Thursday, March 31, 2011
Tuesday, March 29, 2011
Sunday, March 27, 2011
Friday, March 25, 2011
Monday, March 21, 2011
Republican Study Committee Announces $2.5 Trillion in Budget Cuts
"In announcing its package of $2.5 trillion in budget cuts, the Republican Study Committee's announcement includes the graph above and a list of cuts. Among them:The Corporation for Public Broadcasting, $445 million annual savings
# National Endowment for the Arts, $167.5 million annual savings
# National Endowment for the Humanities, $167.5 million annual savings
# Amtrak Subsidies, $1.565 billion annual savings- maddowblog.msnbc.msn.com/_.../5893349-on-the-list-of-gop-spending-cuts-amtrak-public-broadcasting-and-mohair ---while they approved $50 billion dollars to extend the war in Afghanistan. I guess the Republican's BIG OIL donors made their demands loud and clear.
"Glenn Holland: Well, I guess you can cut the arts as much as you want, Gene. Sooner or later, these kids aren't going to have anything to read or write about" -from the movie, "Mr. Holland's Opus".
The kids won't need an education , or an energy efficient rail system , or less greenhouse gas emissions, or cleaner air, water, and open space, because they'll be cannon fodder for the next war.
# National Endowment for the Arts, $167.5 million annual savings
# National Endowment for the Humanities, $167.5 million annual savings
# Amtrak Subsidies, $1.565 billion annual savings- maddowblog.msnbc.msn.com/_.../5893349-on-the-list-of-gop-spending-cuts-amtrak-public-broadcasting-and-mohair ---while they approved $50 billion dollars to extend the war in Afghanistan. I guess the Republican's BIG OIL donors made their demands loud and clear.
"Glenn Holland: Well, I guess you can cut the arts as much as you want, Gene. Sooner or later, these kids aren't going to have anything to read or write about" -from the movie, "Mr. Holland's Opus".
The kids won't need an education , or an energy efficient rail system , or less greenhouse gas emissions, or cleaner air, water, and open space, because they'll be cannon fodder for the next war.
Thursday, March 17, 2011
GIP RIP by Eric Zencey
IF there’s a silver lining to our current economic downturn, it’s this: With it comes what the economist Joseph Schumpeter called “creative destruction,” the failure of outmoded economic structures and their replacement by new, more suitable structures. Downturns have often given a last, fatality-inducing nudge to dying industries and technologies. Very few buggy manufacturers made it through the Great Depression.
Creative destruction can apply to economic concepts as well. And this downturn offers an excellent opportunity to get rid of one that has long outlived its usefulness: gross domestic product. G.D.P. is one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing. It ought to join buggy whips and VCRs on the dust-heap of history.
The first official attempt to determine our national income was made in 1934; the goal was to measure all economic production involving Americans whether they were at home or abroad. In 1991, the Bureau of Economic Analysis switched from gross national product to gross domestic product to reflect a changed economic reality — as trade increased, and as foreign companies built factories here, it became apparent that we ought to measure what gets made in the United States, no matter who makes it or where it goes after it’s made.
Since then it has become probably our most commonly cited economic indicator, the basic number that we take as a measure of how well we’re doing economically from year to year and quarter to quarter. But it is a miserable failure at representing our economic reality.
To begin with, gross domestic product excludes a great deal of production that has economic value. Neither volunteer work nor unpaid domestic services (housework, child rearing, do-it-yourself home improvement) make it into the accounts, and our standard of living, our general level of economic well-being, benefits mightily from both. Nor does it include the huge economic benefit that we get directly, outside of any market, from nature. A mundane example: If you let the sun dry your clothes, the service is free and doesn’t show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable — and give G.D.P. a bit of a bump.
In general, the replacement of natural-capital services (like sun-drying clothes, or the propagation of fish, or flood control and water purification) with built-capital services (like those from a clothes dryer, or an industrial fish farm, or from levees, dams and treatment plants) is a bad trade — built capital is costly, doesn’t maintain itself, and in many cases provides an inferior, less-certain service. But in gross domestic product, every instance of replacement of a natural-capital service with a built-capital service shows up as a good thing, an increase in national economic activity. Is it any wonder that we now face a global crisis in the form of a pressing scarcity of natural-capital services of all kinds?
This points to the larger, deeper flaw in using a measurement of national income as an indicator of economic well-being. In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up.
A similarly counterintuitive result comes from other kinds of defensive and remedial spending, like health care, pollution abatement, flood control and costs associated with population growth and increasing urbanization — including crime prevention, highway construction, water treatment and school expansion. Expenditures on all of these increase gross domestic product, although mostly what we aim to buy isn’t an improved standard of living but the restoration or protection of the quality of life we already had.
The amounts involved are not nickel-and-dime stuff. Hurricane Katrina produced something like $82 billion in damages in New Orleans, and as the destruction there is remedied, G.D.P. goes up. Some of the remedial spending on the Gulf Coast does represent a positive change to economic well-being, as old appliances and carpets and cars are replaced by new, presumably improved, ones. But much of the expense leaves the community no better off (indeed, sometimes worse off) than before.
Consider the 50 miles of sponge-like wetlands between New Orleans and the Gulf Coast that once protected the city from storm surges. When those bayous were lost to development — sliced to death by channels to move oil rigs, mostly — gross domestic product went up, even as these “improvements” destroyed the city’s natural defenses and wiped out crucial spawning ground for the Gulf Coast shrimp fishery. The bayous were a form of natural capital, and their loss was a cost that never entered into any account — not G.D.P. or anything else.
Wise decisions depend on accurate assessments of the costs and benefits of different courses of action. If we don’t count ecosystem services as a benefit in our basic measure of well-being, their loss can’t be counted as a cost — and then economic decision-making can’t help but lead us to undesirable and perversely un-economic outcomes.
The basic problem is that gross domestic product measures activity, not benefit. If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together. The resulting bottom line might tell you something useful about the total cash flow of your household, but it’s not going to tell you whether you’re better off this month than last or, indeed, whether you’re solvent or going broke.
BECAUSE we use such a flawed measure of economic well-being, it’s foolish to pursue policies whose primary purpose is to raise it. Doing so is an instance of the fallacy of misplaced concreteness — mistaking the map for the terrain, or treating an instrument reading as though it were the reality rather than a representation. When you’re feeling a little chilly in your living room, you don’t hold a match to a thermometer and then claim that the room has gotten warmer. But that’s what we do when we seek to improve economic well-being by prodding G.D.P.
Several alternatives to gross domestic product have been proposed, and each tackles the central problem of placing a value on goods and services that never had a dollar price. The alternatives are controversial, because that kind of valuation creates room for subjectivity — for the expression of personal values, of ideology and political belief.
How, after all, do we judge what exactly was the value of the services provided by those bayous in Louisiana? Was it $82 billion? But what about the value of the shrimp fishery that was already lost before the hurricane? What about the insurance value of the protection the bayous offered against another $82 billion loss? What about the security and sense of continuity of life enjoyed by the thousands of people who lived and made their livelihoods in relation to those bayous before they disappeared? It’s admittedly difficult to set a dollar price on such things — but this is no reason to set that price at zero, as gross domestic product currently does.
Common sense tells us that if we want an accurate accounting of change in our level of economic well-being we need to subtract costs from benefits and count all costs, including those of ecosystem services when they are lost to development. These include storm and flood protection, water purification and delivery, maintenance of soil fertility, pollination of plants and regulation of our climate on a global and local scale. (One recent estimate puts the minimum market value of all such natural-capital services at $33 trillion per year.)
Nature has aesthetic and moral value as well; some of us experience awe, wonder and humility in our encounters with it. But we don’t have to go so far as to include such subjective intangibles in order to fix the national income accounts. As stressed ecosystems worldwide disappear, it will get easier and easier to assign a nonsubjective valuation to them; and value them we must if we are to keep them at all. No civilization can survive their loss.
Given the fundamental problems with G.D.P. as a leading economic indicator, and our habit of taking it as a measurement of economic welfare, we should drop it altogether. We could keep the actual number, but rename it to make clearer what it represents; let’s call it gross domestic transactions. Few people would mistake a measurement of gross transactions for a measurement of general welfare. And the renaming would create room for acceptance of a new measurement, one that more accurately signals changes in the level of economic well-being we enjoy.
Our use of total productivity as our main economic indicator isn’t mandated by law, which is why it would be fairly easy for President Obama to convene a panel of economists and other experts to join the Bureau of Economic Analysis in creating a new, more accurate measure. Call it net economic welfare. On the benefit side would go such nonmarket goods as unpaid domestic work and ecosystem services; on the debit side would go defensive and remedial expenditures that don’t improve our standard of living, along with the loss of ecosystem services, and the money we spend to try to replace them.
In 1934, the economist Simon Kuznets, in his very first report of national income to Congress, warned that “the welfare of a nation can ... scarcely be inferred from a measure of national income.” Just as this crisis gives us the opportunity to end the nature-be-damned, more-is-always-better economy that flourished when oil was cheap and plentiful, we can finally act on Kuznets’s wise warning. We’re in an economic hole, and as we climb out, what we need is not simply a measurement of how much money passes through our hands each quarter, but an indicator that will tell us if we are really and truly gaining ground in the perennial struggle to improve the material conditions of our lives.
Creative destruction can apply to economic concepts as well. And this downturn offers an excellent opportunity to get rid of one that has long outlived its usefulness: gross domestic product. G.D.P. is one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing. It ought to join buggy whips and VCRs on the dust-heap of history.
The first official attempt to determine our national income was made in 1934; the goal was to measure all economic production involving Americans whether they were at home or abroad. In 1991, the Bureau of Economic Analysis switched from gross national product to gross domestic product to reflect a changed economic reality — as trade increased, and as foreign companies built factories here, it became apparent that we ought to measure what gets made in the United States, no matter who makes it or where it goes after it’s made.
Since then it has become probably our most commonly cited economic indicator, the basic number that we take as a measure of how well we’re doing economically from year to year and quarter to quarter. But it is a miserable failure at representing our economic reality.
To begin with, gross domestic product excludes a great deal of production that has economic value. Neither volunteer work nor unpaid domestic services (housework, child rearing, do-it-yourself home improvement) make it into the accounts, and our standard of living, our general level of economic well-being, benefits mightily from both. Nor does it include the huge economic benefit that we get directly, outside of any market, from nature. A mundane example: If you let the sun dry your clothes, the service is free and doesn’t show up in our domestic product; if you throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the economy more unsustainable — and give G.D.P. a bit of a bump.
In general, the replacement of natural-capital services (like sun-drying clothes, or the propagation of fish, or flood control and water purification) with built-capital services (like those from a clothes dryer, or an industrial fish farm, or from levees, dams and treatment plants) is a bad trade — built capital is costly, doesn’t maintain itself, and in many cases provides an inferior, less-certain service. But in gross domestic product, every instance of replacement of a natural-capital service with a built-capital service shows up as a good thing, an increase in national economic activity. Is it any wonder that we now face a global crisis in the form of a pressing scarcity of natural-capital services of all kinds?
This points to the larger, deeper flaw in using a measurement of national income as an indicator of economic well-being. In summing all economic activity in the economy, gross domestic product makes no distinction between items that are costs and items that are benefits. If you get into a fender-bender and have your car fixed, G.D.P. goes up.
A similarly counterintuitive result comes from other kinds of defensive and remedial spending, like health care, pollution abatement, flood control and costs associated with population growth and increasing urbanization — including crime prevention, highway construction, water treatment and school expansion. Expenditures on all of these increase gross domestic product, although mostly what we aim to buy isn’t an improved standard of living but the restoration or protection of the quality of life we already had.
The amounts involved are not nickel-and-dime stuff. Hurricane Katrina produced something like $82 billion in damages in New Orleans, and as the destruction there is remedied, G.D.P. goes up. Some of the remedial spending on the Gulf Coast does represent a positive change to economic well-being, as old appliances and carpets and cars are replaced by new, presumably improved, ones. But much of the expense leaves the community no better off (indeed, sometimes worse off) than before.
