Joe Costello
11/09/08
“The power to become habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions....” -- John Maynard Keynes, “The Economic Consequences of the Peace,” 1920
These thoughts opened the book that first gave Keynes renown. They remain critically relevant. “The Economic Consequences of the Peace” was a devastating and accurate critique of the 1919 Versailles Peace treaty. Keynes showed how the smallness of men, combined with the ignorance of actual underlying economic and political conditions led to an agreement that was punitive and self-defeating. The truly horrendous consequences of the treaty would take two more decades to come to fruition and Europe would be plunged into an even more horrendous and destructive war than the one they hoped not to repeat with Versailles. Just as the Versailles Treaty in 1919 showed the victorious allies to be hubristic and blind to the realities of post-war Europe, thus helping induce a catastrophic result, today every action thus far taken by the United States government in reaction to the “credit crisis” leads only to one conclusion: its leadership is both fatally arrogant and removed from the underlying realities of our time.
Instead of addressing the fundamental problems underlying the American political economy, the US government attempts, in vain, to keep inflated a financial bubble built over a couple decades. Just as Versailles failed to take in the realities of early 20th century Europe, Washington's bail-out of Wall Street and the banking system fails to take in the political and economic realities of early 21st century America. While Versailles was too punitive on defeated Germany, Washington is too conciliatory to Wall Street. Each dollar now spent to keep this unsustainable bubble inflated, drains the resources and saps political will for necessary change. Each dollar spent by the Federal Reserve and the Treasury over the course of the past year institutionalizes the status quo, placing the future in debt to a failed past, insuring our future decline just as the Allies fated Wiemar Germany's.
Keynes stated, “very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century,” this goes double for America today. At the end of World War II, the United States was militarily, politically, and economically preeminent on a historically unprecedented scale. On a material basis, for several generations we created a societal standard of living that was as widely shared and opulent as any civilization in history. Yet, it is not simply the results of a “half century” of industrial capitalism by which America prospered, but a century and half. However in the last two decades, much of the wealth created by America was nothing more than debt, glorified as Croesusian profits in the books of the financial industry. Amazingly, financial profits accounted for 31% of all American profits in 2006, compared to only 8% just four decades before. Increasingly, the United States resembles an old landed aristocratic British family at the turn of the 20th century, keeping up appearances and position only by mortgaging the estate. In the last two decades, this avalanche of debt disguised as paper wealth averted attention from America's very real problems.
Over the last six decades, the American economic experience can be divided relatively neatly into two parts. The first thirty years saw the increasing growth of American manufacturing, strong balance of trade, and the continuation of the United States as the planet's greatest creditor nation. The second half, which we can divide neatly, though not completely accurately with the 1973 Oil Crisis, found the United States with a declining manufacturing base, declining balance of trade, and a shift from the world's greatest creditor to the world's greatest debtor. The oil price spike as demarcation between these two periods is not coincidental. What we deem modern society, what Keynes would call our “nature of economic organization,” was built on our ability to harness the power of fossil fuels. Wealth in the United States was based on unlimited access to cheap oil, this started to change in the 1970s. In 1973 oil prices spiked, inflation grew at historic levels, and much of the post-World War II political economy consensus was challenged. For an American economic infrastructure dependent on cheap oil, it was reckoning time for the established order.
Unfortunately, limited attempts to begin weaning America off oil were soon abandoned. Instead another trend was founded in the late 70s that not only continued but exploded over the next three decades -- the unbridled growth of the financial industry and the corresponding and necessary peddling of debt as wealth. In 1980, Washington deregulated the interest rates banks could charge, a historically important event marking the beginning of the soon to be Neo-Go-Go years for finance. For the next 25 years, the continuous deregulation of the financial industry removed, or better, untethered financial profits from any connection to the real economy. Keven Phillips' essential book on the financialization of the economy, “Bad Money,” points out by 2004-6, financial services represented 20 to 21 percent of gross domestic product, manufacturing just 12 to 13 percent.
