If we are ever going to construct a sustainable economic future, it is essential that people understand the laws of economic exchange. In simple terms; we have to understand that we cannot borrow and spend ourselves to prosperity – that we cannot indefinitely consume more than we produce. People also need to understand the second law of thermodynamics as it pertains to our energy future. Again in simpler terms; we have to understand that, as expensive energy hampers our ability to produce, we will naturally also have to curb our consumption. In short, both the laws of thermodynamics and economic exchange dictate that our rampant Western consumerism will have to be stopped very soon. And if we do not stop it ourselves, these fundamental laws will stop it for us. Unfortunately though, stopping will be a lot harder than it sounds…
The madness of perpetual economic growth
The way in which our economy is structured implicitly assumes a perpetual exponential increase in the production of real goods and services. Even a child can see that this is fundamentally impossible on a finite planet and our present economic system is therefore fundamentally guaranteed to collapse, but this is the system we have and the point we will have to start from.
The way in which this works in practice has been discussed more thoroughly on a previous page, but it basically centers around the concept of debt. People and countries take on increasingly large debt burdens on the foolish assumption that inflation-adjusted salaries and property prices will continue to exponentially increase forever. In reality though, the laws of thermodynamics and economic exchange demand a decrease in salaries and property prices in the West and this will cause millions of deeply indebted people to default on their loans, causing a full collapse of the economic system.
It cannot be disputed that this perpetual economic growth must stop (in fact, it has already stopped many years ago in developed nations), but the best way in which to manage the resulting economic decline is still an open question. The process of deleveraging (paying down debt) always causes an economic slowdown, but the incredible scale at which it has to be done this time can quite easily bring about a new Great Depression. The slowdown therefore has to be managed very carefully. My view on how this might be done will be given on the remainder of this page.
The second law of economic exchange demands that the West now starts to produce a lot more than it consumes and the second law of thermodynamics dictates that production will become increasingly difficult as we run out of cheap fossil fuels. The first fundamental thing that must therefore be accepted is that our standard of living (erroneously measured as the rate at which we can buy useless consumer goods) will drop over the coming decades. Unless some aliens arrive on earth carrying the gift of a magical concentrated energy source with all the power and convenience, but none of the pollution of fossil fuels, this decrease in per-capita consumption in developed nations is 100% guaranteed (and is already happening). Accepting this objective reality must be the first step towards building a sustainable economic system.
Getting hundreds of millions of people who have been totally corrupted by our unthinking culture of consumerism and entitlement to accept this objective reality will be very difficult indeed, but, once this vital mindset is installed, things will become a lot easier simply because we will then be able to realistically increase our production and/or decrease our consumption. Doing this in practice, however, will require some very careful planning.
The fundamental problem is that Western societies are massively indebted and massively dependent on their total welfare states. A sudden decrease in income will therefore be catastrophic as people default on their loans and welfare systems collapse. Unfortunately, the lion’s share of Western economies consists of a massively bloated services sector dedicated to ensuring that consumption of imported goods is as easy as at all possible. The incomes of developed world citizens therefore depend to a very large degree on ever-increasing consumer spending on cheap imports.
That which is needed in Western economies is a great shift in the labor market composition away from useless consumer goods and services towards vitally important goods and services within the green economy. As explained in another page series, massive investment in the green economy is the only way in which we can keep on building wealth while simultaneously keeping the cost of living reasonably low. Luckily, the green economy has the potential to become truly humongous and there will definitely be no shortage of work for everybody.
Even more fortunately, innovation within the green economy is ideally suited to the well-developed infrastructure and highly educated workforces of developed nations, implying that the West is very well equipped for this task. Unfortunately, however, China is currently wiping the floor with the West when it comes to green investments such as renewable energy. This is very sad, very embarrassing and very dangerous all at the same time, but there is a very good reason for this trend…
The simple reason why China is the world’s greatest producer is that the Chinese probably do about twice the work for half the salary compared to an average Westerner. Salaries are the primary tool by which the production/consumption balance can be maintained. When salaries are completely over-blown (such as in the West) it means that people have the financial capacity to consume a lot more than they produce. On the other hand, if salaries are often unethically low (such as in China) it means that people are forced to produce a lot more than they consume. In short therefore, to restore balance, the West will have to be willing to do more work for less pay.
