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.

Friendships – My Christmas Gift

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

You may remember that once asked me; how to communicate with people and make friendship? My partner says. My partner continues “People buy ready-made things in the shops. But since there are no shops where you can buy friends, men no longer have any friends. If you want a friend, tame yourself!” What should I do? I asked.

“You must be very patient. First you will down at a little distance from one who wish to make friendship. One shall watch you out of the corner of one’s eye and you will say nothing. Words are a source of misunderstandings. But every day you can sit a little closer to one. You should come back at same time every day. One shall start feeling happy at an hour before the meeting time. As the time passes, one shall feel happier and happier. At the meeting time one shall become agitated and start worrying. One shall discover the price of happiness. But if you come just at any time, one shall never know when should prepare one’s heart to greet you. One must observe certain rites.”

“Now my partner; do you see the ocean? I do nothing to do with it. The ocean does not remind me of anything. And I find it rather boring. But you have heart the size of the ocean. So it will be marvelous when you tame your mind with the influence of your heart. The ocean, then, will remind me of you and I shall love the sound of the wave in the ocean”

Inspire by my partner and courtesy of Antoine De Saint-Exupery’s book “The little Prince”

Nationalism, nation’s economic life

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

The twenty centuries was marked by the progressive process of the fusion of the nation’s fate with the fate of its globalized economic life; but the tendency of this century amid climate change and resource security is the growing contradiction between the nation and globalized economic life. In developed countries this contradiction has become intolerably acute.

The social tensions in national and regional level, like all the upheavals of history, stirred up various historical questions and in passing give the impulse to national-wide radical changes in the more economically stagnated nations. But these are only the belated echoes of an epoch that had already passed away. With emotional methods societies attempt to solve a problem of progressive historic development, the problem of organizing economic life over the entire arena which had been prepared by the uneven distribution of wealth and power.
Needless to say, the social unrest and regional conflict have not and will not find any solution to this uneven distribution problem. On the contrary, it atomizes the world regions even more. It deepens the interdependence of the developing regions to the developed ones at the same time that it deepens the antagonism between them. It gave the impetus to the independent development of the developing regions and simultaneously sharpened the dependence of the developed regions upon the developing regions’ markets. As the consequence of the ongoing upheavals, all the contradictions of the past are again aggravated.  Developing countries have improved their economies from top to bottom. They might effectively organize productive forces but inevitably it implies the reinvigorating of all those evils that had led to the social unrests in developing countries in the past.

The present crisis, which is synthesized all the capitalist crises of the past, signifies above all the crisis of national economic life in the global sphere. International organizations attempt to ease this contradiction by translating from the language of militarism into the language of diplomatic pacts the task which the war left unsolved in the twenty century. But the perpetual series of political, economic, financial, tariff, and monetary deregulations only unfolded the panorama of the bankruptcy of the prevailing global governance structure for deal with this contradictory.

How may the economic unity of the world be guaranteed, while preserving complete freedom of individual and cultural development to the peoples living there, in the context of scares resources? If an answer to this question may exist, it certainly is not by military and diplomatic methods. Toiling and thinking humanity proves incapable of grasping in time of pride of itself, when emotion blinds its eyes to recognize how to organize productive forces correctly on a community scale.

Negative forces of ultra-competition and victorious bankers

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

The sociology of development literature identifies four phases in the development of the capitalist world system; the mercantile phase in the 16s and 19s, it was the transfer of an economic surplus through looting and plunder, disguised as trade. The characteristic commodities of this period were gold, sugar, spices and slaves. The characteristic institutions were slave plantations and the plunder of central and South American societies. Between 1800 to1950, the colonial period, that witnessed the transfer of an economic surplus from peripheral regions to the center through ‘unequal terms of trade’, by virtue of a colonially-imposed international division of labor. In this harsh perspective, the developed center provided the under-developed periphery with simple manufactures, which were exchanged for food and raw materials, but the colonies had to provide increasing volumes of primary exports to by the same quantity of manufactured imports. The characteristic institutions were east European wheat fields, Brazilian coffee plantations, Argentine beef ranches and Lancashire cottons. The neo-colonial period took place between 1950 to1970 when the transfer of an economic surplus from the periphery to the center through ‘technological rents’. It means that when former colonies were given political independence, they were ‘encouraged’ to retain economic links with their former occupying power, and in some respects these economic linkages were strengthened through aid and assistance packages. The latter occur when first world companies establish plant in third world countries, to utilize their advanced technologies and cheap, unskilled labor, thereby making high profits. The characteristic institutions were ‘tied aid’ and ‘foreign direct investment’ (FDI). The main ideological terrain ranges over modernization theory and dependency theory. The modernized trend is so-called: post-imperialism has set out since 1970 onwards It witnesses the transfer of an economic surplus from the periphery to the center by debt repayments. The characteristic institutions were syndicated sovereign lending and are debt rescheduling packages, with ‘IMF loans’. The main ideological terrain concerns the differing interpretations of globalization.

