Technological interrelatedness

28 01 2011

I recently came across an extract from David Landes on the self perpetuating economic cycle that drove the (first) industrial revolution, which I found so insightful that I felt it was too good to keep to myself:

“In all this diversity of technological improvement, the unity of movement is apparent: change begat change. For one thing, many technical improvements were feasible only after advances in associated fields. The steam engine is a classic example of this technological interrelatedness: it was impossible to produce an effective condensing engine until better methods of metal working could turn out accurate cylinders. For another, the gains in productivity and output of a given innovation inevitably exerted pressure on related industrial operations. The demand for coal pushed mines deeper until water seepage became a serious hazard; the answer was the creation of a more efficient pump, the atmospheric steam engine. A cheap supply of coal proved a godsend for the iron industry, which was stifling for lack of fuel. In the meantime, the invention and diffusion of machinery in the textile manufacture and other industries created a new demand for energy, hence for coal and steam engines; and these engines, and the machines themselves, had a voracious appetite for iron, which called for further coal and power. Steam also made possible the factory city, which used unheard-of quantities of iron (hence coal) in its manystoried mills and its water and sewage systems. At the same time, the processing of the flow of manufactured commodities required great amounts of chemical substances: alkalis, acids, and dyes, many of them consuming mountains of fuel in the making. And all of these products – iron, textiles, chemicals – depended on large-scale movements of goods on land and on sea, from the sources of the raw materials into the factories and out again to near and distant markets. The opportunity thus created and the possibilities of the new technology combined to produce the railroad and steamship, which of course added to the demand for iron and fuel while expanding the market for factory products. And so on, in ever-widening circles. ”

(Landes, 1972, pp.2–3)

I think this account is a fantastic example demonstrating the necessity of considering the dependencies of the economy.

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Is sustainable growth an impossibility?

11 01 2011

Let me open with a small proviso: this post is far more theoretical in nature than the typical fare on this blog, so take as many pinches of salt with it as you wish.  I wrote it some time ago, but am prompted to post it now in response to what I feel is a complementary view on it by Paul Krugman on his blog over at the NY Times.  Whilst I don’t feel the fundamentals of the arguments are similar (they aren’t), I nonetheless feel that we are discussing the same idea: in short, that what people see as economic “growth” is, in my view at least, unnecessarily blinkered, when in reality it is people’s choices of what they value that creates wealth and growth.  Those choices are not pre-decided and can and will be revised as circumstances change.

Is sustainable growth an impossibility?

In short: no it is not.  While sustained growth of a given (real world) variable under certain conditions can certainly be shown to be impossible (or at the best existing only as a limit), the potential for as-yet-unimagined avenues for growth and change mean that growth can theoretically be sustained infinitely.

Example:

Malthus originally published his ideas in Europe at the end of the 18th century, and while his point that population increases in geometric progression (i.e. exponentially) has been borne out, that has yet to produce the implied catastrophe.  Now while the argument can be made that it either a) has occurred (or is occurring) but in non-obvious mean or b) is definitely going to occur, I purport instead that changes in human society which are impossible to predict will avert this outcome.

Fundamentally humankind is a highly adaptable organism, equally we are driven by the profit motive.  As the need for sustaining increasing population (i.e. preventing food riots/famine) outweighs the profit made by not altering the status quo (current cash crop profits, supermarkets forcing low purchase prices via monopsony) then humankind will veer towards alternative solutions, which at that point will be economically sensible and thus worthy of investment.

A second argument is that repeatedly throughout history technologically advancement has significantly changed the face of our civilisation, beyond what could have been imagined in previous generations.  While sci-fi authors of the 50s have accurately imagined some of the developments of the ensuing half-century, I nonetheless feel that people who believe in the “singularity” are validated by the notion that to people of Malthus’ time, we are already in a culture so totally different from their own that it would be impossible for them to imagine it; our “future” being unpredictable and qualitatively different from [their] “today”.  Thus it is impossible to say that growth cannot be sustained indefinitely, only that particular types of growth cannot be.

Humanity has consistently discovered deeper and more underlying fundamentals of the universe (or potential multiverse) in which we inhabit.  The eventual harnessing of those fundamentals generally involves a paradigm shift (an exponential increase) in the energy capacity of our civilisation.