In order to grow the financial industry so fantastically, one thing was necessary, debt, and debt became pervasive across the economy. The Financial Times writes, “The aggregate stock of US debt rose from a mere 163 per cent of gross domestic product in 1980 to 346 per cent in 2007. Just two sectors of the economy were responsible for this massive rise in leverage: households, whose indebtedness jumped from 50 per cent of GDP in 1980 to 71 per cent in 2000 and 100 per cent in 2007; and the financial sector, whose indebtedness jumped from just 21 per cent of GDP in 1980 to 83 per cent in 2000 and 116 per cent in 2007.”
The changing of the American economy from production to finance is best represented by General Electric, the storied American company founded by Thomas Edison and responsible for helping build America's 20th century industrial infrastructure. In 2007, GE gained half its profits from GE Capital, their financial arm. The same change in reliance on finance for profit could also be seen with America's largest automobile companies General Motors and Ford.
This transformation of American economy has been accomplished for the benefit of small segments of society, Wall Street and finance. They benefited from the dismantling of the manufacturing base and its transference across the ocean. They benefited from the increased indebtedness of the American citizenry and government. Finally, they benefited outrageously from the great orgiastic last two decades. Regulation from financial activities was removed and leverage was brought to casino-like scales.
The greatest damage has been done to the future. For while America went on binges of conspicuous consumption, paper wealth, and debt, we abandoned changes necessary for the future. In essence, for three decades America lived off the wealth created from the previous half-century and then increasingly, and even more unfortunately, consumed the wealth of the future. The most atrocious aspect of this debt orgy is almost every dollar is owed to the status quo, entrapping the future into the past.
Oil of course is both symbolic and the easiest hard example of America's consumptive debt failure. Since the 1970s and our recognition of oil as a finite global resource, thus neither infinite in supply or permanently cheap, the US has increased oil consumption by 30%, cut public transit budgets, and built ever larger fuel inefficient vehicles. The United States of Debt, the most oil dependent society on the planet, ignored the fact global oil discoveries peaked in the 1960s and have decreased every decade since. From 1980, the planet has consumed more oil every year than it replaces through discoveries, though this wouldn't be alarming for a people encouraged to thrive on debt. However, over the last five years the bill has come due. An increasingly tight global supply of oil caused exponential rising prices, which became instrumental bringing about the crash of America's debt culture. America's debt economy could not run on $4 a gallon gasoline.
Nonetheless, it is not just the financial system, America's entire political economy is broken. The one time vibrant mixture of robust markets and decentralized republican government has atrophied into a centralized behemoth alliance between bureaucratic DC and mega-corporations. Two issues, finance and energy, show this alliance to be completely detrimental, creating a system that rewards, protects, and enhances an unsustainable status quo that profligately profits off debt. In the financial sector, deregulation and continuous consolidation created a massive international Ponzi scheme with the blessings and encouragement of the bipartisan Washington DC establishment. Simultaneously, the oil industry became further entrenched. Oil corporations consolidated, auto-companies and their unions actively fought change, and the DC political establishment codified the the energy status quo.
This was not the work of a couple decades, but the culmination of over a century. Economic activity was increasingly centralized by industrial technologies and institutions, thus helping to politically disenfranchise the citizenry and centralize political power, which was gradually transferred from local government to DC. All this coincided with the abdication of the majority of Americans from civic life and the degradation of the political process, which became predominantly, and in some senses exclusively controlled by moneyed interests and a small professional political class. A centralized corporatist state was created that is in practice neither democratic or free-market, but mouths the principles of both.
Today, we are witnessing a crisis of the status quo. A crisis instigated by a rise in the price of oil and the resulting pop of the massive financial bubble that floated through and above the economy. Tragically, though not surprising, our political and economic agents of inertia responded with the tools of the status quo: further centralization of economic and political power; greater debt; and bubble-headed notions America need only drill for more oil to solve its energy problems. The response to this crisis has done nothing more than further lock in the status quo and, tragically, destroy opportunity for the future.
If for no other reason than our oil problem, though certainly for not that alone, America must change. Change will not come from centralization that begets bureaucracy and inertia. Nor will it come by increasing our already outrageous debt to the status quo. America must go back to some of its founding principles to restore a more democratic-republican political economic architecture, and dethrone the leviathan corporations that now straddle the American economy. America must embrace a reinvigoration of small business, vibrant markets, and distributed democratic political power. Yet, a simple restoration, a renaissance of the principles of the republic's founding is not sufficient. We must also evolve our political economy and institutions with the knowledge of our times.
