Economics: The Sound of Aunt Edna’s Knitting

If the economic landscape beyond Hubbert’s peak proves to be the sort of rough terrain outlined in my last two Archdruid Report posts, how can individuals, families, and communities deal with it? On the large scale, opportunities for action are limited at best, not least because the noise of volatility can too easily hide the signal of decline. Just as recent plunges in the price of oil and natural gas have encouraged the delusion that we no longer have to worry about energy, the upside of the post-peak economy – the fortunes made, the speculative gambles that pay off, the boomtimes when demand destruction crashes energy prices and all seems right with the world – will make it easy for people to convince themselves that industrial society is still on track.

It’s easy to understand this sort of thinking, since the alternative is to accept the unacceptable: to admit that the industrial age is ending, and the luxuries, conveniences, and standard of living that define ordinary lifestyles in the modern world are going away, not just for a little while, but forever. That the unacceptable is also inevitable makes it no easier to cope with. Still, accepting the unacceptable is the crucial step in dealing with the economic impact of peak oil. Every assumption about the future has to be reassessed in the light of a contracting economy in which money and other forms of abstract wealth no longer guarantee access to goods and services.

Not that long ago in historical terms, it's worth recalling, money actually played a fairly small role in the overall economic picture. Until well after 1700, more than half of all goods and services in the western world were produced and consumed in household and community economies, and exchanged in customary networks governed by obligation and reciprocity, not supply and demand. Most households produced the great majority of their own food, clothing, and other necessities, and used surpluses to barter for specialty goods with other local producers. Cash served as a means of exchange for things produced so far away that transport costs and spoilage made barter unworkable. It took cheap, abundant fossil fuel energy to make transportation so cheap that centralized production and distribution of commodities could take the place of local production for local use.

In the aftermath of peak oil, such local economies are the wave of the future, and the money economy of the present and recent past is an anachronism. Since fossil fuel depletion is a gradual process, though, the changeover won’t happen all at once. This is a good thing, since the vast majority of people in the industrial world today lack the skills and tools to function in a local economy. Their jobs – from executives and consultants through salespeople, office staff, and all the other cubicle-shaped pigeonholes in the corporate caste system – serve functions internal to the industrial economy instead of producing goods and services people want or need.

The jobs that matter in a deindustrial economy, by contrast, are the ones that meet human needs directly. Farming is the classic example. If you grow food crops with your own labor, you don’t actually need the money economy, except insofar as it forces itself on you by way of property taxes and the like. Your labor provides you with value directly, since some of your crops end up on your own kitchen table; the rest can be exchanged with other local sources of goods and services you need – the seamstress next door, the blacksmith down the road, the general store in town. Money is a convenient way of facilitating these exchanges, but it’s not necessary; you can as well use barter, or local scrip, or any other means of exchanging value that comes to hand. Because what you produce has value to other people, you can trade for the things other people produce that you need, whether or not the money economy is there to mediate the trade.

Compare the farmer to a corporate marketing assistant or a factory worker in an injection-casting plant and the differences become clear. The marketing assistant provides a service – helping to create and manage marketing plans for a corporation – that has no value outside the money economy. If she wanted to barter with a farmer for food, she probably wouldn’t get far offering to help manage his corporate identity via a media campaign! The factory worker is in a slightly better position. If the money economy comes unglued, the factory owners might pay him in castings, and he could then try to barter these for the goods and services he needs; exactly this arrangement was common in the former Soviet Union during the economic collapse of the early 1990s. Still, he depends on the factory and its owners to provide him with a workplace and some form of pay, and in a volatile, crumbling economy his situation is a precarious one.

In the deindustrial age, then, the farmer’s economic model is the more viable, because it can do without the mediation of the money economy. Other professions that produce necessary goods and services will be in the same comfortable position, since people will continue to need food, clothing, shoes, tools, and the like, and will trade for them using whatever means are available. Except in the most difficult times, they will also be willing to trade for other things that aren’t quite necessities; someone who brews good beer, for example, can count on a market for his wares in all but the most apocalyptic times, and quite possibly even then.

