From Dualism to Triplism: The conflict of Tradition-Patriotism-Globalism

By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group

One of the characteristics of the ancient civilizations is their belief in the duality that underlies the essence of societies’ worldview. Societies, in general, have the fundamental belief in the conflict of good and evil, light and dark, or two eternal discordant forces. Indeed some civilizations had been constantly showing a permanent tendency for embracing dualism and sowed the seeds of dualism while there were such civilizations of Greece, Babel and Egypt revered polytheism and later middle eastern who practiced monotheism and broke away from dualism.

Monotheism had been founded on and the belief in the unique essence of God and spread throughout the world. The triumph of monotheism over dualism significantly shifted the traditional societies’ worldview. The people who had converted to the new belief had nonetheless preserved hidden or open sympathies and respect for their old faith. This enabled them to transmit the remainders of their old beliefs to the collective memory of future generations. Years after this shift, a culture came into being that was no longer tradition, but based on a synthetic patriotic-global-tradition value system. Although this culture discarded the philosophical duality that was the unifying origin of the traditional thought system, it replaced it with triplism. A new complex worldview equipped a primitive people with the means of overpowering an old kingdom, along with its massive social and political infrastructure.
The dualism required a source which could govern and distinguish between good and bad. It needed a purified mandate who could be appropriate authorities for being that source. They were assumed being wise in order to guide their subjects’ life-affairs and setting justice through societies. The simple logic of “suppression of the weak by the strong” had no longer valid.

With the emergence of the Modern Constitutional system and following the globalization, internal and external strife between “patriotism” and “globalization” and “traditions” was finally compelled to face the two diverging paths: on the one hand, it could not easily detach itself from a tradition firmly rooted in the long history of tension within the cultures. On the other hand, it could see the pleasing outlook of the modernity and international markets. The inescapable introduction of globalization with its values to the societies, and its unquestioned ascendancy over the contemporary world, added a complexity to the cultural mixture that threatened the society traditional identity. Subsequently, the pull toward the modernity and all aspects of modern life, in both thought and practice, has become so powerful that the confrontation between tradition and modernity shapes the discourse in developed and developing societies.

The conflict between modernity and tradition has been; and still; is tense at particular historical junctures.  Yet two conflicting political and social tendencies are at work. One is the endeavors in using a rational method suited to the political realities, and the other is the attempt to maintain the traditions for the sake of keep the nation united. It is evident that both of these tendencies display an extreme factional bias dissociated from collective rationality and the interests of people.

Once again, in the downturn of heydays of the late twenty century, this heritage of duplicity undoubtedly underlies the ease with which societies submit to two entirely divergent styles in life, administration, and interaction with one another.  One thoughtful idea will be needed to introduce new lifestyle without or at least less social status competitions; no matter it roots in traditions or modernity.  

Is Wealth worth Money? The problem with theory of Wealth, Value and Money

By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group

 

Before getting through my argument, let me set a line of enquiry for this essay, a question that I was asked a couple of days ago:

“One quests a new or an alternative wealth theory which could explain the value of intangible wealth; such as skill and happiness; since the one reads flaws and shortcomings in the existing theory of wealth which formulated in economics.” 

What is wealth in economic jargon? How can one value the wealth? Is wealth an absolute term or relative? Is wealth identified with its value (I mean if one cannot measure values of wealth by scientific ways, the wealth is not worth!!)?

Introduction

The early theory of wealth emerged in order to answer this question: “What is the source of incomes? How are capital surplus of goods formed? It was not a question about “value”. It was an enquiry to find an absolute and continuous source of income not measuring it. For the sake of saving your precious time, please let me explain this part in brief and in the form of bullets as follows

• In France, Francoise Quesney argued that the source of income and surplus is the sun. He developed the first analytical model about wealth (Tableau Economique). He saw farmers as the transformers of wealth and producers of surplus 
• Adam Smith who went to France to study out there, disagreed with his teachers. He came from industrialized England where labor and capital generated incomes even far above the farmers. Smith proposed that surplus arose from the division of labors, which large-scale manufacturers (capital) allowed. In nutshell, Smith talked about productivity and the role of capital in generating it and how this process led to wealth accumulation
• Marx refined Smith focus on labor to say that labor alone was the source of surplus. However Marx’s initial – not his final – argument was that surplus came from labor and there was a gap between the cost of labor and its productivity. This led to what became known as the "transformation problem”, which locked a century of Marxists into an attempt to reconcile Marx’s arguments with linear algebra. 
• The dominant neoclassical theory argued that was impossible to favor one input over the other: both labor and capital contributed to output, and could be smoothly substituted for each other in what they called a "production function”. The problem for neoclassical model (developed by Robert Solow)was that changes in the amount of labor and capital in Solow’s model accounted for less than 50 per cent of recorded growth: the gap, which became known as "Solow’s Residual”, was attributed to technological change – for which neoclassical economics had no theory.