Consider the 50 miles of sponge-like wetlands between New Orleans and the Gulf Coast that once protected the city from storm surges. When those bayous were lost to development — sliced to death by channels to move oil rigs, mostly — gross domestic product went up, even as these “improvements” destroyed the city’s natural defenses and wiped out crucial spawning ground for the Gulf Coast shrimp fishery. The bayous were a form of natural capital, and their loss was a cost that never entered into any account — not G.D.P. or anything else.
Wise decisions depend on accurate assessments of the costs and benefits of different courses of action. If we don’t count ecosystem services as a benefit in our basic measure of well-being, their loss can’t be counted as a cost — and then economic decision-making can’t help but lead us to undesirable and perversely un-economic outcomes.
The basic problem is that gross domestic product measures activity, not benefit. If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together. The resulting bottom line might tell you something useful about the total cash flow of your household, but it’s not going to tell you whether you’re better off this month than last or, indeed, whether you’re solvent or going broke.
BECAUSE we use such a flawed measure of economic well-being, it’s foolish to pursue policies whose primary purpose is to raise it. Doing so is an instance of the fallacy of misplaced concreteness — mistaking the map for the terrain, or treating an instrument reading as though it were the reality rather than a representation. When you’re feeling a little chilly in your living room, you don’t hold a match to a thermometer and then claim that the room has gotten warmer. But that’s what we do when we seek to improve economic well-being by prodding G.D.P.
Several alternatives to gross domestic product have been proposed, and each tackles the central problem of placing a value on goods and services that never had a dollar price. The alternatives are controversial, because that kind of valuation creates room for subjectivity — for the expression of personal values, of ideology and political belief.
How, after all, do we judge what exactly was the value of the services provided by those bayous in Louisiana? Was it $82 billion? But what about the value of the shrimp fishery that was already lost before the hurricane? What about the insurance value of the protection the bayous offered against another $82 billion loss? What about the security and sense of continuity of life enjoyed by the thousands of people who lived and made their livelihoods in relation to those bayous before they disappeared? It’s admittedly difficult to set a dollar price on such things — but this is no reason to set that price at zero, as gross domestic product currently does.
Common sense tells us that if we want an accurate accounting of change in our level of economic well-being we need to subtract costs from benefits and count all costs, including those of ecosystem services when they are lost to development. These include storm and flood protection, water purification and delivery, maintenance of soil fertility, pollination of plants and regulation of our climate on a global and local scale. (One recent estimate puts the minimum market value of all such natural-capital services at $33 trillion per year.)
Nature has aesthetic and moral value as well; some of us experience awe, wonder and humility in our encounters with it. But we don’t have to go so far as to include such subjective intangibles in order to fix the national income accounts. As stressed ecosystems worldwide disappear, it will get easier and easier to assign a nonsubjective valuation to them; and value them we must if we are to keep them at all. No civilization can survive their loss.
Given the fundamental problems with G.D.P. as a leading economic indicator, and our habit of taking it as a measurement of economic welfare, we should drop it altogether. We could keep the actual number, but rename it to make clearer what it represents; let’s call it gross domestic transactions. Few people would mistake a measurement of gross transactions for a measurement of general welfare. And the renaming would create room for acceptance of a new measurement, one that more accurately signals changes in the level of economic well-being we enjoy.
Our use of total productivity as our main economic indicator isn’t mandated by law, which is why it would be fairly easy for President Obama to convene a panel of economists and other experts to join the Bureau of Economic Analysis in creating a new, more accurate measure. Call it net economic welfare. On the benefit side would go such nonmarket goods as unpaid domestic work and ecosystem services; on the debit side would go defensive and remedial expenditures that don’t improve our standard of living, along with the loss of ecosystem services, and the money we spend to try to replace them.
In 1934, the economist Simon Kuznets, in his very first report of national income to Congress, warned that “the welfare of a nation can ... scarcely be inferred from a measure of national income.” Just as this crisis gives us the opportunity to end the nature-be-damned, more-is-always-better economy that flourished when oil was cheap and plentiful, we can finally act on Kuznets’s wise warning. We’re in an economic hole, and as we climb out, what we need is not simply a measurement of how much money passes through our hands each quarter, but an indicator that will tell us if we are really and truly gaining ground in the perennial struggle to improve the material conditions of our lives.
Wednesday, March 16, 2011
Pepsi unveils its eco-friendly bottle Container is all plant material
Written by
Associated Press
- Filed Under
- Business
The bottle is made from switch grass, pine bark and corn husks, among other materials. Ultimately, Pepsi plans to also use orange peels, oat hulls, potato scraps and other leftovers from its food business.
The new bottle looks and feels the same as the current bottle, said Rocco Papalia, senior vice president of advanced research at PepsiCo. "It's indistinguishable," he said.
Coca-Cola Co. currently produces a bottle using 30 percent plant-based materials and recently estimated it would be several years before it has a 100 percent plant bottle that's commercially viable.
"We've cracked the code," Papalia said.
PepsiCo said it plans to test the product next year in a few hundred thousand bottles. Once the company is sure it can successfully produce the bottle at that scale, it will begin converting all its products over.
That could mean a switch of billions of bottles sold each year. Of Pepsi's 19 biggest brands, 11 are beverage brands that use PET plastic bottles.
Scientists said the technology is an important innovation in packaging. "This is the beginning of the end of petroleum-based plastics," said Allen Hershkowitz, a senior scientist with the Natural Resources Defense Council and director of its waste management project. "When you have a company of this size making a commitment to a plant-based plastic, the market is going to respond."
There are other plant-based plastics available or in development, but Hershkowitz said they are not environmentally preferred because they typically use plants grown solely for that purpose, rather than using the estimated 2 billion tons of agricultural waste produced each year. And these alternative plastics cannot be recycled.
PET plastic is a go-to material for packaging because it's lightweight and shatter-resistant, its safety is well-researched and it doesn't affect flavors. It is not biodegradable or compostable but it is recyclable.
Tuesday, March 15, 2011
The Other Road to Serfdom by Eric Zencey
Why are neoconservatives so unswaveringly dedicated to (supposedly) free markets, even in the face of clear evidence that unregulated markets produce some nasty things (like global climate change and regular financial crises) that we'd be better off without? Why this knee-jerk answer "free markets! Free markets!" to every policy problem?
The answer, I think, has to do with the influence of an Austrian economist, F. A. Hayek. Though he didn't support totally unregulated market capitalism, he did make a strong case against government intervention and control. His book, The Road to Serfdom, was an indictment of the Soviet system with its centrallly planned economies, and was read by millions. Neoconservatives still think of Hayek (and his progeny: Friedman, Greenspan et al.) as having made the definitive case that civil freedom depends on unregulated economic activity.
But Hayek's argument is flawed. Because of that flaw, the course he set us on turned out to be just The Other Road to Serfdom.
The answer, I think, has to do with the influence of an Austrian economist, F. A. Hayek. Though he didn't support totally unregulated market capitalism, he did make a strong case against government intervention and control. His book, The Road to Serfdom, was an indictment of the Soviet system with its centrallly planned economies, and was read by millions. Neoconservatives still think of Hayek (and his progeny: Friedman, Greenspan et al.) as having made the definitive case that civil freedom depends on unregulated economic activity.
But Hayek's argument is flawed. Because of that flaw, the course he set us on turned out to be just The Other Road to Serfdom.
Let's begin with one of my favorite thinkers, John Stuart Mill. A hundred and fifty years ago, in his Principles of Political Economy, he looked ahead to the sort of world we'd have if human population and economic activity continued the growth rates he was seeing in 1848. He did this in order to argue against the idea that more is always better, but today his reductio ad absurdum reads like dismally accurate prediction. There isn't much to like, he said, in a world
with nothing left to the spontaneous activity of nature; with every rood of land brought into cultivation, which is capable of growing food for human beings; [with] every flowery waste or natural pasture ploughed up, all quadrupeds or birds which are not domesticated for man's use exterminated as his rivals for food, [with] every hedgerow or superfluous tree rooted out, and scarcely a place left where a wild shrub or flower could grow without being eradicated in the name of improved agriculture.
It's not quite literally true to say that we have exterminated every animal we haven't domesticated, or that "every rood of land" has been brought into cultivation. The human estate continues to expand, as forests are clear-cut to make way for cattle, as rocky slopes and other marginal lands are brought under the plow. But this growth in arable land has slowed in the past decade, and it now no longer outpaces the rate at which arable land is lost (mostly through salinization from irrigation) to desertification. Total cultivated acreage is declining. As population continues to grow, arable land per person is declining even more rapidly. One result: land that's farmed has to be farmed hard--with techniques that amount to "soil mining" (to use the phrase that Edward Hyams coined)-- an unsustainable draw-down of soil fertility that will reduce further the amount of arable land in the future.
And, while there are non-domesticated species that continue to share our planet with us today, they are there largely because we allow them to be--or because there's a time lag between our acts (like dumping CO2 into the atmosphere) and the consequences of our acts (like the disappearance of polar bear habitat from global climate change), or because extinction-producing processes currently underway (the cutting of rainforest, for instance) have not yet reached their full expression in the world.
In many places, including the U.S., the few remaining ecosystems that register as "wild" are not large enough to support the spontaneous operation of nature within their juridicially defined borders. We have to manage the wilderness in order to sustain it--and the oxymoron inherent in "wilderness management" has long since faded from view, as necessity makes routine what logical consistency would have forbidden.
To many of us who were born into the fossil fuel era, it seems normal and ordinary that we should have vast energies available to us to effect our will in nature. It's all we've ever known, and the pages in history books that tell us it was ever different can be dismissed as reporting a remote, quaint and benighted time. But the handful of centuries that comprise the fossil fuel era are just an instant in geological time, the time scheme in which life evolved, the time scheme in which the natural processes of the planet largely operate.
To put things in a bit of historical perspective: biologists speak of the Net Primary Productivity of ecosystems, the amount of food energy present within them that comes from the conversion of solar energy into biomass through photosynthesis. It's the planet's energy budget, the fuel for all life. Two centuries ago humans made an insignificant dent in Net Primary Productivity, taking a fraction of one percent, with the rest being available to power Mill's "spontaneous operation of nature." Today, biologists estimate that humans are responsible for consuming or destroying an astounding forty percent of the Net Primary Productivity of planetary ecosystems. The remnants of nature that we have so far allowed to remain must make do with what's left. Many ecologists and biologists fear it isn't enough; systems that evolution designed to make maximum efficient use of 100% of the available solar energy are having difficulty adapting to little more than half of that. To keep those ecosystems alive and operating in something like a stable (albeit stripped-down) state requires human intervention: management, regulation, husbandry, legal protection, seeding, stocking, subsidy.
Because of the power unleashed by oil, the dystopia that Mill envisioned in 1848 is very much the world we have today----not an Edenic paradise, not even a garden planet, but a world in which the "spontaneous activity of nature" has been circumscribed, bounded, broken, eliminated.
Call it Factory Planet: a world in which natural processes are treated as parts of a vast world-machine operated to produce a maximum amount of wealth for humans.
It's a world that King Midas would have recognized. Having built our economy beyond the limits of what the planet can sustainably give to us in the form of resource inputs, and sustainably take from us in the form of the wastes it struggles to absorb, we face the problem Midas faced. He enjoyed his power to transform everything he touched into gold until he sat down to dinner and touched his daughter; that's when he learned that an unlimited power to create wealth was neither sustainable nor especially desireable.
I think that like Midas, we're headed for a similar epiphany.
Factory Planet, as it's operated now, is not sustainable. But even were we to make it so--even were we to rein in our productive engines to the level the planet can sustainably support-there's another problem: our conversion of nature into wealth at the maximum rate practicable within environmental limits would still leave very little room for something we cherish as much as Midas cherished his daughter. I don't mean wilderness hikes or the possibility of encountering whales or polar bears or virgin forest --things that only some of us seem to cherish-but something more far-reaching and widely valued: democracy and civil liberty.
One strong principle underlying our freedoms--the rights encoded into our Bill of Rights--is the idea that citizens should be left alone in all things except those that directly affect others. (This distinction between what's public and what's private, and not the false ground of release from work or duty or responsibility, is the true foundation of our experience of freedom, Wendell Berry tells us.) This democratic ideal, fresh and new three hundred years ago, evolved on Garden Planet: a world in which there was a vast distance between what culture took from nature and what nature could sustainably provide. Back then, humans lived in ecosystems that were lush, healthy, resilient. But on Factory Planet the ecosystems that support civilization are strained to the breaking point. In consequence, acts that were private on Garden Planet have public consequences that make them legitimate subjects of public regulation and control.
