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Guillotines, da Vinci, peak oil and discount rates

by Jerome a Paris Wed Nov 22nd, 2006 at 06:22:43 PM EST


Rise of 'casino capitalism' shakes faith of moderate Monks

Between 1993 and 2003, [John Monks, formerly general secretary of the British Trades Union Congress, now the Brussels-based leader of the European trade union confederation] led the British trade union movement with modesty and distinction. He was the moderate's moderate: avoiding confrontation wherever possible and advocating partnership at work between management and employees. Business leaders were happy to do business with him.

Confronted by today's turbo-charged capitalism, Mr Monks cast off his former moderation. He even seemed to be on the verge of recanting his commitment to the partnership model. "Partnership with who?" he asked. There has been, he said, a "disintegration of the social nexus between worker and employer - a culture containing broad social rights and obligations. The new capitalism wants none of it."




Mr Monks contrasted businesses' healthy profitability with the ruthless way some have treated their staff recently, whether through large-scale redundancies or the constant threat that jobs may be sent off-shore or outsourced. While median wages have stagnated, record executive salaries are legion.

He admitted that he had possibly been a bit naive in the past. "I did not fully appreciate what was happening on the other side of the table," Mr Monks said. While he sympathised with business leaders for the relentless pressure they find themselves under - "It cannot be easy running a firm . . . when you are up for sale every day and every night of every year" - he was appalled by the increasingly "shameless", short-termist behaviour of overpaid corporate executives. "More and more they resemble the Bourbons - and they should be aware of what eventually happened to the Bourbons."

As we know, what happened to the Bourbons was the French revolution and the guillotine.

The above was printed yesterday in the Financial Times, the main European business newspaper, and I found this fascinating, in a I-can't-take-my-eyes-off-that-car-crash way, and it brought to me thoughts about peak oil and the current inability of our business world to look into the future.

Before I explain, let me, via a small detour, bring another concept into play. We're all familiar with business cycles: there is growing demand for one product; prices can be very high; people rush to provide the good and offer the suppy that will fulfill that demand; the first comers get excellent prices; as new sellers come in and supply increases, prices goes down and more demand is created; the sector booms and more suppliers poor in; but at some point, prices become too low and new sellers are discouraged, and some of the existing ones drop out until demand can catch up, and prices can go back up.

When products are simple and easy to provide, an equilibrium of sorts can be reached, as supply and demand can ajust fairly quickly to price and other contraints, and the market can be quite stable. But in many industrial sectors, supply is far from being flexible: it can take years to build a new production factory, and thus market conditions may be quite different at the time of the decision to invest and at the moment the capacity acutally becomes available. In such cases, the economic cycles are much more pronounced: if demand grows in a situation of insufficient supply, prices will go up as there simply is no supply to respond to that demand, and thus demand must be restricted, which, for vital product (like electricity) means massive price hikes. Producers will then decide to invest to take advantage of these prices, but it will take a while for them to be ready. Many will do the same, all at a time of apparent undersupply. In the meantime, prices will be extremely high. But at some point that capacity will come on line: the early projects will get excellent prices and a great return on investment, but as the others catch up, you may suddenly get an oversupply and prices may eventually crash brutally, leaving producers with a lot of excess capacity and little to show for their investment - then the sector gets neglected, until demand catches up again, and the whole cycle starts again.

Many such cycles happened in the past, and they would trigger brutal economic crises. Our governments have slowly learnt to manage our economies so as to smooth out such cycles and avoid the worst of the boom-and-bust which is inevitable in pure market driven economies. The way they have done this is by boosting demand during busts (for instance, by providing income to those that lose out in such circumstances, via unemployment insurance or deposit insurance - to avoid banking crashes), and by trying to slow supply during the good times (by limiting money growth and trying to curtial credit at those times to avoid overinvestment). It's never been a perfect science, but by and large, macroeconomic cycles have become a lot less brutal in recent decades than, say, a century ago.

But even today, sectors like electricity or oil are prone to such cycles, due to the long lag time of investment decisions. In the late 70s, there was a boom in refinery building to take advantage of skyhigh gas prices; prices crashed and the oil industry had to nurse a lot of overcapacity for the following 20 years - until recent years when demand caught up and caused brutal price increases (and largely unfair accusations of gouging). Same thing in the power sector in the late 90s, when an investment boom in gas-fired power plants created a glut of power and rock-bottom prices that left a lot of investors (and their financiers) in the dust. Demand is now catching up after several years of little investment, and we again get brownouts or huge price spikes.

