Neoclassical Economics Works!
Just not the way you were taught
After a year of writing and thinking about how our world operates and thinking (falsely) that neoclassical economics is nothing more than religious sect led by priests with false beliefs, I have to repent.
I had to realize that it actually works!
Let's stick to the basics: the law of supply and demand. The market, where the goods on offer meet their customers, strives for a perfect balance between supply and demand — which it finds through the ‘price discovery mechanism’. Should for any reason (external of course) demand outstrip supply then prices would rise, giving an irresistible incentive to innovators waiting for just this moment to unleash their creative potential and flood the market with better and (as a result) cheaper products.
Should anyone view this concept of human ingenuity with doubt, or Heaven forbid dare to think that there might be limits to what is possible, one could easily believe that lacking adequate alternatives prices would rise to levels unaffordable to the vast majority of people and thus demand would be permanently destroyed. What a blasphemy! In such an unlikely case prices would start to fall, this time below what is deemed economic for producers — leading to a fall in production in turn. Should such events repeat several times, it would lead to a lack of investment and a permanent decline in production. Unimaginable!
Folks, let's be honest to ourselves.
If something cannot go on forever, it will stop. Extraction of cheap metals and fossil fuels, among many other things, is a prime example. Since energy is the key in getting both materials and energy itself, it worth starting here. We need energy to power the mining excavators, trucks, smelters, manufacturing (and recycling) plants, ships and trailers.
Take it away, and our magnificent machinery turns into sculpture.
There is an important connection to be made here: energy alone is not enough. We need both a reliable energy source and the material means to continue civilization. Imagine the following situation: you are stuck on a island of barren rock in the middle of the ocean. No grass, no trees, no minerals. Just one single type of rock. The place might bathe in an abundant flow of energy from the Sun, but lacking the material resources to capture it and turn it into useful work leaves you with nothing more than a nice tan.
Lacking energy dense, portable, cheap and most importantly abundant fuels (1) and the easy to reach high grade minerals from which tools (and eventually solar panels and wind turbines) could be made, even the smartest of humans would be prevented to do anything more than to go swimming.
One could say, then we need to import the stuff needed.
The problem is, that we are all stuck on this little dot, called Earth — and we are well into the process of turning it into the barren rock island in our example. This pale blue orb floating in an otherwise endless space has another major problem besides rapidly depleting resources: her climate went haywire. Notice the huge dilemma here: in order to save the planet from a fossil fuel induced overheating, which we absolutely must, we have to burn even more of these fuels to mine, smelt, and produce the ever scarcer and ever lower grade ores of copper, nickel or lithium salts into panels and batteries.
The proposed solutions to our heat trapping gas problem would result in even more heat trapping gases — not to mention destroyed ecosystems.
Were this endeavor possible on the scale needed to replace fossil fuels, it would result in an even more rapid overheating.
On the other hand this transition would offer only a slim hope, that we *somehow* might be able to power our civilization with intermittent electricity, and be able to recycle old equipment while rebuilding an ageing ‘renewable’ infrastructure when it comes due in 20 years or so.
That time however without the use of coal oil and gas. No one has ever demonstrated that such a project is even feasible, let alone that we have enough raw materials to start with. In fact, the contrary has been proven many times before. There are simply neither enough resources nor the technical means to do the change or make it last in any relevant scale to uphold a global civilization as we know it.
Hitting resource limits is painful — and the free market offers no pain relief either. This is nothing new, or groundbreaking. Scientific evidence proving this simple observation was gathered, duly presented, then graciously dismissed by political leaders, and yes the market itself.
While we have spent the past 50 years debating the question whether we should start, then how fast we need to make this transition happen, we have used up the best of our resources: cheap oil, and high grade metallic ores. We were simply too busy turning them into various gadgets now lying around in landfills, floating in the ocean and polluting our rivers and atmosphere.
A fact no one in power took into account.
Quite the contrary: everyone took it for granted that it will always have enough raw materials and energy to go round. Once the energy requirements of mining started to increase faster than production, while our fossil fuel output began to face serious difficulties at the same time however, the only method remained to restore balance between supply and demand was a steep price increase — as proposed by neoclassical economics. This time however with no scalable solution in sight.
It is thus absolutely no wonder, that the price of all forms of fossil fuels went up as a result of their extraction coming ever closer to their ultimate limit. So did the price of so called ‘renewables’ by 30% in response — proving them to be a pie in the sky for the less well-to-do with each day passing.