For instance: two hundred years ago if you burned a bit of carbon fuel or clear-cut a forest, it was pretty much nobody's business but your own. (This simplifies things: English kings and nobles did reserve forests and game for their own use and harvest, and some civilizations disappeared because they cut down the forests and mined the soils that sustained them. But the point is valid: on Garden Planet, humans generally had more discretion to do with nature what they wanted.) In our era, when every ton of CO2 emissions puts a burden on the planet's limited ability to absorb it, and when forests and their necessary services to civilization are becoming scarcer and scarcer worldwide, its clear that carbon emissions and deforestation impose real and measurable damage on us all, and are therefore legitimately controlled by public authority in pursuit of the public good.
Or, suppose you live in Colorado and want to catch the rainwater falling on your roof for use to water your lawn. This is a fundamental prerogative; rain is the free gift of nature, right? Not in Colorado River Compact States. In the watershed of the Colorado River every drop (and then some) of the river is assigned to a use--mostly irrigation to grow food, pace Mill--and law forbids property owners to impede the flow of rainwater to the river.
Or suppose you fancy making a living as a fisherman or lobsterer. Sorry--there's no room for you on the water anymore, not unless you can be taken on by one of the existing quota holders. Every ton of many species of fish, every pound of lobster that nature is capable of producing has been anticipated, counted, assigned to a harvester, a market, a use.
Because our economy exceeds the limits of what nature can sustain, we are experiencing an increasing need for resource regimes: an International Whaling Commission to limit the harvest of whales, a Fishing Treaty to apportion tonnages of catch from world oceans, a Green House Gas treaty to apportion the planet's strained carbon-absorption capacity, international water compacts to apportion river flow among users, and on and on.
The alternative to this kind of rule of law is the absence of the rule of law--and a world in which "extra-legal" conflict over increasingly scarce resources will flourish. Countries in a state of war find it difficult to hang on to civil liberties. Resource shortages displace populations, create failed states, breed resentments on which terrorism feeds, and send nations to war--circumstances under which we'll see further erosion of civil liberties.
The one option that is not available is to continue things as they once were: no resource regimes telling us what we can and can't do, and economic growth without apparent limit. The sad truth is there are limits to sustainable economic activity: the planet can support only a finite amount of throughupt. Our transgression of those limits will force change of one sort or another upon us.
The conclusion is inescapable: if we grow farther beyond the planet's ability to support us, the best option we face is that more and more of our lives will be hemmed in by the imperative to control our collective environmental impact while maximizing our production of food and wealth. To extend the metaphor: factories are marvelously efficient, but they are not generally places where humans are given much room to exercise prerogative, discretion, choice or free will. A factory planet, budgeted right up to the edge of what's ecologically sustainable, and run for the sole purpose of maximizing the wealth that the human species enjoys, is a planet from which we've eliminated the literal ground on which democratic freedoms flourish.
And this is where Hayek's argument, and its flaw, enter in. Fifty years ago Hayek argued that centralized economic planning like that being done in Soviet style socialist countries was The Road to Serfdom. There is, he said, "an irreducible clash between planning and democracy." He argued that a country can maintain its democratic institutions and civil liberties only if it has a free-market economy and the egalitarian free-for-all of (relatively) unregulated capitalism.
His argument has a great deal of merit and influenced generations of neoconservatives, many of whom have cheapened it quite a bit. Hayek was not opposed to government regulation of the economy, though the million-selling Reader's Digest Condensed Version of his long, dry treatise didn't dwell on that element, and so Hayek's delineation of the legitimate grounds for governmental control of markets went largely unread and generally underappreciated. Today many conservatives take Hayek to have supported an idea he would have found abhorrent, that there is no public good other than the one that emerges from the cumulation of private greeds expressed in markets. (Or, as Reagan famously put it, "government is not the solution to our problem; government is the problem.")
Even correctly understood, Hayek's argument has a serious flaw. Hayek, unlike Mill, implicitly and comfortably assumed that we could have infinite economic growth on a finite planet; ecological limits to economic development played no part in his theory. From our perspective fifty years later it's easier to see this truth:
planning is planning whether it's done to minimize poverty and injustice, as socialists were advocating then, or to preserve the minimum flow of ecosystem services that civilization requires, as we are finding increasingly necessary today.In the absence of limits on population growth and resource uptake, the free-market economic development that Hayek advocated turns out to have been just The Other Road to Serfdom.
It's going to take some work to preserve democracy in an era of ecological constraint. A key element is achieving a sustainable, stable level of human population; if we need to budget ourselves to a finite, sustainable level of resource throughput, then continued growth in the human population will reduce the average standard of living that humans can enjoy, and democracy doesn't flourish when the standard of living is in decline. World wide, education of women and girls has an effect in depressing birth rates, (though the linkage is not as strong and direct as UN agencies have long asserted. But because there is a linkage, women's equal access to education world-wide should be seen not just as a civil right, but as a necessary step toward ecological sustainability--and, therefore, a necessary step toward the preservation of democratic liberties for all of us.
Also paramount is the development of a sustainable economic infrastructure--the smart grid, energy from renewable sources, and conservation of all forms of energy through retrofitting and the gradual redesign of how and where we live, work, travel, shop, grow food, recreate. Under a stable rate of throughput, such technical change and innovation will be our only avenue of increasing output--a process ecological economists call development to distinguish it from footprint-increasing growth. There is an enormous amount of waste of resources in our system because resources, particularly energy, were underpriced for most of the twentieth century. We need to pick that low-hanging fruit-and then we'll need to pick quite a bit more.
But these changes, alone, won't be enough. We need, also, a green intellectual infrastructure: reconstruction and adaptation of the mistaken ideas on which our unsustainable institutions and practices were built.
What ideas needs changing? First and foremost, economic theory. I've written elsewhere about the need to devise a better measure of our standard of well-being than the current default, GDP, which was never designed to perform that service. Among the other places in which economic theory presumes that an economy's ecological footprint can grow forever is the concept of Pareto Optimality. Back at the close of the nineteenth century Wilfred Pareto helped split Political Economy in two, separating "scientific" economic theory from the messier, less-easily-quantified realm of political theory. Crucial to the split was his notion that because satisfactions and pleasures are subjective and not interpersonally comparable, all an economist can say, scientifically, is that one system is better than another if it satisfies more needs and wants than another. The implication: we cannot be confident that we improve the level of satisfaction in the world if we take a dollar from a billionaire and give it to a starving man to buy food. For all we know the billionaire might derive as much satisfaction from that last dollar spent as the starving man does buying food. This counter-intuitive result, as hard-hearted and absurd as it is on its face, remains fundamental to economics as it is practiced today. It is one strong impetus pushing us toward unsustainable growth. Thanks to Pareto, in economic circles (and among policy makers who listen to economists), all talk of income redistribution is off the table. If you care about the starving masses of the world, economics tells you, the only solution is to work to increase production, to produce two dollars where before there was only one. Thus, through Pareto, a supposedly value-free science became committed to infinite economic growth--a value-laden, quixotic ideal if ever there was one.
Once we recognize that the planet is finite, and that there is a limit to the stream of resources that can sustainably be used to make wealth, we have to face the difficult questions of distribution of wealth instead of simply--childishly, romantically-assuming the problem away.
And, in our calculations of the minimum amount of nature that should be left alone to preserve a necessary flow of ecosystem services, we need to remember Hayek's warning: democracy and planning are irreducibly in conflict. If we want to avoid the technocratic administration and centralized economic planning of Factory Planet, if we want to make unnecessary the development of an international technocratic elite who manage our interactions with earth's ecosystems in order to preserve the grand project of industrial civilization, we need to preserve some substantial and additional measure of Mill's "spontaneous activity of nature." Only by doing so will we inhabit a planet on which civil liberties remain possible.
The Financial Crisis Is the Environmental Crisis by Eric Zencey
In May of 2009, U.S. federal legislation created the Financial Crisis Inquiry Commission, charged with investigating the causes of the financial crisis that led to the largest economic downturn since the Great Depression. The Commission’s report is due in January. But don’t get your hopes up; they’re more than likely to get it wrong.
The Commission has held hearings with and gathered testimony from quite a few experts, all of them entrenched within the mainstream of neoclassical economic theory. The experts have named the usual suspects: cyclical swings between greed and fear; feedback effects that “disequilibrate” markets; cheap and “poorly documented” mortgage financing; bank accounting that kept some liabilities “off balance sheet;” the international sale of debt that guaranteed that a collapse in one market in one country would ripple out to affect the world; foreign demand for American debt, which created demand-pull for riskier and riskier American investments; and unworkable hedge funds that appeared to transform sure-to-fail loans into sure-to-pay investments.
It’s likely that all of these played a role. Fixes for most of them ought to be undertaken on their own merits. (Who could be in favor of “poorly documented mortgages” or “off-balance-sheet” investments?) But none of the testimony makes this point: the financial crisis is also the environmental crisis. We won’t solve the former until we start solving the latter.
Two facts about this crisis stand out: the world came to the brink of global economic collapse, and the world is and remains on the brink of ecosystem collapse. The economy is humanity’s primary instrument for interacting with its environment; this suggests that these two facts are somehow related. And yet none of the standard diagnoses come anywhere close to acknowledging that there might be a connection, let alone start to illuminate it. In the standard view, the financial crisis beset an economy that consists solely of humans acting within formalized systems of their own creation —systems that have no connection to a larger world.
And that’s why the standard view won’t succeed in fixing the problem. The spasm of debt repudiation with which the crisis began — the collapse of the sub-prime lending market — is what happens when an infinite-growth economy runs into the limits of a finite world.
That insight comes from the reference frame suggested by Frederick Soddy, as elaborated by Nicholas Georgescu-Roegen, Herman Daly, and others. Soddy offered a vision of economics as rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief in the economy as a perpetual motion machine, capable of generating infinite wealth. That belief is nowhere more clearly manifest than in how we treat money. Soddy distinguished between wealth, virtual wealth, and debt. Real wealth, even the provision of services, is irreducibly rooted in physical reality. The money we use to represent this wealth isn’t real wealth, but virtual wealth — a symbol representing the bearer’s claim on an economy’s ability to generate real wealth. Debt, for its part, is a claim on the economy’s ability to generate wealth in the future. “The ruling passion of the age,” Soddy said, “is to convert wealth into debt” — to exchange a thing with present day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made. Money facilitates the exchange; it is, Soddy said, “the nothing you get for something before you can get anything.”
Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy materials and energy that it can sustainably suck from its environment and by the amount of high-entropy effluent that natural systems can sustainably absorb. (We can in practice exceed those sustainable limits, but only temporarily; that is the definition of “unsustainable.”)
There are only two ways that an economy can increase the rate at which it creates wealth: it can process a larger and larger flow of matter and energy, increasing its ecological footprint on both the uptake and the effluent side; or it can achieve efficiencies in its use of a constant flow of matter and energy. Both means of growth have limits. Increasing an economy’s ecological footprint decreases the ability of healthy ecosystems to provide us with a civilization-sustaining flow of ecosystem services (like climate stability, a service currently in critically short supply). Efficiency gains in the use of a constant flow offer large returns today and will probably do so into the future, but those gains will become harder and harder to achieve as we run into diminishing returns. Technological advances and efficiencies will allow us to make more with less, especially in places where we’ve been profligate in our use of low-entropy inputs; but no technical advance will get us around the first law of thermodynamics, which tells us “you can’t make something from nothing, nor can you make nothing from something.” Creation of wealth is irreducibly physical, and all physical phenomena obey the laws of thermodynamics.
Thus, the creation of wealth has physical constraints, set by ecosystem limits, physical law, and the limits of the technology we currently employ. But debt, being imaginary, has no such limit. It can grow infinitely, compounding at any rate we choose to let it.
These considerations led Soddy to this incontrovertible truth: whenever an economy allows debt — a claim on wealth — to grow faster than wealth can be created, that economy has a structural need for debt to be repudiated.