The above historical event explanation reveals how the main issue, searching for source of wealth, disappeared in modern neoclassical economics as the word 'value' was reduced simply to a question of relative prices. But the new problem arises “how relative prices are set” or “How values measure for different types of wealth which differ in their natures”.

Economists define the term of value as functionality of wealth, and scarcity and durability of wealth; by these two definitions they brush away the question on diversity of wealth and reduce the value of wealth to a measureable scale, price / money. Further, they put market mechanism as the medium for determining relative prices where demand and supply face each other.  

From an economic point of view, the value of intangible wealth; skills, knowledge, happiness; can be measured by; the balance between demand-supply of skills, functionality and applicability of knowledge in the markets, and the price of insurance policies for managing risks and consequently remain happy!!

In this sense, wealth maximization is achievable when goods and resources (they assume unlimited resources!!!) are in the hands of those who value them the most; it means someone values a good more, ONLY if he is both WILLING and ABLE to pay more MONEY (or in the equivalent of money) to have it [Dworkin, R. M.; Is Wealth a Value?].

If you disgust with this viewpoint, you are right. One expects theories answer questions not changing questions to fit answers.

 What Heart-Brain may say

To be blunt, my human nature has not been convinced with the existing economic theory for scaling wealth. The theory is far weak to become an ideal model to describe wealth and consequently lead to a robust value assessment method.

Years back, I tried to build a theory upon the theory had proposed earlier by Robert Ayres. The core of my idea was to put energy as an independent factor of production in the neoclassical production function (in addition to capital, labor and technology) in order to enter the limitations which imposed by the second law of thermodynamics in the production model. My intention was to measure a real value for all the production factors (labor, capital, technology).

Although my idea was not welcomed and received with cold shoulders in the course of reviewing my working paper, I learnt that the real value of wealth could not simply be measured by relative prices. There were a few limitations imposed by the law of nature and social behavior of humans.

My point is that the functionality of wealth may vary in its definition in different societies and over the course of time, though the absolute value of wealth can be measured only based on the limitations that the nature puts forward.

The notion of relative price in economics fails to see the whole picture and misleading. 

Conclusions

Our understanding about “social interactions” has locked into perspectives which proposed by the economic theories. Without a multidisciplinary and holistic approach, we cannot expect to find a better theory to explain some truths about the role of wealth in socio-economic-environmental interactions.

Unfortunately, the main stream economists are reluctant to accept non-economic factors entered in to their models. Perhaps they are afraid of complexity or they love status of quo in markets for the sake of easy short anticipations.       

Wealth and Money: Link and delink

By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group

There is a question that boggles critical minds “Is it possible to model an economic system in which accumulation of wealth is delinked from money? “. Here I attempt to put few ideas on a piece of paper about few difficulties to doing so.

Money, as a measure to scale wealth

The value of wealth can be measured by any scales. At the middle stage of society development, an equivalent weight of gold or silver was corresponded to the value of particular wealth. As society advanced towards more complex form; may be characterized with the wealth expansions and wealth ownerships; the scarcity of gold and silver resources curbed the human trades and exchange of wealth. Human’s invention of money was a response to eliminate that limitation of gold and silver.

In this sense, money is just a scale; like the one for kilogram; to weigh the value of wealth. Furthermore money facilitates trades. Assume one owns five pens and desires to exchange the pens for a pair of shoes. If the shoes owner has zero interest to acquire pens for its shoes, but needs to trade its shoes for another goods, such an exchange of wealth would be extremely a hard task.

Indeed money, as just a scale and media for exchanging wealth, could make trades easier.

In this sense the volume of wealth should be corresponded with the volume of money with a constant coefficient without causing any problem.