Five hundred years ago, the Renaissance reintroduced to Europe the ideas, histories, and philosophies of ancient Rome and Greece, renewing interest in democracy, and republican self-government. Subsequently, scientific thought and method was invigorated, redefining humanity's place in the cosmos. Great forces such as gravity were recognized and understood. The earth was removed from the center of the universe and in so doing helped overthrow the great aristocracies of Europe. Over the course of a couple centuries, technology birthed from this great scientific revolution would help break the binds of agrarian servitude. Our modern age came ushered in on the back of science, industry, and self-government.
The gaining of knowledge in the physical sciences was instrumental in both upending the old order and establishing the new. Importantly, the industrial revolution was overwhelmingly based on physics and chemistry, both radically re-shaped human society. Today, we are at the forefront of a new scientific era, a biological one. Our knowledge and understanding of the biological world creates the opportunity to impact human society to a great a degree as physics and chemistry have over the last several centuries.
Just as electricity, the internal combustion engine, and nuclear power made dramatic, and in many ways still little understood changes on human society, so too will our resulting knowledge of biology. Just as we had little understanding of how these past technologies would impact society for better and worse, so too we now stand in a time of change with insufficient understanding. For example, the contemporary environmental movement is based on the understanding people developed on how we as a species were impacting other species and the natural biological systems which we are part. The entirety of environmental knowledge and its impact on how we live is still in its infancy. The ideas and practices from our growing biological understanding will be used to help restore and evolve our political economy in the 21st century. Two ideas are most important; the idea of distributed network order and the essential role feedback plays in these systems.
The idea of distributed network order is as revolutionary as Copernicus' insight that the earth revolves around the sun. Hierarchy has a limited place in biological organisms composed of thousands or trillions of cells, proteins, and DNA, all working and creating order without centralized control. From millions, billions, and trillions of individual parts acting simultaneously and cooperatively, order arises in complex organisms. In his essential new book on the organization of biological systems, “Microcosm: E Coli and the New Science of Life,” author Carl Zimmer exquisitely boils down the concept with, “Robustness (does not) come from some all-knowing consciousness. It emerges from the network itself....robust self-control comes from the feedback loops built into its network.”
This understanding of biological order is a blow to our millenia old thinking of the necessity of centralized order. In fact, we are learning from biology that organic systems would be unable to function if they were predominately centrally controlled. Most interesting and beneficial is that simultaneous and coincidental to our growing knowledge of distributed order, we have already created a rudimentary societal system that operates accordingly – the Internet -- a network of distributed order with no ultimate central hub. Order emerges from the network.
In reforming the American system, the concept and principles of distributed networked power would serve well in both restoring and evolving our political economy. In fact, the fundamental principles of republicanism and democracy share the biological necessities of distributed order and robust feedback loops that create stability. Reinvigorating the principles and practices foundational to the American republic will help move forward the evolution of self-government for the 21st century. Two pillars of the American system are “separation of powers” and “checks and balances,” both based on the idea of distributed power. Of course the elemental component of self-government is the engaged, educated, and active citizen, not centrally controlled but an independent active agent endowed with rights. The fundamental rights of free speech, a free press, freedom to petition and assemble are all viable and important elements to a republican/democratic political feedback loop. Thus we can begin an American reformation by reviving these principles and restoring them to their rightful places in the foundation of our self-government.
It is also clear, more must be done than a simple restoration, we must also evolve our political economy. We can look at three different essential elements of 21st century political economy and see how creating networked distributed order with effective feedback loops will help create the change we are in so desperate need. The three are; energy, government, and corporations.
There is no change more necessary for the United States than moving past its 19th and 20th century dependence on fossil fuels. The rise in the price of oil to almost $150 a barrel severely impacted the American economy, while the continued spewing of fossil fuel emissions into the global environment wreaks greater and greater destruction on the planets biological systems. America must rebuild its energy infrastructure from the ground up, a this task that will overwhelmingly be worked at the local level, with solutions designed to fit the local environment. America's energy infrastructure must be retooled from the ground-up and this starts with demand destruction. The essential questions we must ask ourselves is how do we as individuals, communities, businesses, and government cut the amount of energy we use. As individuals, we must break our auto-centric habits and begin car-pooling, walking, biking and using transit. We must redesign our communities so they are more walkable, bike-able, and friendly to public transit. These are activities that all must be undertaken at the individual and local levels.