The same can happen with their work force: there is slack, people are made to work without wage increases, business pickes up, but still no hires and no higher wages. Until, suddenly, there is a strike (or a resignation) and a loss of production, and a much higher wage increase must be given to get people back to work (or to hire someone new).

To keep it short, some industries, and a lot of economic players, seem structurally unable to anticipate market changes, and react in emergency mode to crises when they hit.

Today, business is on a roll. They see that everything is going their way. Labor is kept in line by the apparent plentiful availability of endlessly renewable pliant Chinese laborers. Demand is boosted by the same emerging economies. Western government's itch to tax is kept in line by the ability to move capital and assets easily across borders. They have the upper hand and they are abusing it, creating a lot of economic dislocation, poverty and resentment in their wake. They think that they can get away with it, even if it means pissing off people that were not hostile to them like Mr Monks.


Their actions are "dangerous to economic stability, traditional industry and jobs", he said. "I would like to see the City pages of the press more challenging and less respectful on these matters . . . Our future - the world's future - is too important to place in the hands of the new capitalists."

Will corporate leaders - those that have read this far anyway - simply shrug their shoulders and get back to their slashing and burning ways? Is Mr Monks merely offering a wholly predictable, knee-jerk, lefty rant? I do not think so. This general secretary just does not do lefty rants. So business people should take note. When the John Monkses of this world say enough is enough, that the capitalist system itself is sick, you can be sure that elsewhere in the world there is deep-seated, lingering resentment and unhappiness.

Which suggests that the only way to reverse this trend will not be small, moderate steps, but brutal retaliation, when it becomes possible and/or attractive for people that have little left to lose. Revolution. Guillotine. Quite possibly worse than a market crash or -gasp- wage increases for the guillotined.

And which also makes me pessimistic about our ability to react to peak oil in a sensible way. Markets are unable to anticipate the sea change that stagnant production at a time of sharply increasing demand will mean, and the requisite demand destruction, which could be brought about in an organised fashion via a combination of market manipulation (taxes to increase the apparent price) and regulation (to encourage or impose energy efficiency, for instance), will happen brutally, via huge price increases and the serious economic dislocation that will entail.

As Leonardo de Vinci noted, nature does not break its law. If there is a wall in front of us and we do not brake, then the wall will stop us - and probably destroy us in the process. If there is not enough oil, then not everybody that wants some will have it. Either we organise the sharing, or nature will do it for us, brutally.

So what has the discount rate got to do with all this? In fact, whatever your discount rate, an event so momentous as peak oil or global climate change should register in your balance sheet and make you adapt your decisions (essentially, whatever your speed, you should be able to see the wall and decide to adapt your driving). The fact that it doesn't suggest strongly that we have a clear case of market failure, and that government intervention is needed to avoid the crisis.

The alternative is crashing in the wall, or finishing under the guillotine. And that's not a lefty ranter telling it.

Display:
So what has the discount rate got to do with all this? In fact, whatever your discount rate, an event so momentous as peak oil or global climate change should register in your balance sheet and make you adapt your decisions (essentially, whatever your speed, you should be able to see the wall and decide to adapt your driving). The fact that it doesn't suggest strongly that we have a clear case of market failure, and that government intervention is needed to avoid the crisis.
I would say such momentous events, if they register at all should have a big impact on the balance sheet. The question is, what prevents people from seeing them?

If is apparent that many in the oil industry, including several of the oil majors, are seeing peak oil ("BP: Beyond petroleum", are you kidding me?), so which sectors of the economy are not seeing either peak oil or climate change?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Wed Nov 22nd, 2006 at 08:24:14 PM EST
There are people within the oil industry and most governments that know exactly what is going on, but nothing is changing. I think the question why aren't the decision makers within these organizations responding.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Nov 23rd, 2006 at 04:21:00 AM EST
[ Parent ]
Maybe because they are just lining their pockets and positioning themselves on top of the dung heap? The level of "wealth capture" that Jerome has been denouncing indicates that the people at the top are hollowing out the system as if it were no longer in their interest to keep it going. They are even getting rid of the middle class as a buffer, maybe they think Blackwater is a better one?

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Thu Nov 23rd, 2006 at 05:37:20 AM EST
[ Parent ]
This one gets my vote.  I remember attending a Republican political rally (long ago) and overhearing two party stalwarts discussing labor issues and what should be done. They finally agreed when one said "let them vote with their feet and quit, then we will know it's time to do something different."