Since the twilight of the money economy will be a gradual process, it won’t necessarily be possible for individuals to make the transition to a deindustrial career in a single leap. What can and must be tackled right now is the learning curve demanded by any of these skilled trades. It’s not enough to line your shelves with books about organic farming, for example; you need to start buying tools, digging garden beds, and growing your own crops, and you need to do this as soon as possible, because mastering the craft of organic farming takes time. The same is true if you decide to take up blacksmithying, brewing, small appliance repair, or any other useful trade: you need to get the tools and start learning the craft, so you’ll have your Plan B firmly in place when the money economy folds out from under you.

Skilled trades for local exchange are part of the picture, but another part is just as essential – the reinvention of the household economy. Not so long ago, a large fraction of all economic value came from the household sector. Many of us still remember grandmothers who always had jars of homemade jelly in the cupboard and crochet hooks dancing in their hands, and grandfathers whose garages were as full of well-worn tools as their gardens were of ripe tomatoes. The marketing campaigns that squeezed the last traces of the household economy out of existence stigmatized these activities as hobbies, and dowdy hobbies at that, but they were once a good deal more – and in a world on the brink of deindustrialization, they desperately need to be revived.

People have different opportunities and talents, and one size emphatically does not fit all. For those who have access to garden space, though, a household garden is probably the top priority here. It’s not necessary to grow all your own food, or even a large proportion of your total calorie intake, for this to have a significant impact on your quality of life. In America, at least, bulk crops such as grains and beans will likely be available via the money economy for many years to come. Fruits, vegetables, and animal foods – that is, sources of vitamins, minerals, and protein – are another matter. A vegetable garden, a couple of fruit trees, and perhaps a rabbit hutch or a tank for carp or tilapia may mean the difference between malnutrition and health.

If you don’t have access to garden space, consider taking up a useful handicraft or two. Aunt Edna’s habit of knitting cardigans for all and sundry may have seemed quaint in the heyday of the industrial economy, but when central heating prices itself out of existence and transport costs put paid to clothing imports from Third World sweatshops, warm clothing you can make with your own hands has obvious value, and may also be a useful item of barter. The same is true of many other skills, from soapmaking and herbal medicine to the handyman skills that allow plumbing, furniture, and appliances to be repaired at home.

Another response to human wants and needs outside the money economy will be vital during the deindustrial age, and needs to be revived and practiced as soon as possible. This is the art of doing without. The industrial economy has trained all of us to think that the only possible thing to do with a desire is fulfill it, preferably by spending money on some consumer product or other. The contracting economy of the deindustrial age will offer very little leeway to this sort of self-indulgent thinking. On the far side of Hubbert’s peak, your capacity to survive will largely be measured by the number of things you can do without. It’s hardly an accident, either, that the world’s spiritual traditions also affirm the value of being unattached to material things.

Among the things we will have to learn to do without, though, perhaps the most important is not a material thing at all, but a habit – the deliberate cultivation of uselessness that goes by the name of “leisure.” Only a society flush with cheap energy could convince itself that the highest goal of human life is to sit around doing nothing, and even so it takes the nonstop blare of the media to distract us from the fact that sitting around doing nothing is the dullest of all human activities. Our grandparents’ generation and their ancestors knew as much, which is why leisure a century ago focused on creative activities rather than indolence, and why Aunt Edna knitted all those cardigans long after the industrial economy made home production of clothing unnecessary. The twilight of industrial society, like the fall of other civilizations before it, will doubtless be accompanied by plenty of tumult and shouting, but the real story – the signal behind all that noise – will be a much fainter sound: the soft clatter of Aunt Edna’s knitting needles, beginning to knit the fabric of a new and more sustainable world.