Secondly, we must replace fossil fuels with other energy sources. Solar for one will be more useful in distributed as opposed to traditional central generation systems. Our electric system must be completely overhauled and made intelligent, allowing a more efficient use of renewable fuels, distributed as opposed to centralized generation, and intelligence in the system that allows more efficient use of energy in our homes, offices, and public places. Our centralized, information bare, limited feedback electric grid must be transformed into another Internet -- a distributed, intelligent, feedback filled robust network.
In changing the American energy infrastructure we will fundamentally change America's industrial infrastructure, and this is not simply a technological process, it is also a tremendously political one. The Financial Times reports,
“A report by the American Society of Civil Engineers concludes that America's infrastructure overall is close to "failing" and deserves a grade of "D." It estimates that an investment of $1.6 trillion will be needed to bring it up to working order.
According to the report, nearly 30 percent of the nation's 590,750 bridges are "structurally deficient or functionally obsolete" and it will take "$9.4 billion a year for 20 years to eliminate all bridge deficiencies.”
This would be just for maintaining the existing infrastructure, but what we must do is not maintain, but transform the existing infrastructure. America's present infrastructure is not simply technologically entrenched, but just as importantly or maybe more importantly, it is politically entrenched. This technological infrastructure has people, corporations, and governments all with an invested interest in preserving the status quo, and they will work hard to do so. Even more importantly, much of the transformation of American infrastructure will not be wealth creating in our traditional industrial economy accounting. Traditionally, wealth is created by transforming raw natural resource into products, however in the necessary transformation of American infrastructure, we will need in many cases to recycle and transform existing infrastructure. Wealth will not be created so much as transferred, for example, taking 20 commuters out of their cars and placing them on buses or trains.
Next, we must reform the centralized industrial corporation. The centralization of economic and political power from industrialization has been tremendous. The rise of the industrial corporation from its beginning was seen as threat to the distributed power of the republic. Stopping the growth of corporate power was met with limited, though really no success in American history. We must begin a corporate reformation based on distributed power. We can look for guidance to the wisdom of the turn of the 19th and 20th century anti-trust movement, particularly to Supreme Court Justice Louis Brandeis who stated,
“Both liberty and democracy are seriously threatened by the growth of big business. Today the need is not so much for freedom from physical restraint as for freedom from economic oppression. Already the displacement of the small independent businessman by the huge corporation with its myriad of employees, its absentee ownership, and its financier control, presents a grave danger to our democracy. The social loss is great; and there is no economic gain. Political liberty, then, is not enough; it must be attended by economic and industrial liberty.”
Brandeis was of course bringing to the 20th century, Thomas Jefferson's universal understanding that democracy was inherently decentralized. Jefferson understood the self-sufficient yeoman farmer was an essential element to 18th century American self-government. However, the agrarian/merchant republic Jefferson helped found was birthed simultaneously with the industrial era, the two have had a fitful coexistence. Over time, many of the practices and principles of industrialization crushed their democratic counterparts. Most notably the industrial ideas of “economies of scale” and “consolidation” destroyed small economic associations and decentralized power, squashing democracy across the spectrum of our society from production, to finance, to communication. Today, the American economy is more centralized than any time in our history, thus it is also the least democratic. The concepts and practices of “economies of scale” and “consolidation” can only be looked at as unambiguously beneficial when one takes the political out of the economy. However if you looked at economics and politics as intricately entwined, made perfectly clear to even the most near-sighted by our present financial crisis and the swinging wide of our Treasury vaults for Wall Street, “economies of scale” and “consolidation” are undemocratic.
Media consolidation has been destructive for the necessary feedback loops of any healthy democratic system. It has placed the majority of news, and thus political information, the life's blood of any system of self-government, into the control of an ever increasingly small number. Such a concentration is historically anathema to any democratic system. With our growing understanding of biological systems and complexity, this centralization creates instability, as seen in the current financial crisis. It is a tremendously insufficient architecture for vital and necessary feedback.