It cannot be disputed that most Western salaries are grossly inflated. And the only reason for that is our massive debt binge over the past three decades or so. As both individuals and governments kept on borrowing like crazy, the amount of money circulating inside the system increased tremendously and salaries kept on increasing with it. However, now that the world is slowly starting to realize that Western nations will never ever be able to pay back their debts, this incredible debt binge is coming to an end and, just like our massive expansion of credit inflated our salaries, the fundamentally enforced impending contraction of credit will deflate them once again.
Indeed, there can be no doubt that the average Western salary will have to decrease relative to the average Chinese salary in order to correct the terribly skewed production/consumption ratio. However, this should be done very carefully so as to avoid a deflationary spiral and another Great Depression. We therefore have the seemingly impossible task of correcting the production/consumption imbalance without significantly lowering median Western salaries. Of course we can just work ourselves into the ground, but that is simply not healthy. We therefore have to consider other, somewhat unconventional options as well…
Yep, you could probably see that coming. As with everything else on this blog, personal lifestyle change on a One in a Billion basis is seen as the one and only viable solution to the plethora of seemingly insurmountable global crises bearing down on us. This time, the individual action is very simple: buy green and buy local.
Every developed world citizen who can afford it (and there are tens of millions who can) has to play his/her part in supporting the restoration of the productive capacity of his/her country. And, as stated before, the green economy is the best vehicle through which to facilitate this absolutely vital restoration. Also note that buying local is a green choice regardless of whether the product is actually green or not. International trade, despite all of its merits, is a massive drain on our dwindling oil reserves and a massive contributor to climate change. Local is good, but green local is divine.
It really is very simple: the more local (green) products are sought, the more local (green) jobs will be created. This will increase local productivity while simultaneously building towards a sustainable future. However, individual initiative is absolutely key here. And the reason for that is (once again) the humungous wealth disparities even within developed nations themselves.
Buying local and buying green quite simply is more expensive than buying totally unsustainable Chinese consumer goods. Ironically, buying local could even occasionally be cheaper over the full life-cycle of the product since local products are highly likely to be much more durable than their Chinese counterparts. But the roaring success of the concept of planned obsolescence just illustrates the blindness of the average consumer to this very important point. The shift towards buying local and buying green will therefore have to start with high net-worth individuals.
Really, if you are in a strong financial position, you have absolutely no excuse for not investing in the renewable energy infrastructure required to become fully energy independent as described earlier. You also have no excuse for buying cheap imported goods just for the sake of saving a few pennies. This is your responsibility and, if you want to continue living within a stable society where your vast wealth actually means something, you had better follow through on this responsibility.
Finally, it is true that government can also facilitate such changes by massively taxing the rich, imposing huge import taxes and directly funding local green companies, but such forced government intervention into the free market will unfortunately kill the economy in record time. But still, some controlled government incentives to buy green and buy local (such as redistributive VAT which makes carbon intensive products more expensive and carbon neutral products cheaper) can definitely help. Unfortunately though, the democratic process is simply far too slow, far too exposed to the ignorance of the average consumer and far too susceptible to manipulation from special interest groups to make this happen in time. This is the whole reason behind this blog: even though many of our problems can theoretically be solved through government decree, it just ain’t gonna happen. Informed individual action (responsible people making responsible free choices) really is our one and only hope.
A future post series will outline many concrete steps for living local and living green, thereby not only ensuring a sustainable future, but also helping to restore the tremendous consumption/production imbalances within and between nations. The importance of making this shift in consumption patterns really cannot be overstated, but actually putting this into practice will require an understanding of the third and final fundamental law in this series. Please proceed to the next page.