Money, as tradable goods

What I mean by “tradable goods” is that is present the demand and supply for just money; independent from the demand for wealth. But the question could be “what makes demand for money varies over time and independent from demand for wealth?”

I shall analyze the above mentioned question based upon three facts,

 

1.       Persons who wish to exchange their wealth may have not enough money to seal their deals on time,

2.       Some types of Wealth can be quickly converted into cash (liquid) while some types take times,  

3.       The value of wealth alters over time and space.

The first bullet refers to the fact that distribution of money IS NOT corresponding with distribution of wealth. Suppose I have a house which is worth for $1000. It does not mean that I can exchange my house with another asset with similar value. So I may apply for a loan or sell my house in lower price, if I am under enormous pressure to acquire the other asset.

The second fact speaks by itself. Demands for goods vary over products and time (Interests and the concept of interest rates). Again if I have an $1000 house worth, and another person holds a piece of gold of $1000 worth, it is hard to say that we can achieve our desired assets (or dream cars) with spending same amount of time and energy.

The third fact tells us, the value of wealth can be altered by any changes in policy, people’s appetites, social institutions and lifestyle. Therefore it would be a hard task to keep the ratio of the wealth volume with the volume of money in a constant figure (Hard to keep the volume of money related to the value of wealth.)

Conclusion     

Alike all human’s inventions, money brings about together misery and peace. The correlation between money and wealth are deniable as markets for exchanging variety of wealth require the existence of a single media for easy exchanges of wealth. It makes a strong correlation between money and wealth.

The unequal distribution of money (it is natural), the wealth values alternation over type, time and space, and the fact of liquidity create demand and eventually markets for money. There is NO-EXIT from the notion of the money market institution. Money markets will continue to stand warm and speculators will; again and again; generate profits and losses. However central bankers will remain busy with turning up and down the machine of money supply to balance; as they claim! I do not know; economic system.

A Mechanical Economic Model; a review on Ray Dalio’s principles

 By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group

Ray Dalio articulates dynamics of economic growth in three principles; perpetual productivity growth, short time business cycle, and long term cycle. In this sense, he portrays the economics as machines, whose elements mechanically respond and interact to / with each other. His principles appear on two videos, which I checked out; they are reachable at http://www.youtube.com/watch?v=PHe0bXAIuk0 and http://www.youtube.com/watch?v=SFaRazMpxcM . The former has been prepared in an educational format with clear explanations and referred by New York Time. The latter presents Ray’s talks in the “Council of the Foreign Relations”, which is hard to stay with since Ray is a businessman, so he hardly puts his ideas in words, the job that professors/teachers do very well. I recommend watching the former video.

 

What I took away from his principles!

Alike economists who practice business, he tries to generalize the replication of some historical events in a single mental model. He develops the mental model to understand interlinks of historical events and in order to predict futures. His model simplifies a complex system which is inherent with social, political and technical elements, while in effect each element by itself is a complex system. From this sense, one should appreciate his efforts because his simplified model is easy to grasp for non-technical people and even technical persons encourage revisiting their views on economic systems.

Ray in his model takes “the existence of a perpetual productivity growth” for granted!!! He assumes a few small independent markets interact with each other at a higher level (aggregated), the level in which governments / central banks influence the trend of the “market interactions”. Furthermore from his point of view, economies experience two cyclic moves; namely short term and long run; which take place due to governments/central banks influences on credit/money markets by imposing fiscal/monetary policies. 

 

In short, he puts up his economic growth model upon these fundamental assumptions and he concludes such ups-downs is a nature of economic system and he predicts more financial crisis /recovery in the years to come.

 Critique of perpetual productivity growth

Advocators of technology growth may praise Ray’s idea. In his talk, like technologists Ray took the “perpetual productivity growth” for granted (Schumpeter, J., The notion of Destructive Innovation). Despite he gives a description at length about the source of business cycles (cyclic moves) before taking them as assumption, in his simplified model he fails to link business cycle with the productivity growth and does not explain “how to sustain productivity growth in long term”.  One with a background in industrial economics may think of “investments in R&D (research and Development)” as the source of productivity growth which has been theoretically proven (Endogenous Growth Theory; Arrows, K.; Uzawa, H.; Romer, R.). But one may fail to see the underlying principle of the endogenous growth theory which is POLICY measures such as subsidy which has financial consequences on country’s balance sheet. In fact there is a threefold reason that “I do not believe to the notion of the perpetual productivity growth”.