Inflation can do the job, decreasing debt gradually by eroding the purchasing power of the monetary units in which debt is denominated. And debt repudiation can be exported — some of the pressure to reconcile wealth and debt is released when other nations in the system inflate their currencies or default on obligations.
But when there is no inflation, and when the economy becomes one integrated global system in which export to outside the system is no longer possible, overgrown claims on future wealth will produce regular crises of debt repudiation — stock market crashes, waves of bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets in any shape or form. As Lawrence Summers noted in a speech last year at the Brookings Institute, “In little more than two decades, we have seen the stock market crash of 1987, the savings and loan scandals, the decline of the real estate market, the Mexican crisis, the Asian crisis, LTCM, Enron and long-term capital. That works out to one big crisis every two and a half years.” He went on to add: “We can and must do better.” Each and every one of the crises he listed was, at bottom, a crisis of debt repudiation. We are unlikely to avoid their recurrence until we stop allowing claims on real wealth to grow faster than real wealth can grow.
The cause of the financial crisis, Soddy would certainly say, isn’t simply opportunistic financiers exploiting the lag between innovation and regulation, isn’t simply ignorance, isn’t a failure of regulatory diligence, isn’t a cascading lack of confidence that could be solved with some new and different version of the F.D.I.C. The problem is a systemic flaw in our treatment of money. Whenever and wherever growth in claims on wealth outstrips growth in wealth, our system creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernie Madoff or a subprime mortgage repackager or a hedge fund innovator willing to play their part in setting us up for a spasm of debt repudiation. Regulation will always be retrospective.
The best solution is to eliminate that niche. To do that, we must balance claims on future production of wealth with the economy’s power to produce that wealth.
Soddy distilled his vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable. One: abandon the gold standard. Two: let international exchange rates float against one another. Three: use federal surpluses and deficits as macroeconomic policy tools, countering cyclical trends. Four: establish bureaus of economic analysis to produce statistics (including a consumer price index) that will facilitate this effort. These proposals are now firmly grounded in conventional practice. Only Soddy’s fifth proposal remains outside the bounds of conventional wisdom: stop banks from creating money, and debt, out of nothing.
Soddy’s work helped to inspire the short-lived “100% Money” movement that emerged during the Depression, which offered a diagnosis that went beyond treatment of symptoms (the cascading collapse of confidence that led to bank failures, which was addressed through creation of the F.D.I.C.) to reach the underlying cause: the leveraging of debt through the practice of fractional reserve banking. Irving Fisher at Yale and Frank Knight, the prominent Chicago School economist, also supported the elimination of fractional reserve banking. For a time the movement counted no less an economic eminence than Milton Friedman as a sympathizer. (Perhaps because he saw that the tide of history was against him, Friedman eventually dropped his call for elimination of fractional reserve banking from his policy recommendations.) The 100% money movement finds a contemporary advocate in ecological economist Herman Daly, who has called for the gradual institution of a 100 percent reserve requirement on demand deposits. This would begin to shrink what he has called “the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash.”
In such a system, banks would support themselves by charging fees for safekeeping, check clearing, loan intermediation, and all the other legitimate financial services they provide. They would not generate income by lending out, at interest, the money entrusted to them for safekeeping — money that does not belong to them. Banks would still make loans and still be able to lend at interest “the real money of real depositors,” people who forego consumption today in order to take money out of their checking account and put it in time deposits (e.g., CDs, passbook savings, and 401Ks). In return these savers would still receive interest payments — a slightly larger claim on the real wealth of the community in the future.
In a 100% money system, every increase in spending by borrowers would have to be matched by an act of saving — abstinence — on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. To achieve 100% money, the creation of monetarized debt through other mechanisms — repackaged mortgages and securitized derivatives and the like — would also have to be brought under control.
An added benefit: establishing 100% money would have an enormous and positive effect on the public treasury. Seigniorage, the profit that comes from the creation of money, is currently given away free to banks (which collect it as the payment of interest and the repayment of principle on loans made with money that is not actually theirs). Under a 100% money regime, money would be created — spent into existence — by a public authority. (This is what Friedman advocated.) The capture of seigniorage would have obvious benefits for governmental budgeting: the seigniorage on a modest 3% growth in M1 (one of the chief measures of the money supply) amounts to $40 billion a year. And, when you come right down to it, to whom does seigniorage, by rights, belong? Despite long-standing custom to the contrary, the profit that comes from the issuance of money belongs to the sovereign power that guarantees that money. In the U.S., that’s us: We, the People.
This change in our banking system would eliminate the structural cause of spasms of debt repudiation. It would also eliminate one strong driver of uneconomic growth —growth that costs more in lost ecosystem services and other disamenities than it brings in the form of increased wealth. The change is thus economically and ecologically sound. It is, obviously, politically difficult — so difficult that advocacy for it sounds hopelessly unrealistic. But consider: in the 1920s, the abolition of the gold standard and the implementation of floating exchange rates sounded absurd. If the laws of thermodynamics are sturdy, and if Soddy’s analysis of their relevance to economic life is correct, we’d better expand the realm of what we think is realistic.
The Commission has held hearings with and gathered testimony from quite a few experts, all of them entrenched within the mainstream of neoclassical economic theory. The experts have named the usual suspects: cyclical swings between greed and fear; feedback effects that “disequilibrate” markets; cheap and “poorly documented” mortgage financing; bank accounting that kept some liabilities “off balance sheet;” the international sale of debt that guaranteed that a collapse in one market in one country would ripple out to affect the world; foreign demand for American debt, which created demand-pull for riskier and riskier American investments; and unworkable hedge funds that appeared to transform sure-to-fail loans into sure-to-pay investments.
It’s likely that all of these played a role. Fixes for most of them ought to be undertaken on their own merits. (Who could be in favor of “poorly documented mortgages” or “off-balance-sheet” investments?) But none of the testimony makes this point: the financial crisis is also the environmental crisis. We won’t solve the former until we start solving the latter.
Two facts about this crisis stand out: the world came to the brink of global economic collapse, and the world is and remains on the brink of ecosystem collapse. The economy is humanity’s primary instrument for interacting with its environment; this suggests that these two facts are somehow related. And yet none of the standard diagnoses come anywhere close to acknowledging that there might be a connection, let alone start to illuminate it. In the standard view, the financial crisis beset an economy that consists solely of humans acting within formalized systems of their own creation —systems that have no connection to a larger world.
And that’s why the standard view won’t succeed in fixing the problem. The spasm of debt repudiation with which the crisis began — the collapse of the sub-prime lending market — is what happens when an infinite-growth economy runs into the limits of a finite world.
That insight comes from the reference frame suggested by Frederick Soddy, as elaborated by Nicholas Georgescu-Roegen, Herman Daly, and others. Soddy offered a vision of economics as rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief in the economy as a perpetual motion machine, capable of generating infinite wealth. That belief is nowhere more clearly manifest than in how we treat money. Soddy distinguished between wealth, virtual wealth, and debt. Real wealth, even the provision of services, is irreducibly rooted in physical reality. The money we use to represent this wealth isn’t real wealth, but virtual wealth — a symbol representing the bearer’s claim on an economy’s ability to generate real wealth. Debt, for its part, is a claim on the economy’s ability to generate wealth in the future. “The ruling passion of the age,” Soddy said, “is to convert wealth into debt” — to exchange a thing with present day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made. Money facilitates the exchange; it is, Soddy said, “the nothing you get for something before you can get anything.”
Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy materials and energy that it can sustainably suck from its environment and by the amount of high-entropy effluent that natural systems can sustainably absorb. (We can in practice exceed those sustainable limits, but only temporarily; that is the definition of “unsustainable.”)
There are only two ways that an economy can increase the rate at which it creates wealth: it can process a larger and larger flow of matter and energy, increasing its ecological footprint on both the uptake and the effluent side; or it can achieve efficiencies in its use of a constant flow of matter and energy. Both means of growth have limits. Increasing an economy’s ecological footprint decreases the ability of healthy ecosystems to provide us with a civilization-sustaining flow of ecosystem services (like climate stability, a service currently in critically short supply). Efficiency gains in the use of a constant flow offer large returns today and will probably do so into the future, but those gains will become harder and harder to achieve as we run into diminishing returns. Technological advances and efficiencies will allow us to make more with less, especially in places where we’ve been profligate in our use of low-entropy inputs; but no technical advance will get us around the first law of thermodynamics, which tells us “you can’t make something from nothing, nor can you make nothing from something.” Creation of wealth is irreducibly physical, and all physical phenomena obey the laws of thermodynamics.
Thus, the creation of wealth has physical constraints, set by ecosystem limits, physical law, and the limits of the technology we currently employ. But debt, being imaginary, has no such limit. It can grow infinitely, compounding at any rate we choose to let it.
These considerations led Soddy to this incontrovertible truth: whenever an economy allows debt — a claim on wealth — to grow faster than wealth can be created, that economy has a structural need for debt to be repudiated.
Inflation can do the job, decreasing debt gradually by eroding the purchasing power of the monetary units in which debt is denominated. And debt repudiation can be exported — some of the pressure to reconcile wealth and debt is released when other nations in the system inflate their currencies or default on obligations.
But when there is no inflation, and when the economy becomes one integrated global system in which export to outside the system is no longer possible, overgrown claims on future wealth will produce regular crises of debt repudiation — stock market crashes, waves of bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets in any shape or form. As Lawrence Summers noted in a speech last year at the Brookings Institute, “In little more than two decades, we have seen the stock market crash of 1987, the savings and loan scandals, the decline of the real estate market, the Mexican crisis, the Asian crisis, LTCM, Enron and long-term capital. That works out to one big crisis every two and a half years.” He went on to add: “We can and must do better.” Each and every one of the crises he listed was, at bottom, a crisis of debt repudiation. We are unlikely to avoid their recurrence until we stop allowing claims on real wealth to grow faster than real wealth can grow.
The cause of the financial crisis, Soddy would certainly say, isn’t simply opportunistic financiers exploiting the lag between innovation and regulation, isn’t simply ignorance, isn’t a failure of regulatory diligence, isn’t a cascading lack of confidence that could be solved with some new and different version of the F.D.I.C. The problem is a systemic flaw in our treatment of money. Whenever and wherever growth in claims on wealth outstrips growth in wealth, our system creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernie Madoff or a subprime mortgage repackager or a hedge fund innovator willing to play their part in setting us up for a spasm of debt repudiation. Regulation will always be retrospective.
The best solution is to eliminate that niche. To do that, we must balance claims on future production of wealth with the economy’s power to produce that wealth.
Soddy distilled his vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable. One: abandon the gold standard. Two: let international exchange rates float against one another. Three: use federal surpluses and deficits as macroeconomic policy tools, countering cyclical trends. Four: establish bureaus of economic analysis to produce statistics (including a consumer price index) that will facilitate this effort. These proposals are now firmly grounded in conventional practice. Only Soddy’s fifth proposal remains outside the bounds of conventional wisdom: stop banks from creating money, and debt, out of nothing.
Soddy’s work helped to inspire the short-lived “100% Money” movement that emerged during the Depression, which offered a diagnosis that went beyond treatment of symptoms (the cascading collapse of confidence that led to bank failures, which was addressed through creation of the F.D.I.C.) to reach the underlying cause: the leveraging of debt through the practice of fractional reserve banking. Irving Fisher at Yale and Frank Knight, the prominent Chicago School economist, also supported the elimination of fractional reserve banking. For a time the movement counted no less an economic eminence than Milton Friedman as a sympathizer. (Perhaps because he saw that the tide of history was against him, Friedman eventually dropped his call for elimination of fractional reserve banking from his policy recommendations.) The 100% money movement finds a contemporary advocate in ecological economist Herman Daly, who has called for the gradual institution of a 100 percent reserve requirement on demand deposits. This would begin to shrink what he has called “the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash.”
In such a system, banks would support themselves by charging fees for safekeeping, check clearing, loan intermediation, and all the other legitimate financial services they provide. They would not generate income by lending out, at interest, the money entrusted to them for safekeeping — money that does not belong to them. Banks would still make loans and still be able to lend at interest “the real money of real depositors,” people who forego consumption today in order to take money out of their checking account and put it in time deposits (e.g., CDs, passbook savings, and 401Ks). In return these savers would still receive interest payments — a slightly larger claim on the real wealth of the community in the future.