We must not only open more channels and distribute power in communications, but we must reform control of information itself. Open standards must be built into all our technological and information processes. Our patent and copyright laws are in desperate need of reform. They have been mutilated beyond both recognition and the public good. Once again, one of the principles of the republic's founding, a free and open press, that is the unencumbered distribution of information necessary for self-government, must be revived, strengthened, and evolved in all aspects of our political economy.
With any reform of self-government, corporate reform must go hand in hand. We can start with Jefferson's simple principle of the necessity of decentralization, brought forward by Brandeis, combined with our new knowledge of complexity and feedback. “Break Them Up” can be the foundational rallying cry for all corporate reform -- “Too big to fail” must become “Too big to exist.”
Finally, we must reform our government structures. America must begin distributing power out of Washington DC. The wildest Federalist's dream could never have imagined the concentration of power in today's Washington DC. Inside DC, we watch an executive branch descending into ever greater power grabs and increasingly attempting to place itself beyond the rule of law. Historically, no republic ever collapses into chaos, it is overthrown by a strongman with the compliant apathy of an effete disenfranchised citizenry.
The United States government must begin to evolve from an hierarchical representative architecture to a more distributed network, directly democratic system. Fortunately for the United States, this system is already in place. The United States from its founding was in many ways a distributed system. The checks and balances and separation of powers weren't simply inside the Federal government between the executive, legislative, and judicial branches, but also between federal, state, local governments, and finally and most importantly the citizen.
The local and county governments of America exist and are functional, but they have become increasingly powerless. Reforming America self-government means bringing power to these institutions, then evolving them by connecting them through a distributed network architecture. There's no reason for local governments to go to state capitals or DC to work amongst themselves, or plead for resources taken from them. They are the established nodes of what can become a very robust distributed network. What needs to be created are the connections. With these connections, local governments can pass information, work together on economic development, transform our energy infrastructure, and more effectively manage local and regional environments.
Bringing power to local governments will also help make government power more accessible to the citizen. The elemental force underneath all healthy system's of self-government are the citizens themselves. The last half of the 20th century has seen an almost complete disenfranchisement of the citizenry from both politics and government. The centralization of political economy has been at expense of the citizen. Any reform must create greater roles for the citizenry in both politics and government. America's citizenry is going to have reengage in a restored and evolved democratic politics and republican government.
Of course, there is a giant paradox in this idea of the renewal of the local, which is, it must be accomplished in many ways with Washington DC actively removing power from itself and empowering city and county governments. Such voluntary abdication of power has limited historical precedent, the most recent having been Mikhail Gorbachev's Moscow. Nonetheless, if America is to restore its republic, we will need to see the equivalent of an anti-president and anti-congress, this will not come about without plenty of pressure from the bottom.
So, if we look at our present financial crisis, as simply or even predominately as a financial problem, we are missing the greater underlying forces. Yet to this date, we see an inability to confront any of these issues. Instead, we see a literally mad attempt to protect our habituated status quo. Instead of facing up to our now decades long drift into delusion that debt is wealth, every dollar we now spend assures an even deeper hole from which we will have to climb. Just as the Allies sought in the name of peace to cripple Germany, thus creating future war, our political and economic leadership in the name of financial well being, cripples the future, fating us to insolvency.
The challenge America faces is substantial. Our political economy is built on a sandy and false foundation reaching back not simply a half century, but over a century and half. The notion of unlimited production and unlimited consumption based on infinite resources, the foundation of industrial economics, crumbles as the oil fields upon which it rests decline. With this crumbling comes the collapse of many of the concepts and principles of the industrial era, leading to increasing societal volatility. We must reach into history for roots that are much deeper than industrial society to help provide stability, and combine it with our present knowledge of natural systems to help foster future healthy growth.
At its simplest and sublimest, civilization can be defined as humanity's ability to incorporate the past and plan for the future. This isn't something that can be measured on a quarterly basis, in fact any society that tries to measure success on such a time frame can rightly be considered uncivilized. The changes laid out here will take years and generations. Once again I'll turn to Mr. Keynes, one of the finest minds of the 20th century, and borrow his conclusion, “The true voice of the new generation has not yet spoken, and silent opinion is not yet formed. To the formation of the general opinion of the future I dedicate this (essay).”
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