Example: elements, underlying the development of chemistry, allowing for a huge increase in output of energy and economy.  Atomic structure, allowing us access to the strong nuclear force via fission and fusion, both of which pale in comparison to the potential energy output from matter/antimatter collisions.  However even our current understanding of the fundamental forces (which would imply an upper limit on energy production (e.g. harnessing all the energy from all stars in the universe)) may be flawed.  It may be that the creation of parallel universes via big bangs whose entire energy output can be channelled into our own is achievable.  I do not say this because I think it likely, but more to point out that history demonstrates that our understanding of reality, and what is really possible, fundamentally shifts, and with increasing regularity.

Example: if humankind digitises, our capacity for growth would increase exponentially- our requirements for sustenance would no longer be organic and thus the ability of the earth to produce subsistence level food would be irrelevant.  Developments in energy harnessing (fusion, high-efficiency solar conversion etc) would solve the “food” shortage.

The final argument is also technological, however it may not always hold true: historically advances in agriculture have consistently increased the world’s ability to generate subsistence.  It is possible that this may continue, although I would personally argue that the ability of evolution to increase the efficiency with which organisms transfer the sun’s energy into their own (i.e. by which food could be made more efficient to eat, or grazing animals to need less grass to live on) is on a geological scale compared to our own far faster rate of growth.  Thus eventually, unless something along the lines of an energy->matter converter is invented, food itself will eventually run out.

In conclusion- growth is sustainable, as long as our ideas about what needs to grow are flexible.





Debt costs money and the money debt costs, costs more money

20 10 2010

Cllr. Kitkat has written a post on his blog today entitled “Not worth the panic: This deficit is manageable,” in which he argues, in essence, that since on a couple of specific occasions the UK national debt (as % of GDP) was higher than today, that it’s nothing to “panic” over.  Since he prefaces his argument by implying that comparing figures “arbitrarily” can be misleading, I think his choice of example is somewhat ironic: relating our current deficit to that after two world wars isn’t really an appropriate comparison. I certainly agree we shouldn’t panic- but we should be taking action.

His other point is about interest payments- pointing out that the difference is that we have longer repayment terms than say, Spain.  This misses an important point- the longer we take to pay off our debt, the more the cumulative interest is that we will have to pay in addition.  It is misleading to suggest that if we pay our debt off over a longer time that this will cost the same.

To illustrate: currently, as Jason pointed out, the UK national debt is 71% of GDP, that is to say: one trillion pounds, and he quotes interest rates of “between 3% and 4%”.  Calling that 3.5%, we will be paying £35bn in interest this year.  Assuming interest rates stay the same (which I will expand on in my final point), the interest we would pay solely on the interest generated from the previous year would be £1.25bn.  So just because we can pay our debt over a longer period, doesn’t mean we should.

Finally, the entire argument is predicated on “the key issue with debt”- interest rates.  If they stay at their current levels then, ok, we’ll be paying off the equivalent of our education budget in interest each year, but perhaps that’s “manageable” in some people’s opinions (read: not mine).  However this is not a given- the interest rate on our debt has gone down recently as the money markets believe the government is making an effort to reduce the deficit.  Less fervent measures in this regard could cause the interest rate to skyrocket (EDIT: to illustrate: each 0.1% additional rate of interest is £1bn in interest per year, this means that any new bonds issued will be much more expensive for the government.  The government must perforce raise new debt because we are in deficit).  Equally, the current rates of interest on government gilts are being held down by the Bank of England buying them at cost (quantative easing), however this very policy (printing money to pay for debt) will inevitably cause inflation to rise.

The problem with inflation, is that it devalues the value of bonds, people will sell bonds, leading to higher interest rates on bonds and higher debt interest payments. If investors see inflation is getting out of control, people will not want to hold bonds. Foreign investors will sell their securities and this will cause a devaluation in the currency – Tejvan Pettinger

Ironically, Jason’s analogy about starving the family to pay the mortgage (whilst grossly inaccurate as I hope I’ve explained), is nonetheless an appropriate reason to pay the deficit off quickly- I’d rather tighten my belt than lose my home.  Wouldn’t you?

Points for recognising the inverse reference in the title!

[EDIT – For clarification:  inflation causes the future value of bonds to decrease in real terms.  As such, investors do not wish to hold them as they will take a loss.  They sell them.  In response, in order to finance itself, the government must issue new bonds at a higher rate of interest in order to encourage people to buy them.  This then increases the amount the government must pay on these “new” bonds.  Feel free to correct me if this is a misinterpretation].