In a 100% money system, every increase in spending by borrowers would have to be matched by an act of saving — abstinence — on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. To achieve 100% money, the creation of monetarized debt through other mechanisms — repackaged mortgages and securitized derivatives and the like — would also have to be brought under control.
An added benefit: establishing 100% money would have an enormous and positive effect on the public treasury. Seigniorage, the profit that comes from the creation of money, is currently given away free to banks (which collect it as the payment of interest and the repayment of principle on loans made with money that is not actually theirs). Under a 100% money regime, money would be created — spent into existence — by a public authority. (This is what Friedman advocated.) The capture of seigniorage would have obvious benefits for governmental budgeting: the seigniorage on a modest 3% growth in M1 (one of the chief measures of the money supply) amounts to $40 billion a year. And, when you come right down to it, to whom does seigniorage, by rights, belong? Despite long-standing custom to the contrary, the profit that comes from the issuance of money belongs to the sovereign power that guarantees that money. In the U.S., that’s us: We, the People.
This change in our banking system would eliminate the structural cause of spasms of debt repudiation. It would also eliminate one strong driver of uneconomic growth —growth that costs more in lost ecosystem services and other disamenities than it brings in the form of increased wealth. The change is thus economically and ecologically sound. It is, obviously, politically difficult — so difficult that advocacy for it sounds hopelessly unrealistic. But consider: in the 1920s, the abolition of the gold standard and the implementation of floating exchange rates sounded absurd. If the laws of thermodynamics are sturdy, and if Soddy’s analysis of their relevance to economic life is correct, we’d better expand the realm of what we think is realistic.
The Economic Thought of Frederick Soddy by Herman E Daly
Almost always the men who achieve these fundamental inventions of a new paradigm have been either very young or very new to the field whose paradigm they change.
- Thomas S. Kuhn,
The Structure of Scientific Revolutions(1962), page 89.
I. Introduction
Frederick Soddy (1877-1956) is best known as a pioneering chemist who collaborated with Rutherford in studying radioactive disintegration, predicted the existence of and coined the name for isotopes, and was a major contributor to the modern theory of atomic structure. For these achievements he was elected a Fellow of the Royal Society in 1910 and was awarded the Nobel Prize in 1921. He was a member of the Swedish, Italian, and Russian acadamies of science. During his career he held university positions at McGill, Glasgow, Aberdeen, and from 1919 onward, Oxford (Fleck 1957).
Although an enthusiastic believer in scientific progress and in the possibility of a society in which the fruits of scientific knowledge would be shared by all, Soddy was acutely aware that history supported the view that science has proved as much a curse as a blessing to humanity. Nor could he accept the comfortable view that scientists have no responsibility for the uses to which their work is put. Even though others (bankers and economists) bore, in his view, a far greater burden of guilt for the misuse of knowledge, scientists could not plead innocent. The world's real problem was faulty economics, not faulty chemistry, and for the second half of his nearly eighty years economics replaced chemistry as the center of his intellectual life.
Soddy realized earlier than most the theoretical possibility of atomic energy. Since his own work had contributed to the discovery that this vast energy potential existed, it was natural for him to ask, "what sort of a world it would be if atomic energy ever became available" (
Wealth, page 28). His answer (written in 1926) was clear:
If the discovery were made tomorrow, there is not a nation that would not throw itself heart and soul into the task of applying it to war, just as they are now doing in the case of the newly developed chemical weapons of poison-gas warfare ... If [atomic energy] were to come under existing economic. conditions, it would mean the reductio ad absurdum
of scientific civilization, a swift annihilation instead of a none too lingering collapse [Wealth, page 28].
For Soddy, the problem was to change economic conditions in order eventually to make the world safe for atomic energy and other fruits of science. There must be something radically wrong with economic thought and institutions in order for the gift of scientific knowledge to have become such a threat. Soddy was thus led to a radical critique of economics.
It is interesting that Soddy's concern about the destructive potential of atomic energy was considered extreme at the time. Another Nobel laureate, Robert A Millikan, commented:
... since Mr Soddy raised the hobgoblin of dangerous quantities of available subatomic energy [science] has brought to light good evidence that this particular hobgoblin - like most of the bugaboos that crowd in on the mind of ignorance - was a myth ... The new evidence born of further scientific study is to the effect that it is highly improbable that there is any appreciable amount of available subatomic energy for man to tap[Millikan, page 121].
Millikan, of course, turned out to be wrong, but the underlying faith that he went on to express is still held by many, namely that one may "sleep in peace with the consciousness that the Creator has put some foolproof elements into his handiwork, and that man is powerless to do it any titanic physical damage" (
ibid). As R L Sinsheimer recently noted, "Scientific endeavor rests upon the faith that our scientific probing and our technological ventures will not displace some key element of our protective environment and thereby collapse our ecological niche" (Sinsheimer, page 24). It now seems evident that the only protective element the Creator put into his handiwork is man's capacity for moral insight and restraint, which is far from foolproof. With the benefit of hindsight we can see that Soddy was the true prophet and that the scientific establishment, represented by Millikan, was whistling in the dark.{1} Far from believing in providential "foolproof elements" built into creation, Soddy was convinced that the economic system contained built-in elements for assuring the destruction of creation, once science gave man the power. The key problem therefore was to discover and correct the errors in our economic thinking and institutions, a task which Soddy tackled with both moral fervor and the systematic logic of an experienced scientist.
Perhaps the most intriguing thing about Soddy the economist is that he started his inquiry with a mind both highly intelligent and completely free from the preconceived paradigm of the orthodox economists, for whom he had an undisguised contempt. The contempt was mutual. With the significant exception of Frank Knight, to be discussed later, Soddy's work was ignored by economists. Unlike the American positional astronomer, Simon Newcomb, who also came to economics from the physical sciences, Soddy came as a critic, not a student, and remained an outsider. Newcomb liked economics, did not believe that his pre-World War One America was in mortal danger from an increasingly powerful but misdirected application of science, and wrote a fairly orthodox
Principles of Political Economy(1885) which demonstrated that he had done his economics homework, and had earned the right to try to make economics just a bit more scientific. Soddy, on the other hand, considered economics a pseudoscience in need of a totally new beginning. John Ruskin, not Ricardo, Mill, or Marshall, was his inspiration.
The not surprising consequence of this approach was that Soddy was and continues to be written off as a crank. In fact, Soddy's economics seems to have been something of an embarrassment to everyone but Soddy. The
Times Literary Supplement(page 565), in reviewing his major economic work (
Wealth, Virtual Wealth, and Debt) remarked that it was sad to see a respected chemist ruin his reputation by writing on a subject about which he was quite ignorant. Nor had the verdict changed thirty years and several books later, when in 1956 an obituary in
Sciencelamented that, "Some ... knew him only as ... a 'crank' on the subject of monetary policy ... His fanatical devotion to schemes of this sort, derided by the orthodox economists, ... was surprising to many who knew him first as a pioneer in chemical science" (Russell, page 1069). This neglect of Soddy's economics is unfortunate because, although Soddy is admittedly unconvincing in his frequent attribution of war and all other evils to fractional reserve banking, he nevertheless has much to teach us, and in fact anticipated the recent contribution of N Georgescu-Roegen (1971) in providing economics with a partial foundation in thermodynamics, the physics of usefulness.
The fact that Soddy might have learned more from economists than he did does not mean that economists have nothing to learn from Soddy. The approach here taken is to think of him somewhat as an intelligence from Mars which looked at economic issues in a different way, and to try sympathetically to understand him and render him intelligible to modern economists. In what follows I attempt to summarize and explain Soddy's critique of economics.
II. The Neglected Physical Basis of Economics
Soddy's basic philosophical approach to economics might be called materialism without reductionism. We must recognize the fundamental dualism of the material and the spiritual and resist "monistic obsessions" (
Cartesian Economics, page 6). Economics occupies the middle ground between matter and spirit, between the electron and the soul:
In each direction possibilities of further knowledge extend ad infinitum, but in each direction diametrically away from and not towards the problems of life. It is in this middle field that economics lies, unaffected whether by the ultimate philosophy of the electron or the soul, and concerned rather with the interaction, with the middle world of life of these two end worlds of physics and mind in their commonest everyday aspects, matter and energy on the one hand, obeying the laws of mathematical probability or chance as exhibited in the inanimate universe, and, on the other, with the guidance, direction and willing of these blind forces and processes to predetermined ends[ibid].
Soddy rejects the monism of "Ultra-Materialism":
I cannot conceive of inanimate mechanism, obeying the laws of probability, by any continued series of successive steps developing the powers of choice and reproduction any more than I can envisage any increase in the complexity of an engine resulting in the production of the "engine-driver" and the power of its reproducing itself. I shall be told that this is a pontifical expression of personal opinion. Unfortunately, however, for this argument, inanimate mechanism happens to be my special study rather than that of the biologist. It is the invariable characteristic of all shallow and pretentious philosophy to seek the explanation of insoluble problems in some other field than that of which the philosopher has first hand acquaintance[ibid, page 7].
Yet a proper materialism must be one of the foundation stones of economics. In fact, "without phosphorus no thought" (
Story of Atomic Energy, page 129) is an axiom that all philosophers and ethicists should be required to memorize. What mechanical science teaches economics is that
life derives the whole of its physical energy or power, not from anything self-contained in living matter, and still less from an external deity, but solely from the inanimate world. It is dependent for all the necessities of its physical continuance primarily upon the principles of the steam-engine. The principles and ethics of human law and convention must not run counter to those of thermodynamics[Cartesian Economics, page 9].
The last sentence is very significant because it provides the basis for many of Soddy's criticisms of the economy as a presumed perpetual motion machine. For men, like other heat engines, the physical problems of life are energy problems. Pre-nineteenth-century man lived on energy revenue (sunlight captured by plants, the "original capitalists"). Present-day man augments this revenue by consuming energy capital (coal, the "stored sunlight of palaeozoic summers"). While man can use fuel-fed machinery to lighten labor, he can feed his internal fires only with new sunshine, or rather the energy of new sunshine as transformed through the good offices of the plant. Life thus depends on a continuous flow of energy, and hence the enabling requisites of life must partake of the nature of a flow rather than only a stock. There are limits to the degree that this flow can be stored for future use. A significant part of the requisites of life must come to us as a current flow or "revenue" that cannot in any physical sense be converted to a stock and indefinitely stored for later use. Like the manna which God sent to the Hebrews in the wilderness, the revenue is renewed daily, must be gathered in amounts sufficient for the day (neither too much nor too little), and breeds worms and becomes foul if accumulated too much in excess of current needs (
Exodus16: 17-20). Stocks of assets, to the extent that we can maintain them against the ravages of entropy, are aids and accessories in improving our ability to tap the energy revenue, but the revenue itself cannot be significantly increased, and it cannot be saved except to a limited degree. Indeed, the very maintenance of our accumulated stock of physical wealth against the destructive force of entropy requires the renewing power of the low-entropy "revenue" flow. True, nature has stored energy in coal, but it took geologic epochs of time, and we are only able to unstore it. Furthermore the "flamboyant period" of using up the capital stock of coal was perceived by Soddy as a "very passing phase", after which the constraints imposed by living on energy revenue would be more clearly seen and unmistakably felt.
For Soddy the basic economic question was "How does man live?" and the answer was "By sunshine". The rules that man must obey in living on sunshine, whether current or palaeozoic, are the first and second laws of thermodynamics. This in a nutshell is "the bearing of physical science upon state stewardship". Wealth is for Soddy "the humanly useful forms of matter and energy" (
The Arch Enemy, page 6). Wealth has both a physical dimension, matter-energy subject to the laws of inanimate mechanism, and a teleological dimension of usefulness, subject to the purposes imposed by mind and will. Soddy's concept of wealth reflects his fundamental dualism and his belief that the middle world of life and wealth is concerned with the interaction of the two end worlds of physics and mind in their commonest everyday aspects. That Soddy concentrated on the physical dimension in order to repair the consequences of its past neglect should not be allowed to lead one to suppose that he proposed a monistic physical theory of wealth, a misinterpretation which, we will see, was fostered by Frank Knight.