First, theoretically it depends on investment which in turn is subject to business cycle (cyclic moves). It means the productivity growth contributes in both causes and effects of business cycle.

So Ray’s straight line for productivity growth should be teeth-shaped or cyclic-waved.

Second, the empirical data from the “DOT COM” era shows the “effectiveness of investment” in R&D is also matter. Even DOT COM market failed to effectively allocate the investment resources to high-tech activities which rely heavily on R&D activities (same is true in pharmaceutical industries.) It partly stems from the phenomenon of “emergence of asset bubble.”

Third, from an energetic analysis perspective (from the book “biofuels an illusion”), productivity cannot infinitely grow at least in a constant pace. Inter and intra human, capital, and energy replacement are constrained with the capacity of system which means a nonlinear productivity growth trend.

Having the above mentioned arguments, I beef with Ray’s idea of perpetual growth (a British expression of disagreement.)

 

Critique of Ray’s notion of money and credit

True. Changes in the volume of credit and money in the market lead to cyclic moves of the economic growth. Also true where Ray said government’s income sourced from taxes and selling governmental bonds and a central banks was independent from government for controlling the value of currency. But Ray’s model falls short to define three important phenomena:

 

·         Government investments; their needs and effects. Think about them in lights of the fact that private businesses are much capable than governments to allocate investment resources effectively by tracking the market forces (please assume for a moment that there is no market failures; in financial downturns, private businesses are reluctant to invest, even price signals tell the private businesses “Go Ahead” WHY?)

·         Whether short business cycle causes a long business cycles or vice versa or there is no fundamental link between two (Ray jumps over this topic)

·         Consumer saving behavior and its effect on the credit and money markets (Ray’s model cannot capture this non-mechanical phenomenon however Ray talks about only borrowing but not saving.)

 With reducing social systems in general and economic systems in particular to the mechanical systems (as economic modelers do, not econometricians) many phenomena are either excluded from models or their causes/effects are not fully captured. Economic models; from simple to complex ones; tend to be calibrated based on a benchmark. In other words, they are forced to look like the true models. These economic models simplify many behavioral or institutional phenomena to single parameters which in reality are nonlinear variables.

Government bonds, for example, and their effects on the central bank’s balance sheet when the bonds are purchased back by the central bank is a delicate institutional variable which is ignored in Ray’s model and many other models. It could explain why government investments are needed and how far these investments can go.

It also explains the phenomenon of money printing (please note that, there are four monies in economies, printing money DOES not mean increasing the money base). Again it is about balance between spending, earning and value of creating outcome.

 In Ray’s model, it seems that the accumulation of short term business cycles leads to the long term cycle. We should take it with the grain of salt. The latter cycle, if I may use Hegel’s dialectic approach, is a synthesized product of lifestyle changes, political & ideological shifts, markets integration, and evolution of inter and intra society’s relations. Doubtless, the long term cycle is indirectly affected by the short business cycle. In my opinion there is no general pattern for long term cycle as our observation through history goes back only 200 years. But I agree with Ray’s model for the short term cycle and its causes by credit expansion / contraction.

Undoubtedly the saving behavior correlates with fiscal and monetary policies. Increasing tax will reduce the saving level as households’ disposable income slashed and price levels shift upward. A downward move for interest rates would cut the desire for short term saving too as yields are not significant in comparison to alternative investments. But the saving behavior strongly links to the societal demography and institutions.  An aging society with well-structured pension funds tends to buy safe government bonds regardless the movement of fiscal or monetary policies. Such a behavior is hard to be abstracted within a parameter as it varies over time and space.

In addition, the long term behavior of saving / investment links to the prospect of inflation trend which is function of many parameters and hardly influenced by short term fiscal and monetary policies. 

 Conclusion       

Ray Dalio’s principles and idea on the economic system provides an abstract, simple, mechanical and illustrative model. The model introduces very fundamental dynamics of the economic system in very simple language. However it falls short to dig out the realities behinds the evolution of the economic system as a mechanical economic model is far weak to capture underlying socio-political forces.

The linear perpetual growth is a notion that being supported with no empirical evidence. 

Printing money is an abstract and vague term. There are at least four types of money, and in the last three decades no hard currency has be printed in excess in the sense of printing paper.