What about now, the age of free trade and globalization? How does the international socio-economic work? Who are dominant powers? How do dominant powers control the socio-economic system?

The debate has been hot for and against the Marx’s perspective on political economy. Marx believed that ultra-competitive nature of capitalism would tend to depress the levels of profit in the capitalist system. Industrial companies would tend to become dominated by the banks and other financial institutions, which in turn would pour money into the development of new markets and new sources of production overseas, where materials were more abundant, labor cheaper, and demand for basic products potentially infinite. As dependency theory concerns, there are those who have followed Marx to argue that the capitalist powers did more damage in the structure of economy through their dominance of politics and institutions, leaving the structure and ideas that had much more to do with the needs of the powerful banks than with other elements of the . Perhaps one can expect, after the age of classic imperialism (annexation of colonies) and direct rule which turned to be costly, the emergence of powerful banks and financial institutes (in the shape of free trade and capital flow), which is cheaper, and involved domination by unequal exchange.

In short, it sounds, nowadays, that the powerful institutes (e.g. banks) use their control of trade and finance to gain excess from free trade even by manipulating political systems. It may be thought, as some suggests, much more of a political than an economic phenomenon; essentially a political response to disturbances. But I am not convinced by this sort of arguments and sill I believe that this stems from the nature of competition.  

The root of short-termism: implication for institutions

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

If public policy experts are asked to describe the global challenges, they will provide a rich account of most important problems, potential solutions, and typically the institutional constraints to the solutions. What is institution? How do the experts assume the role of institutions in their analysis? In a broad sense, institutions are rules of the social game in which individuals interact with each other and the society as a whole. This definition links institutions closely with the way individuals think. Rules reflect cause-and-effect relationship. But causality is also fundamental organizing principle of individual thinking (Bower and Morrow 1991). The experts tend to recount their professional opinions with narratives that have a causal structure. The causal mental model is thus an individual’s interpretation of the institutional rules that constrain their decisions.

Having the above premise, we can say that the main institutional argument of public policy is that the actions of decision makers are largely determined by a feedback between institutions and the mental models of these decision makers. Nowadays, among the experts, the global consensus favors the efficiency of market economy; therefore this consensus leads to adopting the institutions of the capitalist system. As these institutions have proven their legitimacy for an efficient economic system, in return, their feedback influences the decision makers’ mindset. Accordingly the predominant of institutional order in societies prioritizes short term economics achievement over long term sustainability and system stability. It persuades decision makers to adopt cognitively inharmonious mental models in which economic efficiency achievement values higher than socio-economic harmony for the society.  While thinking that long term concerns should guide the public policy decisions, the mental models of decision makers focus only on economic concerns that, they believe, could destabilize the social system in shorter term. In the end, the short term economic concerns will determine which policies will be implemented. There is no way to get out of the link between mental models and institutions and they together constitute the decision making process.

Cognitive scientists assert that the more the formal institutions dominate the actions of decision makers, the stronger the cognitive dissonance they experience; but the stronger their cognitive dissonance, the more decision makers try to reduce it by adhering to the existing institutional order. They also explain that the individually conceived mental models form the building blocks for determining expert’s socially constructed reality of the issues.

The mental models than can be observed in experts’ narratives are complex causal networks containing both normative and factual statements which are reflected in the institutions and then influence the public policy decisions.