Pretty much the same as "let them eat cake" I'd say.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Thu Nov 23rd, 2006 at 12:16:28 PM EST
[ Parent ]
Companies don't have to compute their long term impacts outside Generally Accepted Accounting Principles.  If the auto industry had to account and then pay for, say, the health and environmental impacts of their products they'd be bankrupt.  

These aren't hidden costs.  Everybody knows about them.  The companies don't have to pay for them so they don't care.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Nov 23rd, 2006 at 12:59:34 PM EST
[ Parent ]
So it's just a question of bad accounting, just like when we discussed Herman Daly's farewell speech from the World Bank.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Thu Nov 23rd, 2006 at 06:48:51 PM EST
[ Parent ]
This view on new capitalisism is interesting. (Emphases mine.)
While recently listening to an academician extol the virtues of a global economy and corporate outsourcing in a televised seminar lecture sponsored by George Mason University, I was immediately impressed by the way he expediently circumnavigated the issue of an independent nation-state's sovereignty over its own unique and sufficiently productive trading economy. The monolithic quasi-governmental paradigm he proposed for the implementation of a global free-market demand system, inter-connecting the economies of industrialized First, Second, and Third World states, was cleverly disguised as socially innocuous by an apparently superficial appeal to a common utilitarian good. I couldn't more strenuously disagree with this application.

[...]

Reducing the number of available lucrative jobs within the United States by hiring people of another country at lower wages, all for the purpose of increasing corporate profits, only serves to accomplish two things. It further destabilizes what is already a lop-sided U.S. economy, while establishing a veritable economic caste system with artificially contrived limitations on whom may produce certain products, and why they are to be produced. In essence, such a system would create a de facto economic dictatorship, where the unit of economic exchange would be standardized among the states comprising the system (much like the Euro), and the products produced, along with the means of production, would be corporately controlled. This type of global economy would preclude small businesses from being successful in developing and marketing products. While there are many existing products and services available around the world, there are a limited number of providers. In a global system, you would have something much like what is represented by Microsoft and Walmart. Microsoft has a virtual monopoly on computer operating systems around the world, and Walmart has the upper-hand in distributing software to the public, along with countless other products. When a Walmart Super-center moves into a U.S. or foreign metropolitan area, 90 percent of all other smaller businesses selling the same products are shut down because they cannot compete with the prices offered by the larger store. In a global economic system, the only productive businesses in the cooperating nation-states would be the Microsofts and the Walmarts. People would either be forced to buy from them or have nothing.

Corporations have continually proven to be counter-productive to all small business investments. This can be observed historically through the evolution of 17th, 18th , and 19th Century mercantilism in Britain. [...]

by das monde on Wed Nov 22nd, 2006 at 10:45:59 PM EST
Reducing the number of available lucrative jobs within the United States by hiring people of another country at lower wages, all for the purpose of increasing corporate profits, only serves to accomplish two things. It further destabilizes what is already a lop-sided U.S. economy, while establishing a veritable economic caste system with artificially contrived limitations on whom may produce certain products, and why they are to be produced.

Somewhat off the topic. Last night I heard that the USG has passed and implemented new tax legislation relative to American expats, employed abroad. The measures are expected to collect an additional $2 billion by taxing oversea employment benefits, like housing allowances.  One result will be that many U.S. based companies will no longer hire Americans for positions abroad, and will turn instead to other qualified English speaking candidates.  Good news for non-US job seekers.


I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears

by Gringo (stargazing camel at aoldotcom) on Thu Nov 23rd, 2006 at 12:31:05 PM EST
[ Parent ]
Whoa! There's a reason for expats to pay a little visit to the US consulate and give up US citizenship... Will they also tax the value of socialised medicine, and stuff like that?

All hail the "country of origin" principle!

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Thu Nov 23rd, 2006 at 12:33:35 PM EST
[ Parent ]
Since the link in the previous post was a success, here is another similar reading!
 
by das monde on Fri Nov 24th, 2006 at 01:44:02 AM EST
[ Parent ]
So what has the discount rate got to do with all this? In fact, whatever your discount rate, an event so momentous as peak oil or global climate change should register in your balance sheet and make you adapt your decisions (essentially, whatever your speed, you should be able to see the wall and decide to adapt your driving). The fact that it doesn't suggest strongly that we have a clear case of market failure, and that government intervention is needed to avoid the crisis.
Discount rates sometimes don't figure this, though. Set them high enough, and a catastrophe that wipes out the entire economy in a few hundred years and can be prevented at limited cost focused in the present and near future becomes the more economical option.