The Ray’s model provides a nice simplified definition for short business cycle. However it looks over the role of saving behavior and institutions in shaping, intensifying the cycle. The model also mechanically and linearly links the long cycle with short business cycle, which is half true.  The long cycle is a complex phenomenon and with a handful historical data, it is hard to offer a generalized model for them.

Conservatism: Role of mental models, a quick look

By: Shahab Sabahi, Policy analyst in Energy Security and Policy Research Group

Conservatism is an ideology which values the status quo and accepts change only reluctantly and at a very slow pace [Adana, J.]. It is based upon the premise that human institutions are the product of a gradual process of experience or intrinsically existed, and that they have endured because they have proven to be effective over a long period of time. It follows that it would be most irresponsible to change these institutions and practices in any fundamental way [West, N.]. From conservatism’s view, it is not realistic to expect that workable new institutions and practices can be introduced to replace existing ones except through a long gradual process of experimentation. To do otherwise is to invite chaos. Where does this idea come from?

To answer the question above, I attempt to examine conservatism based on the human mental idea creation mechanism. People in all human societies create mental models of reality. The mental models attribute causality to factors; sometimes invisible ones; which make the world affairs more predictable and easy to understand. In earlier societies, these invisible forces were spirits and nature; today they are abstraction like scientific theories, socio-economic hypothesis. All world views and beliefs constitute a metal model of reality, in which observable events are attributed to either nonvisible or visible forces. Shared mental models are critical in facilitating large scale collective actions by setting common goals. Shared mental models are bases for social rules and shaping institutions, since the models often suggest clear rules for societies to follow. Oftentimes rules and institutions are enforced in the form of beliefs. They contain with considerable emotional elements and therefore are believed for intrinsic reasons and not simply because they are context related and accurate for just specific times. Intrinsic values are unchallengeable and thus become foundations for other sub-rules and institutions. Rules and institutions with intrinsic values are heritable, so they should be saved generation through generation by right people who understand the intrinsic values. They are always interpreted as effective rules as they continuously set parallel common goals, failure to one give a success for other one.    

All of this reinforces the fundamental conservatism, because with presence of beliefs and emotion, mental models of reality once adopted are hard to change in the light of new evidence that prove they are not working. 

 

 

“There is no way out of crude oil dependency”.

A review on the article :“Does biodiesel demand affect palm oil prices in Thailand?”

By: Shahab Sabahi, Policy analyst in Energy Security and Policy Research Group

In an article in the Journal of Energy for Sustainable Development, 2013; Chongprode Kochaphum et al examine the biodiesel development policy in Thailand. Through a lucid analysis, they caution few socio-economic impacts that the Thai biodiesel development plan would bring about. By employing demand-supply functions and analyzing the datasets of Thailand’s economy over the period 2006 and 2011, even if a short time span, they reveal that potential increases in the palm oil products would burden a net negative impact on the Thailand economy and society. However their findings show a reduction in crude oil import and a rise in farmer’s income as the positive impact of the biodiesel development policy. They, furthermore, highlight the degree to which net negative impacts are exacerbated when the crude oil price and demand for biodiesel increase with carrying out a sensitivity analysis.

The scope of Chongprode Kochaphum et al’s analysis was confined to the Thailand biodiesel domestic market and the import and export and related international trade variables were excluded [The article Page 2; Methodology, Price estimation]. This scope was implicitly disclosed a fact that a partial equilibrium and a static demand-supply analysis was employed by the article. Moreover this scope was formed an assumption which led to unrealistically calculation of average price. 

For the purpose of encouraging and opening fronts for future researches,  I would like to make few remarks on some of the article’s assumptions / views /conclusion statements as follows:

1.       The article introduced a term so-called “currency saving”. It appeared first in the article’s abstract without a definite definition. Readers might confuse the term with “balance of payment savings” which refers to national’s foreign current account. However the article clearly termed “currency saving” as “oil import reduction” [Page 2; Goal and scope of study]. With this definition, my perception from the article’s findings is that  

·         Biodiesel development will replace some “Volume” of the imported crude oil and does not necessarily translate to a “Surplus in balance of payment” by saving the “Monetary Value” of the imported crude oil. The article calculated its so-called “currency saving” with simply multiplying the average diesel price of the domestic  market by the replacement volume of diesel producing by palm oil instead of crude oil. The view failed to consider the facts firstly the Thai government pays “foreign hard currency” NOT “Thai Baht” to acquire “crude oil”  and the and secondly Thailand is a net imported crude oil commodity and the “Thailand balance of payment” whose status show “currency surplus” or “currency deficit” significantly links to the value of Thai Baht-US Dollar exchange rate. Make any judgment about “money currency saving” requires a broader international trade and finance consideration that the article’s scope falls short for taking them into the account. 