Economics: Hallucinated Wealth

As last week’s Archdruid Report post argued, prophecies of catastrophe don’t accurately reflect the economic terrain on the downslope of Hubbert’s peak. Mind you, the reassuring fictions of those who insist that business as usual will go on forever won’t fare any better. I’ve suggested that the future we face is an age of economic, social, and technological decline as industrial civilization slides down the long and bumpy slope to the agrarian societies of the deindustrial future. The economic dimension of that decline is crucial, but those who expect it to show up in obvious ways in the markets and crunched numbers of today’s official economics may be missing a central facet of what’s going on.

I have no idea if kids still do this, but in my elementary school days in the late 1960s it was common practice to write IOUs for “a million billion trillion dollars” or some equally precise sum, and use those as the stakes in card games like Old Maid and Go Fish. Some of those IOUs passed from hand to hand dozens of times before being accidentally left in a pocket and meeting their fate in the wash. Kids who were good card players amassed portfolios with a very impressive face value, especially compared to the 25 cents a week that was the standard allowance in my neighborhood just then. If I recall correctly, though, nobody ever tried to convert their IOU holdings into anything more substantial than cookies from a classmate’s lunchbox, and that’s apparently the one thing that kept me and my friends from becoming pioneers of modern finance.

It surprises me how many people still seem to think that the main business of a modern economy is the production and distribution of goods and services. In point of fact, far and away the majority of economic activity today consists of the production and exchange of IOUs. The United States has the world’s largest economy not because it produces more goods and services than anyone else – it doesn’t, not by a long shot – but because it produces more IOUs than anyone else, and sells those IOUs to the rest of the world in exchange for goods and services.

An IOU, after all, is simply a promise to pay a given amount of value at some future time. That describes nearly every instrument of exchange in today’s economy, from bonds and treasury bills through bank deposits and government-issued currency to credit swaps and derivatives. All these share three things in common with the IOUs my schoolmates staked on card games. First, they cost almost nothing to issue. Second, their face value needn’t have any relationship at all to the issuer’s ability to pay up. Third, they can be exchanged for goods and services – like the cookies in my example – but their main role is in exchanges where nothing passes from hand to hand except IOUs.

It’s harsh but not, I think, unfair to call the result an economy of hallucinated wealth. Like the face value of those schoolroom IOUs, most “wealth” nowadays exists only because everyone agrees it does. Outside the social game of the market economy, financial instruments have no value at all, and the game continues only because the players – all of them, from the very rich to the ones with scarcely a million billion trillion dollars to their name – keep playing. They have to keep playing, because access to goods and services, not to mention privilege, perks, and power, depend on participation in the game.

The resulting IOU economy is highly unstable, because hallucinated wealth has value only as long as people believe it does. The history of modern economics is thus a chronicle of booms and busts, as tidal shifts in opinion send various classes of IOUs zooming up in value and then crashing back down to earth. Crashes, far from being signs of breakdown, are a necessary and normal part of the process. They serve the same role as laundry day did in the schoolroom IOU economy, paring down the total number of IOUs when an excess emerges, and thus maintaining the fiction that the ones left still have value.

All this leaves us in a historically unprecedented situation. Economies based purely on hallucinated wealth existed before the 20th century, but only for brief periods in the midst of speculative frenzies – the Dutch tulip mania, the South Sea bubble, and so on. Today’s hallucinated wealth, by contrast, has maintained its place as the mainspring of the global economy for more than half a century. Social critics who point to the housing bubble, the derivatives bubble, or the like, and predict imminent disaster when these bubbles pop, are missing the wider picture: the great majority of the global economy rests on the same foundations of empty air.