III. The Major Confusion: Wealth Versus Debt
The fundamental error of economics is the confusion of wealth, a magnitude with an irreducible physical dimension, with debt, a purely mathematical or imaginary quantity. The positive physical quantity, two pigs, represents wealth and can be seen and touched. But minus two pigs, debt, is an imaginary magnitude with no physical dimension:
Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... For sufficient reason, the process of compound interest is physically impossible, though the process of compound decrement is physically common enough. Because the former leads with the passage of time ever more and more rapidly to infinity, which, like minus one, is not a physical but a mathematical quantity, whereas the latter leads always more slowly towards zero, which is, as we have seen, the lower limit of physical quantities[Wealth, page 70].
The ruling passion of the age is to convert wealth into debt in order to derive a permanent future income from it - to convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in perennial interest (
Money Versus Man, page 25). No individual could amass the physical requirements sufficient for maintenance during his old age, for like manna it would rot. Therefore he must convert his non-storable surplus into a lien on future revenue, by letting others consume and invest his surplus now in exchange for the right to share in the increased future revenue. The revenue is "a river of perishable and consumable wealth, steadily flowing to waste whether consumed by human beings or by rats and worms" (
Inversion of Science, page 24). But since future annual revenue is limited, there is a corresponding limit on the extent to which present surpluses can be exchanged for perennial streams of future revenue. Soddy emphasizes that the present surplus accumulation can never be changed into future revenue in any physical sense, but only exchanged for it under social conventions. Although it may comfort the lender to think that his wealth still exists somewhere in the form of "capital", it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues to be generated by future sunshine. "Capital", says Soddy , "merely means unearned income divided by the rate of interest and multiplied by 100'' (
Cartesian Economics, page 27).
Although debt can follow the law of compound interest, the real energy revenue from future sunshine, the real future income against which the debt is a lien, cannot grow at compound interest for long. When converted into debt, however, real wealth "discards its corruptible body to take on an incorruptible" (
Money Versus Man, page 28). In so doing, it appears "to afford a means of dodging Nature" (page 24), of evading the second law of thermodynamics, the law of random, ravage, rust, and rot. The idea that people can live off the interest of their mutual indebtedness (
Wealth, page 89) is just another perpetual motion scheme - a vulgar delusion on a grand scale. Soddy seems to be saying that what is obviously impossible for the community - for everyone to live on interest - should also be forbidden to individuals, as a principle of fairness. If it is not forbidden, or at least limited in some way, then at some point the growing liens of debt holders on the limited revenue will become greater than the future producers of that revenue will be willing or able to support, and conflict will result. The conflict takes the form of debt repudiation. Debt grows at compound interest and as a purely mathematical quantity encounters no limits to slow it down. Wealth grows for a while at compound interest, but, having a physical dimension, its growth sooner or later encounters limits. Debt can endure forever; wealth cannot, because its physical dimension is subject to the destructive force of entropy. Since wealth cannot continually grow as fast as debt, the one-to-one relation between the two will at some point be broken - that is, there must be some repudiation or cancellation of debt. The positive feedback of compound interest must be offset by counteracting forces of debt repudiation, such as inflation, bankruptcy, or confiscatory taxation, all of which breed violence. Conventional wisdom considers the latter processes pathological, but accepts compound interest as normal. Logic demands, however, that either we constrain compound interest in some way, or accept as normal and necessary one or more of the counteracting mechanisms of debt repudiation. {2} As Soddy put it,
You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy][Cartesian Economics, page 30].
The perpetual motion delusion of living on debt has arisen in the following way, Soddy says:
Because formerly ownership of land - which, with the sunshine that falls on it, provides a revenue of wealth - secured, in the form of rent, a share in the annual harvest without labor or service, upon which a cultured and leisured class could permanently establish itself, the age seems to have conceived the preposterous notion that money, which can buy land, must therefore itself have the same revenue-producing power[Wealth, page 106].
If debt and money are the units of measure by which we account for and keep track of the production and distribution of physical wealth, then surely the units of measure and the reality being measured cannot be governed by different laws. Soddy's "acid test is that no monetary accountancy be allowed that could not be done equally well by physical counters" (
The Arch Enemy, page 24). If wealth cannot grow at compound interest for long, then debt should not either. If wealth cannot be created
ex nihilothen how can we allow money (debt) to be created ex nihilo (and just as easily destroyed)? Worse, how can we tolerate the fact that money is both created
ex nihiloand lent at compound interest, while at the same time serving as a unit of measure for wealth which is incapable of either of those "conjuror's tricks"? This brings us to money, the topic which most occupied Soddy's attention.
IV. The Monetary Flaw
The main defect in the economic system was, for Soddy, the practice of fractional reserve banking whereby the private banking system was enabled to create money, thus appropriating what he called the Virtual Wealth of the community, which it then lent at interest. The concept of "virtual wealth" plays a key role in Soddy's analysis. Essentially it is the aggregate value of real wealth which individuals in the community voluntarily abstain from holding in order to hold money instead. In order to escape the inconvenience of barter everyone must hold money, which could be exchanged for real wealth, but is not. In Soddy's words, "This aggregate of exchangeable goods and services which the community continuously and permanently goes without (though
individualmoney owners can instantly demand and obtain it from other individuals) the author terms the Virtual Wealth of the community" (
Role of Money, page 36).
If everyone tried to exchange his money holdings for real assets it could not be done, because all real assets are already owned by someone, and in the final analysis someone has to end up holding the money. So Virtual Wealth does not really exist as actual wealth over and above the value of real assets, which is why it is called Virtual. Yet people behave as if Virtual Wealth were real, because at an individual level money is easily exchangeable for physical assets. The phenomenon of Virtual Wealth must occur in a monetary economy, unless the money is itself a commodity that circulates at its commodity value.
The value of each unit of money, or the inverse of the "price-index", is simply the Virtual Wealth divided by the total aggregate of money held.
Soddy gives the following summary of the nature and importance of Virtual Wealth:
Money is now a form of national debt, owned by the individual and owed by the community, exchangeable on demand for wealth by transference to another individual. Its value or purchasing power is not directly determined by any positive or existing quantity of wealth, but by the negative quantity or deficit of wealth, the ownership and enjoyment of which is voluntarily abstained from without the payment of interest, by the owners of the money, to suit their individual business and domestic affairs and convenience. The aggregate of this deficit is called the Virtual Wealth of the community, and it measures the value of all the money owned by the community, which is forced by the necessity of exchanging its produce to act as though it possessed this amount of wealth more than it actually does possess. The Virtual Wealth of a community is not a physical but an imaginary negative wealth quantity. It does not obey the laws of conservation, but is of psychological origin[Wealth, page 295].
Virtual Wealth varies with the size of population and national income and the business and payment habits of the community. It is only when Virtual Wealth is constant that we can equate the value of a unit of money to the ratio of Virtual Wealth to aggregate money held. Soddy believed that Virtual Wealth, though not constant, was far less variable than the money supply.
Who benefits from Virtual Wealth? In a sense the whole community does, since it is the price of avoiding barter, or more precisely the price of avoiding the waste of a full commodity currency which uses costly resources (gold) to perform a function that could be performed by paper or by abstract accounting units. In another sense, Virtual Wealth is like seigniorage, the difference between the monetary value and the commodity value (cost of production) of the money token. With the advent of credit money the commodity value of the token becomes nil and seigniorage or Virtual Wealth is the full monetary value of the money issued - or rather the equivalent in forgone utility. The analogy with seigniorage suggests a further answer to the question of who benefits from Virtual Wealth. It is the issuer of fiat money, whoever first puts it in circulation, that gets the seigniorage. The ancient prerogative of the crown has been usurped, not by the modern State, the crown's legitimate heir, but by the private banking system, which "has corrupted the purpose of money from that of an exchange medium to that of an interest-bearing debt'' (
Wealth, page 296). Moreover the very existence of the bulk of our money depends upon this debt never being liquidated. The very existence of money now becomes a source of private income, and the total money supply becomes a "concertina" expanding to fuel a boom, and contracting with debt repayment and default thereby reinforcing a slump.
Soddy's concept of Virtual Wealth bears an interesting relation to the modern debate about whether fiat money is a part of the net wealth of the community. Pesek and Saving (1967) argue that it is, whereas others, such as James Tobin (1965), argue that it is not. Soddy says that fiat money is Virtual Wealth. Individuals voluntarily hold money balances rather than an equivalent value in real assets in order to escape the enormous inconvenience of barter. Virtual Wealth is the utility cost of holding money. The fact that the benefits are worth more than the costs does not make the costs disappear, and does not convert money into wealth. The social institution of money may be regarded as a form of collective patrimony in the same sense as an efficient legal code or an advanced technology. But the money commodity itself need not be, and in the case of fiat money is not, a productive asset. Indeed, the very advantage of fiat money is to free resources from being tied up in money so that more real assets may be produced with the resources. We count the extra real assets made possible by fiat money as a part of the aggregate wealth of the community, but not the paper chits themselves. Soddy's notion of Virtual Wealth is actually very close to what James Tobin terms the "fiduciary issue":
The community's wealth now has two components: the real goods accumulated through past real investment and fiduciary or paper "goods" manufactured by the government from thin air. Of course, the nonhuman wealth of such a nation "really" consists only of its tangible capital. But, as viewed by the inhabitants of the nation individually, wealth exceeds the tangible capital stock by the size of what we might term the fiduciary issue. This is an illusion, but only one of the many fallacies of composition which are basic to any economy or society. The illusion can be maintained unimpaired as long as the society does not actually try to convert all of its paper wealth into goods[Tobin, page 676].
For Soddy, banks do not really make loans, because a loan implies that the lender gives up what the borrower receives. When a bank lends money it gives up nothing, creating the deposits
ex nihiloup to the limit set by reserve requirements. {3} The real "lender" is the community at large whose money balances lose in purchasing power with the issue of new money. We know the new money will be spent and increase demand, because the borrower who gets it would not pay interest just to increase his idle balances. Prices are bid up since
ex nihilocreation of money (demand) can increase much more rapidly than can the
ex materiacreation of new physical wealth (supply). But the more direct line of causation is simply that relatively constant Virtual Wealth divided by more pounds means each pound is worth less. Money should not bear interest as a condition of its existence, but only when genuinely lent by an owner who gives it up to a borrower. Banks are like counterfeiters who lend false money, accept their own false money in repayment and destroy it, but receive the interest in real money transferred to them by the rest of the community, and which is not destroyed. Banks create and destroy money with no understanding of the "laws that correlate its quantity with the national income" (
Wealth, page 296). Also by continually changing the value of money as they create and destroy it, the banking system converts the pound sterling into a rubber yardstick, in effect making a mockery of all physical measurement standards, since "yards per pound" or "gallons per pound" become variable magnitudes, even though yards and gallons be fixed.
At first sight it may seem odd that one who analyzes the economy with the concepts of physical science should focus so much on money, instead of real resources, matter, energy, and the rest. But, of course, it is precisely the fact that money seems to have escaped the laws of conservation and entropy that led Soddy to conclude that the flaw in the system must lie with the "conjuror's tricks" of modern bankers, who
have been allowed to regard themselves as the owners of the virtual wealth which the community does not possess, and to lend it and charge interest upon the loan as though it really existed and they possessed it. The wealth so acquired by the impecunious borrower is not given up by the lenders, who receive interest on the loan but give up nothing, but is given up by the whole community, who suffer in consequence the loss through a general reduction in the purchasing power of money[Wealth, page 296].
A further contradiction arises from the interest-bearing national debt being used as collateral security by bondholders who borrow from banks. Banks create a deposit (new money) for the borrowing bondholder and charge him interest. The public is taxed to enable the government to pay interest on the bond to the bondholder who, in effect, passes the interest on to the bank. Soddy draws the conclusion that "taxes are thus paid to the bank for doing what the taxes were imposed to prevent being done, namely, the increase of the currency. Otherwise, there would have been no reason for the State to borrow at interest if it had not wished to prevent the increase of the currency" (Wealth, pages 195, 298). Soddy considers this the final
reductio ad absurdumof the monetary system.