·         The value of Thai Baht had been appreciating about 26 percent during the period 2006 to 2011 [the Bank of Thailand statistics]. This development made importing crude oil would be cheaper than producing indigenous fuels production as the domestic business costs soared (Long Range Aggregated Supply LRAS)  and became more expensive, even with the presence of subsidy, to produce biodiesel and even cooking oil [the Bank of Thailand CPI and Total Factor Productivity report]. Indeed the Thailand economic growth and Direct Foreign Investment caused to boost upper the value of the Baht (an analysis on the Long Range Aggregated Supply can reveal the drivers of growth and price shift).  To consider effects of this development an “adjusting prices” mechanism is required. The effects of this development should be implicit in every “calculated average prices”. For the sake of estimating an “adjusted average diesel price” considering this mechanism, my rough calculation shows an “adjusted average diesel price” of between 4 to 7 Baht / liter instead of 16 Baht/liter that the article calculation assumed the latter one. Thus the positive contribution that the article called “currency saving” should be roughly halved (far less than half) than the article’s calculated figure which would shift the net cost-benefit balance in favor of more costs.    

2.       The article found that the price of cooking oil would increase in the Thailand domestic market. Since the article had excluded any impacts from importing cooking oil, they concluded a reduction in the net income of farmer.  If the exclusion assumption would be relaxed, a new conclusion might emerge which would be close to reality. In theory it is arguable. As the article calculated an increase of farmer income and a rise in the cooking oil price in domestic market, there would be a point in the time that imported cooking oil would be cheaper than the domestic one. This would create a dynamic to shift from consuming local cooking oil to imported one. This dynamic would play a trade-off between disposable income- consumption of farmers to a new improved balance status.

Therefore a reduction in net income of farmer may not be a conclusion. It depends on the value of the marginal propensity to consume and other socio-economic factors. The figures in an article “Wealth effects and Consumption in Thailand” in 2011 by Phurichai Rungcharoenkitkul -The Bank of Thailand, support this argument. 

However I would like draw my own conclusion from the article’s analysis:

 “There is no way out of crude oil dependency”.  

True, this is what the article’s findings revealed to me. The article sensitivity analysis has more stories to tell. The sensitivity analysis shows changes in crude oil prices will considerably shift the price of biodiesel which in its own determines that biodiesel production would be economically feasible or not.  Even demand of energy plays its role to make this new creature; biodiesel; being viable in an economy or not.

No matter if a nation is able to produce biodiesel and consequently, likely, cut its crude oil imports, the inconvenience truth is that  movements in crude oil market, determinants of monetary and foreign policies shape the nation’s energy security policy formulation [energy security which is defined “accessible, affordable and sustainable supply of energy”]

As long as this conventional source of “easy” energy is at hand and in part monetary policies pegs to this source of energy, indigenous biodiesel development remains a shadow in the economic system.

Struggle for status: Is it the character of the modern world’s territorial disputes?

By: Shahab Sabahi, policy analyst in Energy Security and Policy Research Group

In most of conflicts and disputes between nations over a specific region, one tries to search causes around the region’s natural resource capacity or its geostrategic advantage. Doubtlessly they could be necessary factors but may not be always sufficient. My argument is that if natural resources or geostrategic is ever the case the dispute could be settled down with a cooperative regime by rationales. However the dispute usually flares up that could end to a conflict. What might be sufficient condition?

By nature human being’s desire is not just limited to material resources but also recognition. By definition recognition is the acknowledgment of another human being’s dignity or otherwise understood to be status and worth. Status is relative rather than absolute, thus struggles for status are zero-sum competitions. In other words, one can have higher status only if everyone else has lower one.   When in a dispute struggle for recognition (e.g. the twenty first century territorial or social class disputes) comes forefront, a cooperative scheme and its recognizable gains, which are positive sum and allow players to enjoy, does not work.