Those who have noticed this wider picture, on the other hand, are fond of suggesting that sometime soon, given a suitable shock, the entire structure will come cascading down. Those of you who were reading the alternative press at the time of the 1987 stock market crash will recall predictions of economic collapse in the wake of that vertiginous plunge. Similar predictions have accompanied each of the notable fiscal crises since then – the Japanese stock market debacle of 1990, the Mexican debt crisis of 1995, the Asian currency crash of 1998, the tech-stock crash of 2000, and so on. Similar claims are now being made about the housing bubble, the US trade and credit deficit, and of course about peak oil as well.

Plausible as these claims are, I suspect they’re missing the core of the situation, as well as the lessons taught by twenty years of violent economic gyrations. It’s a mistake to expect hallucinations to obey the laws of gravity. It’s doubly a mistake when the institutions charged with keeping them in midair – the Federal Reserve Board in the US and its equivalents elsewhere – have proven tolerably adept at manipulating markets, flooding the economy with cheap credit (that is, more IOUs) to minimize the effects of a crash, and inflating some other sector of the economy to take up the slack of a deflating bubble. It’s triply a mistake when the American middle class and, to a lesser extent, its equivalents in other industrial countries display a faith in speculation so invulnerable to mere reality that their response to a crash in one market is invariably to go looking for a new speculative bubble somewhere else.

To say that the economic empire of hallucinated wealth will continue to exist, though, does not imply that it will continue to produce the goods and services and provide the jobs that people need. Arguably, it doesn’t do that very well now. The “jobless recovery” of recent years saw most economic statistics rise well into positive territory, while most people saw their expenses rise and their income shrink when their jobs didn’t simply fold out from under them. Things could go much further in the same direction. It requires no particular suspension of disbelief to imagine a situation where the stock market hits new heights daily and other measures of economic activity remain in positive territory, while most of the population is starving in the streets.

Partly, as Bernard Gross pointed out several decades ago, economic indicators have morphed into “economic vindicators” that promote a political agenda rather than reflecting economic realities. The dubious statistical gamesmanship inflicted on the consumer price index and the official unemployment rate in the US show this with a good deal of clarity. Partly, though, most of the common measures of economic well-being only track hallucinated wealth, and the markets whose antics fill so much of the financial news are IOU markets disconnected from what remains of the real economy, where real people produce and consume real goods and services.

Thus trying to track the economic impact of peak oil, global warming, and other aspects of our predicament by watching markets and financial statistics may well turn out to be as misleading as trying to track the supply of cookies in a schoolroom by watching the exchange of IOUs in card games. As for the theory that a massive market crash triggered by peak oil will bring down the economy, this is, to be frank, naive. Crashes there will certainly be, and some of them may be monumental, since volatility in the energy markets tends to play crack-the-whip with the rest of the economy. Crashes aren’t threats to the system, though; crashes, and the recessions and economic turmoil that follow them, are part of the system.

The economy of markets and statistics has aptly been compared to a circus, and like any other circus, it serves mostly to distract. While interest rates wow the crowd with their high-wire act and clowns pile into and out of various speculative vehicles, the real story of economic decline will be going on elsewhere, in the non-hallucinated economy of goods and services, jobs and personal income, all but invisible behind a veil of massaged numbers and discreetly unmentioned by the mainstream media. There's good reason for that to be tucked out of sight, too, because it won't be pretty at all.

As the boom and bust cycle continues and accelerates, we can expect each recession to push more people down into poverty, and each recovery to lift fewer out of it. As industries dependent on cheap abundant energy fold, we’ll see jobs evaporate, lines form at the doors of soup kitchens, and today's posh suburbs slump into tomorrow’s shantytowns. Rising transport costs and sinking median incomes will squeeze the global trade in consumer goods until it implodes; shortages and ad hoc distribution networks will be the order of the day, and wild gyrations in currency markets could easily make barter and local scrip worth a good deal more than a million billion trillion dollars of hyperinflated IOU-money. Poverty, malnutrition, and desperation will be among the very few things not in short supply.

It’s not a pretty future, no, but there are straightforward ways to cope with it, proven in equivalent economic crises in recent history. I’ll be discussing some of those in next week’s post.