V. Reform Measures
Three basic reforms are suggested by Soddy to restore honesty and accuracy to the economic system: a 100 percent reserve requirement for banks; a policy of maintaining a constant price-index; and freely fluctuating exchange rates internationally.
With a 100 percent reserve requirement banks could no longer create money, and that basic function, along with the seigniorage prerogative, or the ownership of Virtual Wealth, would be restored to the State, which would again become the sole "utterer" of money. Banks would have to exist by charging for their legitimate services, that is, those that do not require the creation of money.
What principle is to govern the State in issuing money? Money is to be created or destroyed by the State as needed in order to keep the purchasing power of money constant. A price index will be devised by the National Statistical Authority. If the index has a tendency to fall over time, the government will finance its own activities by printing money. Alternatively it might lower taxes, or use the newly created money to redeem interest-bearing national debt. In other words deflation would be corrected by some form of money-creating government deficit. If the index shows a rising tendency the government will raise taxes (or issue interest-bearing national debt) and not spend the revenue. Inflation would be corrected by a money-destroying government surplus. Soddy makes an analogy between the price index and the governor on a steam engine. Both provide a mechanism of stabilizing feedback. The then existing system suffered from destabilizing feedback, since the money supply would expand during a boom and contract during a slump, thereby reinforcing the original tendency.
Equilibrium in balance of payments with the rest of the world would be achieved by freely fluctuating exchange rates which would tend to establish a kind of purchasing power parity among currencies. International flows of gold and the consequent inflationary and deflationary pressures on national economies would thereby be eliminated, thus easing the task of keeping the internal purchasing power of the currency constant. Furthermore, the need for tariffs and other interferences with free trade designed to correct international payments imbalances, major causes of international conflict, would have been eliminated.
Soddy's proposals have nothing in common with those of Silvio Gesell or Major Douglas, or other famous "monetary cranks". Soddy respected these men for raising important questions, but concluded that in their proposals for reform they were just as guilty of appealing to "conjuror's tricks" as were the orthodox money men. Far from advocating "funny money schemes", Soddy considered the existing canons of sound finance to be elaborate mystifications obscuring the most blatant "funny money" practices carried on in the interest of the bankers and their class, to the detriment of society. These socially dishonest though perfectly legal practices, along with the attempt to convert wealth into debt internationally and live off the interest received from other countries, plus the waning of the "flamboyant period" of energy capital consumption, of which "imperialism marks its final bid for survival" (
Cartesian Economics, page 12), would lead inexorably to international conflict and to the misuse of the gifts of science in warfare.
Reform of both economic understanding and the economic system in the light of physical and moral first principles is the sine qua non of a civilization capable of using knowledge for good rather than evil. "Let us have an end of the pretence that economics should not be concerned with morals" (
Role of Money, page 214). As a minimum morality, economics must surely insist on a system of honest weights and measures underlying exchange; yet the current monetary system with its fluctuations in purchasing power subverts honest measure and gives a false accounting of the physical realities underlying the production and distribution of wealth.
VI. The Relevance of Soddy's Economic Thought Today
Soddy's insistence that the first and second laws of thermodynamics must be the starting point of economics (
Role of Money, pages 4, 5) is a fundamental insight the relevance of which has grown as we have come to discover that neither the sources of low entropy inputs nor the sinks for high entropy waste outputs are infinite. Probably the most important economic treatise of the last forty years is Nicholas Georgescu-Roegen's
The Entropy Law and the Economic Process(1971), which demonstrates that the economic process is entropic in its physical coordinates; that wealth is an open system, a structure maintained in the midst of a throughput that begins with the depletion of low entropy matter-energy and ends with the return of an equal quantity of polluting high entropy matter-energy back to the environment; that in contrast to the reversibility of mechanical phenomena, entropic phenomena are characterized by irreversibility, a fatal weakness of the mechanistic epistemology of standard economics; and that there is a critical asymmetry between our two sources of low entropy. The last point refers to the fact that solar low entropy (Soddy's revenue) is nearly infinite in total amount but strictly limited in its rate of flow to earth, whereas terrestrial low entropy (concentrated minerals in the earth's crust) is strictly limited in total amount, but can be used up at a rate of our own choosing. Economic development since the industrial revolution has been in the direction of ever less reliance on the abundant solar flow and towards dependence on the relatively scarce terrestrial stock. This is what Soddy called the "flamboyant period", destined to be short-lived.
Evidently Georgescu-Roegen was unaware of the writings of Soddy on this subject, because he never cites Soddy. No one is more scrupulously honest and painstaking in citing the work of others than Georgescu-Roegen, and this omission is pointed out only to indicate the extent of Soddy's obscurity as an economist. Similar comments apply to Kenneth Boulding, {4} who has also related economics to thermodynamics, without mentioning Soddy, and to the present author as well. This omission is understandable because after all Soddy was a chemist not an economist, and his economic writings all bore titles indicating only the monetary nature of his economic work, or such uninformative titles as
Cartesian Economics. Only the subtitle of the latter, "The Bearing of Physical Science Upon State Stewardship", gives any hint of the nature of his most important and original contribution to economics. But the fact remains that Soddy anticipated the basic insights of Georgescu-Roegen and Boulding regarding the relation of economics and thermodynamics, and deserves recognition as a pioneer in a line of thinking which I believe will one day be dominant.
Soddy was also a pioneer in recognizing the moral responsibility of science, and in realizing ahead of others that new knowledge, while it might not be permanently "forbidden", can certainly be "inopportune" under existing social and moral conditions, even to the extent of being lethal to the civilization that made it possible (Sinsheimer, page 24).
Was Soddy successful in his effort to discover the flaws in the economic system that corrupted the fruits of science and led to war? Would 100 percent reserves, a constant price index, and flexible exchange rates make the world safe for atomic energy? Is it true that whether science emancipates or destroys humanity depends on a "minor technical point in a banking system", as Soddy claimed (
Inversion of Science, page iv)? One may reasonably doubt it. In fact it seems that at this point Soddy himself was "seeking the solution to insoluble problems in some field other than that of which the philosopher has firsthand acquaintance" - to recall his own jibe at the mechanistic biologists. But the fact that Soddy exaggerated the efficacy of his suggested reforms does not mean that his analysis is unimportant. Neither the specific proposals nor the reasoning underlying them can be fairly dismissed as those of an outsider or a monetary crank who just does not understand economics. {5} Flexible exchange rates have come into being already, and Soddy was arguing their virtues at a time when most economists were wedded to the gold standard. The new humility born of the theoretical anomaly of simultaneous inflation and unemployment and the demonstrated inability of orthodox "monetary cranks" to deal with persistent inflation could conceivably lead to a reconsideration of the constant price-index and 100 percent reserve requirements. Of course some of these policies have had other champions besides Soddy, some with very respectable academic credentials, such as Henry Simons and Irving Fisher (see Simons 1948 and Fisher 1935).
It is curious that Irving Fisher never mentions Soddy in his writings on 100 percent money. Soddy, however, in a pamphlet written in 1943 refers to Fisher: "Some years later, after the great depression in the USA, an American economist, Professor Irving Fisher of Yale University, put forward a scheme which in its original form was practically identical [to Soddy's "pound for pound banking" plan] and which he termed 100% money" (
The Arch Enemy, page 11). Soddy's plan was published in 1926, Fisher's in 1935. Soddy seems to regard the near identity of plans as an interesting and encouraging coincidence and in no way suggests that Fisher had copied or even been influenced by him.
Although a great enthusiast for science and technology, Soddy could not share the popular obsession with unlimited growth. Even if continual economic growth were possible, it would at some point become senseless. On this point Soddy quotes John Ruskin, whom he greatly admired as an economist: "Capital which produces nothing but capital is only root producing root; bulb issuing in bulb, never in tulip; seed issuing in seed never in bread. The Political Economy of Europe has hitherto devoted itself to the multiplication ... of bulbs. It never saw or conceived such a thing as a tulip" (
Money Versus Man, page v).
Soddy held that "economic sufficiency is the essential foundation of all national greatness and progress" (
Money Versus Man, page 12). But sufficiency means "enough" and growth beyond "enough" is just "seed issuing in seed never in bread". Soddy does not define "sufficiency", but it is clear that any definition must respect the limits of energy revenue from the sun as captured by plants, and the entropic limits on the possibility of storing up wealth for future use, as well as the teleological constraint implied by a defined (that is, limited) purpose from which low entropy matter-energy derives its value dimension, and thus becomes wealth. Not all matter-energy is capable of becoming wealth; only low entropy matter-energy has the physical potential for usefulness, for receiving the imprint of information and purpose. Since the entropy law says in effect that potential gets used up, then scarcity must increase over the long run. But what bothered Soddy was not the scarcity implications of entropy, since he believed that science could more than offset increasing scarcity for a very long time yet. The truly scarce factor for Soddy was not low entropy, but our ability to keep from blowing up scientific civilization with the increasing power that science made available. We persist in applying those powers toward the impossible goal of making the real world of matter-energy conform to the purely mathematical law of compound interest. This leads to debt cancellation, conflict, and war. Orthodox growth economics notwithstanding, the best evidence is that the earth is not growing at all, much less at a rate equal to the rate of interest. The attempt to pit an absurd human convention against a natural law is not only foolish, but highly dangerous.
The absurdity of infinite growth has been the most carefully ignored anomaly in the paradigm of modern economics. As Soddy put it,
If Christ, whose views on the folly of laying up treasures on earth are well known, had put by a pound at this rate, it should now be worth an Octillion, and Tariff Reform would be of little help to provide that, even if you colonized the entire stellar universe ... It is this absurdity which inverts society, turns good into evil and makes orthodox economics the laughing stock of science. If the consequences were not the familiar atmosphere of our daily lives they would be deemed beyond the legitimate bounds of the most extravagant comic opera[Inversion of Science, page 17].
A contemporary unsympathetic reviewer, economist A G Silverman, was at least forthright enough to face the issue and to attempt a reply:
In criticism of the above theory, it may be asked how can the receivers of interest, if they live on this income, take advantage of the law of compound interest; and if they reinvest this "unearned" income why cannot the law of compound interest approximately hold for physical capital as well as debt [Silverman, page 277]?
The first question is sensible but irrelevant because Soddy never suggested that one could take advantage of compound interest without reinvesting at least part of the interest income. The second part of the question, however, reveals that the questioner had no conception of the difference between physical and purely mathematical quantities, and must have made Soddy despair of ever communicating with economists. Perhaps by "approximately" Professor Silverman meant "for a limited time period". But then we must ask what happens at the end of that limited time period, and how long it is.
Probably the most favorable review that Soddy got from an economist came from none other than Frank Knight, who began by confessing that
Somewhat to the reviewer's surprise this book [Wealth, Virtual Wealth, and Debt]
has proven well worth the time and effort of a careful reading. Surprising because, in general, when the specialist in natural sciences takes time off to come over and straighten out the theory of economics he shows himself even dumber than the academic economist, and because, in particular, Soddy's Pamphlet on Cartesian Economics
which we read some years ago did not promise to set a new precedent in this regard[Knight, page 732].
Knight went so far as to call the book (page 732) "brilliantly written and brilliantly suggestive and stimulating". I would like to be able to appeal to the authority of Frank Knight to support my own favorable evaluation of Soddy's economics, but unfortunately our particular appreciations of Soddy conflict. Knight considers Soddy's practical theses concerning money to be "highly significant and theoretically correct" (
ibid), a judgment with which I do not basically disagree, but consider a bit too kind, since Soddy certainly exaggerated the significance of his practical theses, however correct they may be. Concerning the physical basis of economics and the relation to thermodynamics, however, Knight is very negative (
ibid):
His effort to establish a conception of physical wealth, subject to a principle of conservation and interpretable in relation to physical energy, must be briefly dismissed.