In this situation struggle over relative status is the case in which a gain for one player is necessary a loss for another. It looks like the old game that was the clash of ideologies.

Social logic and status competition

By Shahab Sabahi, Energy and Environment for Development – Policy Research Group

 

Social logic influences humans’ choice for lifestyle. By definition, in society level, people make decisions by using a social logic that is based on norms and the expectations of society. Social logic is enormously swayed by policy choice and the fabrication of the conventional wisdom [The Affluent Society; J.K. Galbraith] which are in the hands of governments, elites or interest groups.

This essay has no intention to elaborate on how rationalists and constructivists see social logic. Rather it argues consequences of using social logic when it manifested in the form of trends, fashions, belief, and particularly in the form of societal status completion. 

For society as a whole, the major benefit of status competition is that continuously raises demands for goods and services. It legitimates the expansion of existing markets and consumption. Furthermore status competition requires the introduction of new goods and services. It, in turn, inspires the supply side of the economy to increase the production and to carry out innovation. Ever-last demand and innovation [creative destructive, J. Schumpeter] are two pillars of a capitalistic economy. Thus, status competition is inevitably essential for perpetuating economic growth.

However there are also disadvantages that arise from status competition, let alone environmental impacts, such as individual’s internal conflict. Status competition may differently affect dominate and subordinate members of society. There is a vast literature on the competition-driven-individual’s stress in the field of biology. Stress, as lab experience reports has testified is a sign that a living object is growing increasingly unfit for the environment in which it lives. A. R. Wallace’s research showed when a living object and its environment are no longer a good match, either should give, and it is always the former.

In long term, the person who exposes to prolonged stress would lose its competition ability. Research shows person who experiences stresses or radical changes has large chance to hold high level of cortisol in its body at the cost of reduction in testosterone. Cortisol is a chemical inside bodies that is released in response to stressful events, while testosterone is essential steroid for boosting competition (research articles in Social psychology field).

According to the above argument, eventually status competition washes away its earlier economic benefits and leaves behind an ineffective consumption-centered society.

Perhaps social logic should influence individual’s decision towards a higher quality, instead of status, competition.   

Capital, Energy and Capitalism

By Shahab Sabahi, Energy and Environment for Development – Policy Research Group

The emergence of capitalism in human history was a natural event and, just like other large scale natural events, it had positive and negative side-effect. How did this evolutionary process set in? How did the discovery of fossil energy amplify this process? What might put the growth of the process in standstill or derail the process’s prevailing trajectory?
Modern society no longer needs human slaves or a social organization based on distinct classes. Investments in useful energy instead of human and land investments has been the key to modern capitalist society. Substituting capital for human activity makes it possible to maintain a certain pattern of growth in modern society, in which only a tiny fraction of human activity is invested in those specialized compartments generating surplus. In modern society, physical capital that powered by fossil energy have taken the place of humans in preindustrial society. Fossil energy provides an extraordinary power level controlled by humans that has dramatically reduced overhead costs of generation.  By continuously accumulating capital, developed societies managed to lift the constraints that previously prevented the decoupling of economic growth from investments of human-energy-centered supply activities.

The continuous increase in capitalization to ease the biophysical limitation never arrived to crash against the existence of an external constraint. By adoption of fossil energy used by the growing capital supported the strategy of continuously lifting internal constraints on the energy input supply [M. Giampietro and K. Mayumi]. The abundant availability and accessibility of fossil energy removed the historical external constraints that is, the impossibility of expanding capital, that used to be colonized land, as much as necessary and permitted humans to control quantities of energy unthinkable in preindustrial times. The move from land-tied energy inputs to fossil energy opened up the era of exploitation of concentrated flows of energy carriers. But, what would be the next possible stage, when there would be no possibility of taking advantage of accumulated capital. History tells, an analogous, all empires initially organized effective and powerful army but reached at a point either internal capability diminished to a point that no longer could handle the empire power level or no more small realms left to conquer. Internal capability of system or external constraints brings the system to a point that no incentive exists for building up or expanding capital. The bottleneck faced to get a larger capability is to guarantee achieving a larger power level. The larger power level leads to the more capital accumulation, and it implies the more quality concentrated energy source should be used.

