. Question is how?

O O O O O O O O O O O

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