If not mistaken (and I may well be, so correct me if I'm wrong), in economic theory something like peak oil will be reflected in the price through 'hotelling rents'. Verbally, if a limited non-renewable resource is extracted, its future price will go up. A company which is extracting the resource will thus postpone current extraction if it can get a better price by future extraction. By postponing extraction, however, the current supply will drop, increasing the price up to a point where it no longer is profitable to postpone extraction. According to the Hotelling rule, this will lead to a rate of price increase equal to the discount rate.

Aside of several unrealistic assumptions about the market, many of which can be adjusted for, this ignores sudden shocks caused by systems not considered by the economy, such as a large regional war in the middle-east, a breakdown of the ecosystem, or a collapse of the western Antarctic Ice Shelf. The closer we skate towards the edges, the greater the risk of the ice breaking suddenly, but the advice given by classical economists is to skate as close as we can and not worry about drowning.

by nanne (zwaerdenmaecker@gmail.com) on Thu Nov 23rd, 2006 at 06:37:50 PM EST
This is a topic we've discussed before, which is resilience, or the simple fact that we should have safety margins for some things in case they go wrong.

Instead, market practice pushes for the active elimination of these safety buffers, as they cost money in the short term and are "inefficient". Thus, just-in-time logistics, dearth of energy storage capacity, and increased volatility.

Financial markets love volatility. Industries, not so much. and we end up with industry adopting a volatility-creating business model, and then paying the financial markets to protect itself against the risk.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Nov 24th, 2006 at 03:21:20 AM EST
[ Parent ]
Resilience is not only about safety margins, but more importantly about self-repair and redundancy. It is dynamic, not static.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 03:24:05 AM EST
[ Parent ]
I was simplifying; you're right, of course.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 24th, 2006 at 03:44:52 AM EST
[ Parent ]
Your point was a topic for several months in the pop-journal world after 9-11 demonstrated how insecure most "assets" really are. It was quickly forgotten as the intellectuals fell all over themselves to write new plans for saving Afghanistan and Iraq. It's too bad, lack of redundancy magnifies the odds of horrible cascade failures within the world economy in an increasingly energy poor world.

you are the media you consume.

by MillMan (millguy at gmail) on Fri Nov 24th, 2006 at 04:23:34 AM EST
[ Parent ]
Are you sure cascading failures are avoidable?

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 04:30:47 AM EST
[ Parent ]
No, but what we have done is set ourselves up for a spectacularly rapid crash.

you are the media you consume.

by MillMan (millguy at gmail) on Fri Nov 24th, 2006 at 04:33:40 AM EST
[ Parent ]
So the problem is that we have engineered a situation with multiple single failure points for a system crash, rather than one where a system crash requires a cascading failure.

Cascading failures are a feature of resilient systems with redundancy, in fact.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Fri Nov 24th, 2006 at 04:36:55 AM EST
[ Parent ]
I think I'd state it as "the number of events that must occur to cause a cascade failure is much lower than it could or should be."

you are the media you consume.

by MillMan (millguy at gmail) on Fri Nov 24th, 2006 at 04:44:56 AM EST
[ Parent ]
Digby has a go at centrist tendencies here.

http://digbysblog.blogspot.com/2006_11_01_digbysblog_archive.html#116425564962012342

Moderates and centrists of good will often try to split the difference and find ways to appease all sides when it comes to civil rights and liberties. And they almost always screw things up because fundamental rights are called fundamental for a reason. Once you let go of them all sorts of other things become possible.

I'm reminded of Martin Luther King's letter from a Birmingham jail. He was, of course, talking about the necessity of activism to gain civil rights for African Americans, but I think the sentiment applies equally well to those who allow the rights and freedoms women already have to be whittled away over time in political negotiations.

I must make two honest confessions to you, my Christian and Jewish brothers. First, I must confess that over the past few years I have been gravely disappointed with the white moderate. I have almost reached the regrettable conclusion that the Negro's great stumbling block in his stride toward freedom is not the White Citizen's Counciler or the Ku Klux Klanner, but the white moderate, who is more devoted to "order" than to justice; who prefers a negative peace which is the absence of tension to a positive peace which is the presence of justice; who constantly says: "I agree with you in the goal you seek, but I cannot agree with your methods of direct action"; who paternalistically believes he can set the timetable for another man's freedom; who lives by a mythical concept of time and who constantly advises the Negro to wait for a "more convenient season." Shallow understanding from people of good will is more frustrating than absolute misunderstanding from people of ill will. Lukewarm acceptance is much more bewildering than outright rejection.




keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Fri Nov 24th, 2006 at 10:18:51 AM EST


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