It was the extraordinary strength of concentrated energy in the form of fossil energy that makes it possible to successfully implement the ideological imperatives of maximization of profit and perpetual growth. The acceptance of this ideology translated into a powerful and simple strategy “survival of the fittest” [A. Lotka].  

Societies that were faster in accumulating capital and securing the flow of energy have won the battle for control over more energy. In fact they could generate more useful work, and approach to higher power level. As a consequence, they were able to use more resources than others. There is nothing fundamentally wrong with this strategy. As a matter of fact it represents exactly the series of event expected in the evolution of living systems.

 Perhaps in future, the story of mutual success for accumulating capital and fossil energy-oriented growth would reach to its end. Though now, voices for the risk of climate change and exploitation of natural resources are widely ignored, a bitter competition on securing the supply of fossil energy is ongoing and it will strain supply-demand balance of these crucial treasures for capitalism. The competition will pose an external constraint for fossil fuel supply (scarcity goes higher), and it will get more hostile when adding the fact that nations are confined in their own ability of diplomacy to get cheap energy.

Governments with Visions in Conflict

By Shahab Sabahi – Energy and Environment for Development – Research Group

One of the principal roles of government is to ensure that long term public goods are not undermined by short term private interests. Governments also desire to protect social justice, and sometimes at least rhetorically ecosystem. Further, governments are bound to the pursuit of economic growth.

To drive the latter task, governments ought to, as the conventional macroeconomic wisdom urges, be so active in championing the pursuit of unbounded consumer freedom, often elevating consumer sovereignty above social goals and actively encouraging the expansion of the market even if it is necessary, in private areas of individuals. Contrary, the first two roles require governments intervene, either implicitly or explicitly, to protect common goods from spread of the market and guarantee the redistribution of wealth.

There is a real sense of policy-goals competition. Under prevailing political economic logic, it is clear that for stabilizing the macroeconomics, economic growth is indispensable. Governments, therefore, are bound to prioritize economic growth, even with compromising other goals.

It means, since the consumption expansion, spending extension, and depleting natural resources assure the social stability, governments never take serious measures to encourage society-wide savings, support small community-based businesses, and never intervene to stop exploitation of natural resources (by the way,  governments love to fund researches on sustainable development).  They simply say “people can spend more, so they would be happy, won’t they?”  

Are you happy?

Labor Productivity: Fear of social instability and the dream of economic growth

By: Shahab Sabahi, Energy and Environment for Development – Research Group

The conventional macroeconomic model implies when demand for goods and services falls, revenues to firms are reduced, leading to job losses and reduced investment. Reduced investment leads to a lower capital stock which, together with a lower labor input, in turn reduces the productive capability of an economy. Public revenues also fall, debt increases and the economic system has a tendency to become unstable. This logic supports the fundamental idea of rising and continuing consumption growth for long term economic stability.  

The model argues that a lasting consumption growth is feasible. It provides a formulation the key relationship between supply and demand. In a simple way, it says, income is calculated as labor input multiplies by the productivity of labor. In this simple formulation the dependency on capital, technological progress, efficiency and resources is all rolled into the factor of labor productivity. Thus labor productivity can be thought of as the average amount of income generated by an hour of labor input. In effect, if the labor input remains constant then growth is determined merely by the increase in the labor productivity. In capitalism, labor productivity is expected to grow over time, as technologies advance. It benefits the supply-side by increasing output and eliminating the need for additional expensive labor input. Furthermore, this increase in income, the model advocator believes, promises society-wide prosperity.  Though in the real world, the evidence tells different story

If labor productivity grows in a larger pace than labor input growth rate (e.g. aging population or purposefully reducing the share of expensive labor input in production), the only way to stabiles economic output, in long term, is by reducing further the labor input that means accepting some underemployment. Not only unemployment leads to low consumption demand which in return undermines the economic system, but it destabilizes the society.  

By persisting only in the idea of improving labor productivity and continuing consumption growth, we just try to mend the economy. Particularly it is the case for developed countries. Mending economy may work for a while but soon or later it will stall. There is no doubt that continuing labor productivity improvement is essential. But the question is about its pace. Its growth rate should be in harmony with labor input growth rate. It is not easy sailing, but few strategies have been adopted by governments; such as work-time sharing which, look promising toward a long term social stability. We should discuss more about this subject before getting fooled by another version of this complex macroeconomic model.