Viewed from a resource and energy perspective this makes perfect sense. Lock-downs, forcing people to stay at home was a perfectly logical step not only from a healthcare perspective, but from a ‘how to encourage people to use less’ viewpoint as well. The unity of western nations in face of a brutal invasion (right after COVID has ended — which in fact it didn’t) makes even more sense. Distracting folks from the fact that we have entered a game of musical chairs when it comes to resources, made people more forgiving towards high energy prices and inflation.
What does this has to do with the free market? Can it still save us? I hope I’m not disappointing you too much, but the market is not a benevolent force looking for the best interest of the people or the planet for that matter. It’s only a device used by the lucky few to profiteer from the less powerful: the poor, the exploited, the dispossessed. (Feel free to use these terms to people and to Nature alike.)
The free market in this sense is nothing more than pump with a semi-permeable filter: allowing wealth and power to trickle upwards, while leaving nothing more than damage and destruction down below. Being a one-way process however, it inevitably runs into limits then crashes time and time again. After it over-exploits its resources and raises inequality to the sky it crumbles, but as long as there is wealth to be siphoned from below it rebuilds itself and continues where it left off before its latest fall.
The ‘market’ thus, by definition, cannot solve the resource and environmental crisis at hand. It is already long into the process of sucking its pool of resources dry. At first it started to guzzle some air, bloating itself into enormous sizes (debt bubble, inflation anyone?) making very strange and somewhat disturbing noises in the process.
Rational people would hit the kill-switch at this point, but since humans, and especially those in power cushioned by their wealth are no such beings, this happens rarely, if ever.
So the flurry of strange sounds continued and the machine started to turn on itself. Faced with an unresolvable conflict between the fact that it is operating on a finite planet with finite resources embedded into a fragile ecosystem, and its desire to grow unabated, it started to shut off its parts involuntarily and exclude its members from consumption.
Call it ‘price discovery’ or inflation the result is the same: more and more people will find him- or herself unable to pay for fuel, electricity, food and a range of other goods at the same time. Entire subcontinents, home to some 1.6 billion people experience outages and supply shortfalls as a result. Take Pakistan, India and Sri Lanka for example: lacking fuels to power the grid — let alone to build out a brand new ‘renewable’ one. This is going to be an unbearably hot summer for a large population.
Yes, you can blame it on bad policy, currency shortages and so on, but if this pale blue orb were indeed so rich in resources and human ingenuity as it is touted by free market apologists, then this should not be the case. If infinite growth were possible, supplies of coal and oil would kept pace with economic growth or popped up as needed, along with cheap and scalable solar panels and wind turbines. What happened instead, was that the well-to-do part of world scooped up the very much limited supply of both energy resources and drove prices out of reach for the rest of the planet.
The biggest problem is that we have outgrown this planet. We are still growing in numbers and demands. We are not far from having serious issues from not being able to provide enough freshwater and food in the south, and enough heat and electricity on the North.
Our biosphere is dying, yet we can only talk about how do we build more stuff.
Mineral resources will go away much sooner than people expect. Instead of driving this race to the bottom, we could be discussing how to use what is still accessible to humanity wisely. Instead of trying to replace fossil fuel infrastructure (a primary goal in the North) with non-renewable pieces of glass and metal, we could use these devices to prevent people in need from falling from an energy cliff. We could cap and ration our consumption equitably — achieving both climate goals and saving the living world from even more harm at the same time.
We could think of technology as a parachute, rather than a way to perpetuate destruction. This energy transition could be something more than how we maintain this wholly unsustainable lifestyle. It could be about how do we transition away from our polluting, ecosystem wrecking civilization into something radically different, using much less energy and resources.
Unless resource limits from water to oil and minerals are put to the table and discussed honestly however, we can only expect more propaganda that everything will be fine, while war, poverty, climate change and the 6th mass extinction rages on.
The free market seemed to be working only until the pie kept growing and limits where out of sight. In a finite world however we need something different: a constrained market. One designed to handle scarcity without out-pricing billions, and without leaving the consumption of the top 0.1% intact. One, which recognizes planetary limits, and that these limits are going to be tighter with each and every year passing. One, which helps to steer us back from overshoot.
Whether this new market will come by deliberate choice, or will be forced upon us by limits is yet to be seen. Knowing how we have handled the situation so far, I would not hold my breath though.
Until next time,
(1) None of this is true in this combination to the proposed replacements to fossil fuels. Here is my concise summary on the topic.