Knight's grounds for dismissal are opaque:
Magnitudes of wealth and productive capacity ... change absolutely whenever a human being changes his (or her!) mind; and the mass-energy relations of mind-changes are as unimportant in this connection as they are obscure - if their very existence is anything but a metaphysical inference based on the monistic bias of the scientific intellect[Knight, page 732]
Whatever that may mean, it is surely odd that anyone who read
Cartesian Economics(recall the first two quotations in Section III above) could even obliquely accuse Soddy of "monistic bias". Furthermore Soddy had no theory of conservation of the
valuedimension of wealth (which may change with mental states), but only insisted that the physical dimension of wealth is subject to the laws of thermodynamics regardless of mind changes or financial conventions, and that this fact is not trivial. If the fact that magnitudes of wealth and productive capacity change absolutely whenever a human being changes his mind were the whole truth, then how easy it would be to make everyone wealthy - all we would need do to double wealth would be to change our minds! Then wealth could grow as fast as debt, since it would be free from its physical body. It would be quite unfair to accuse Knight of such simple-minded angelism, but it strikes me as equally unfair of Knight to treat Soddy as a simple-minded physical reductionist. It is true that Soddy emphasized the physical aspect of wealth in order to correct for its neglect by economists, a procedure which, if Knight's attitude is representative, Soddy was certainly justified in adopting.
In view of the fact that Soddy's critique of money stemmed directly from his prior physical analysis, it is strange that Knight could so categorically reject the latter while enthusiastically embracing the former, although it is conceivable that one could arrive at the right monetary conclusions for the wrong physical reasons. Knight offers the following support for Soddy's views on money:
In the abstract, it is absurd and monstrous for society to pay the commercial banking system "interest" for multiplying severalfold the quantity of medium of exchange when (a) a public agency could do it at negliglible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system [ibid]
.
Knight deserves much credit for having been the only reputable economist to have taken Soddy seriously, even though in my opinion he missed Soddy's main contribution. But then so did everyone else until now, when, in the light both of Georgescu-Roegen's masterly reuniting of economics with its physical base and of the current recognition of the critical importance of energy, the prior contribution of Soddy has become visible enough for anyone to see. Soddy was in many ways fifty years ahead of his time.
Notes:
1. In fairness to Millikan it should be noted that in concluding his vigorous defense of science he did temper his optimism with the following caution: "I am not in general disturbed by expanding knowledge or increasing power, but I begin to be disturbed when this comes coincidentally with a decrease in the sense of moral values. If these two occur together, whether they bear any relationship or not, there is real cause for alarm" (Millikan, page 129).
2. This point has been forcefully made by biologist Garrett Hardin. See his (with Carl Bajema)
Biology: Its Principles and Implications, third edition (San Francisco, 1978), page 257.
3. When a bank lends to A it forgoes the opportunity of making the same loan to B, so in that sense there is an opportunity cost in allocating the virtual wealth among borrowers, but there is no opportunity cost to the bank in acquiring the Virtual Wealth in the first place.
4. In fact, Boulding told me he was very much aware of Soddy the scientist, having slept through his chemistry lectures at Oxford, but knew nothing of his economic writings. As for sleeping through chemistry lectures, even the writer of one obituary tribute remarked that it would be idle to pretend that Soddy was a successful classroom teacher.
5. For such a dismissal see A G Silverman (1927).
_____
The author is grateful for support from the Rockefeller Brothers Fund during the period in which this article was written. Helpful comments on an earlier draft were received from T Beard, W Campbell, E Cook, G Hardin, S Farber, G Smith, and an anonymous referee. The author, of course, is solely responsible for all contents of the article.
References:
Irving Fisher.
100% Money. New York, 1935.
Alexander Fleck. "Frederick Soddy".
Biographical Memoirs of Fellows of the Royal Society 3 (1957): 203-16.
Nicholas Georgescu-Roegen.
The Entropy Law and the Economic Process. Cambridge, Massachusetts, 1971.
Frank H Knight. Review of Wealth, Virtual Wealth and Debt.
Saturday Review of Literature, 16 April 1927, page 732.
R A Millikan. "Alleged Sins of Science".
Scribner's Magazine87, no 2 (1930): 119-30.
B P Pesek and T R Saving.
Money, Wealth, and Economic Theory. New York, 1967.
Alexander S Russell. "F Soddy, Interpreter of Atomic Structure".
Science, 30 November 1956, pages 1069-70.
A G Silverman. Review of Wealth, Virtual Wealth, and Debt.
American Economic Review, June 1927, pages 275-78.
Henry Simons.
Economic Policy for a Free Society. Chicago, 1948.
Robert L Sinsheimer. "The Presumptions of Science".
Daedalus, Spring 1978, pages 23-35.
Frederick Soddy.
Science and Life. London, 1920.
Frederick Soddy.
Cartesian Economics. London, 1922.
Frederick Soddy.
Wealth, Virtual Wealth, and Debt. London, 1926, 1933.
Frederick Soddy.
Money Versus Man. New York, 1933.
Frederick Soddy.
The Role of Money. London, 1934.
Frederick Soddy.
The Arch Enemy of Economic Freedom(pamphlet). Oxford, 1943.
Frederick Soddy.
The Story of Atomic Energy. London, 1949.
Times Literary Supplement, London, 26 Aug. 1926, page 565.
James Tobin. "Money and Economic Growth".
Econometrica33, October 1965.
- Thomas S. Kuhn,
The Structure of Scientific Revolutions(1962), page 89.
I. Introduction
Frederick Soddy (1877-1956) is best known as a pioneering chemist who collaborated with Rutherford in studying radioactive disintegration, predicted the existence of and coined the name for isotopes, and was a major contributor to the modern theory of atomic structure. For these achievements he was elected a Fellow of the Royal Society in 1910 and was awarded the Nobel Prize in 1921. He was a member of the Swedish, Italian, and Russian acadamies of science. During his career he held university positions at McGill, Glasgow, Aberdeen, and from 1919 onward, Oxford (Fleck 1957).
Although an enthusiastic believer in scientific progress and in the possibility of a society in which the fruits of scientific knowledge would be shared by all, Soddy was acutely aware that history supported the view that science has proved as much a curse as a blessing to humanity. Nor could he accept the comfortable view that scientists have no responsibility for the uses to which their work is put. Even though others (bankers and economists) bore, in his view, a far greater burden of guilt for the misuse of knowledge, scientists could not plead innocent. The world's real problem was faulty economics, not faulty chemistry, and for the second half of his nearly eighty years economics replaced chemistry as the center of his intellectual life.
Soddy realized earlier than most the theoretical possibility of atomic energy. Since his own work had contributed to the discovery that this vast energy potential existed, it was natural for him to ask, "what sort of a world it would be if atomic energy ever became available" (
Wealth, page 28). His answer (written in 1926) was clear:
If the discovery were made tomorrow, there is not a nation that would not throw itself heart and soul into the task of applying it to war, just as they are now doing in the case of the newly developed chemical weapons of poison-gas warfare ... If [atomic energy] were to come under existing economic. conditions, it would mean the reductio ad absurdum
of scientific civilization, a swift annihilation instead of a none too lingering collapse [Wealth, page 28].
For Soddy, the problem was to change economic conditions in order eventually to make the world safe for atomic energy and other fruits of science. There must be something radically wrong with economic thought and institutions in order for the gift of scientific knowledge to have become such a threat. Soddy was thus led to a radical critique of economics.
It is interesting that Soddy's concern about the destructive potential of atomic energy was considered extreme at the time. Another Nobel laureate, Robert A Millikan, commented:
... since Mr Soddy raised the hobgoblin of dangerous quantities of available subatomic energy [science] has brought to light good evidence that this particular hobgoblin - like most of the bugaboos that crowd in on the mind of ignorance - was a myth ... The new evidence born of further scientific study is to the effect that it is highly improbable that there is any appreciable amount of available subatomic energy for man to tap[Millikan, page 121].
Millikan, of course, turned out to be wrong, but the underlying faith that he went on to express is still held by many, namely that one may "sleep in peace with the consciousness that the Creator has put some foolproof elements into his handiwork, and that man is powerless to do it any titanic physical damage" (
ibid). As R L Sinsheimer recently noted, "Scientific endeavor rests upon the faith that our scientific probing and our technological ventures will not displace some key element of our protective environment and thereby collapse our ecological niche" (Sinsheimer, page 24). It now seems evident that the only protective element the Creator put into his handiwork is man's capacity for moral insight and restraint, which is far from foolproof. With the benefit of hindsight we can see that Soddy was the true prophet and that the scientific establishment, represented by Millikan, was whistling in the dark.{1} Far from believing in providential "foolproof elements" built into creation, Soddy was convinced that the economic system contained built-in elements for assuring the destruction of creation, once science gave man the power. The key problem therefore was to discover and correct the errors in our economic thinking and institutions, a task which Soddy tackled with both moral fervor and the systematic logic of an experienced scientist.
Perhaps the most intriguing thing about Soddy the economist is that he started his inquiry with a mind both highly intelligent and completely free from the preconceived paradigm of the orthodox economists, for whom he had an undisguised contempt. The contempt was mutual. With the significant exception of Frank Knight, to be discussed later, Soddy's work was ignored by economists. Unlike the American positional astronomer, Simon Newcomb, who also came to economics from the physical sciences, Soddy came as a critic, not a student, and remained an outsider. Newcomb liked economics, did not believe that his pre-World War One America was in mortal danger from an increasingly powerful but misdirected application of science, and wrote a fairly orthodox
Principles of Political Economy(1885) which demonstrated that he had done his economics homework, and had earned the right to try to make economics just a bit more scientific. Soddy, on the other hand, considered economics a pseudoscience in need of a totally new beginning. John Ruskin, not Ricardo, Mill, or Marshall, was his inspiration.
The not surprising consequence of this approach was that Soddy was and continues to be written off as a crank. In fact, Soddy's economics seems to have been something of an embarrassment to everyone but Soddy. The
Times Literary Supplement(page 565), in reviewing his major economic work (
Wealth, Virtual Wealth, and Debt) remarked that it was sad to see a respected chemist ruin his reputation by writing on a subject about which he was quite ignorant. Nor had the verdict changed thirty years and several books later, when in 1956 an obituary in
Sciencelamented that, "Some ... knew him only as ... a 'crank' on the subject of monetary policy ... His fanatical devotion to schemes of this sort, derided by the orthodox economists, ... was surprising to many who knew him first as a pioneer in chemical science" (Russell, page 1069). This neglect of Soddy's economics is unfortunate because, although Soddy is admittedly unconvincing in his frequent attribution of war and all other evils to fractional reserve banking, he nevertheless has much to teach us, and in fact anticipated the recent contribution of N Georgescu-Roegen (1971) in providing economics with a partial foundation in thermodynamics, the physics of usefulness.
The fact that Soddy might have learned more from economists than he did does not mean that economists have nothing to learn from Soddy. The approach here taken is to think of him somewhat as an intelligence from Mars which looked at economic issues in a different way, and to try sympathetically to understand him and render him intelligible to modern economists. In what follows I attempt to summarize and explain Soddy's critique of economics.
II. The Neglected Physical Basis of Economics
Soddy's basic philosophical approach to economics might be called materialism without reductionism. We must recognize the fundamental dualism of the material and the spiritual and resist "monistic obsessions" (
Cartesian Economics, page 6). Economics occupies the middle ground between matter and spirit, between the electron and the soul:
In each direction possibilities of further knowledge extend ad infinitum, but in each direction diametrically away from and not towards the problems of life. It is in this middle field that economics lies, unaffected whether by the ultimate philosophy of the electron or the soul, and concerned rather with the interaction, with the middle world of life of these two end worlds of physics and mind in their commonest everyday aspects, matter and energy on the one hand, obeying the laws of mathematical probability or chance as exhibited in the inanimate universe, and, on the other, with the guidance, direction and willing of these blind forces and processes to predetermined ends[ibid].
Soddy rejects the monism of "Ultra-Materialism":
I cannot conceive of inanimate mechanism, obeying the laws of probability, by any continued series of successive steps developing the powers of choice and reproduction any more than I can envisage any increase in the complexity of an engine resulting in the production of the "engine-driver" and the power of its reproducing itself. I shall be told that this is a pontifical expression of personal opinion. Unfortunately, however, for this argument, inanimate mechanism happens to be my special study rather than that of the biologist. It is the invariable characteristic of all shallow and pretentious philosophy to seek the explanation of insoluble problems in some other field than that of which the philosopher has first hand acquaintance[ibid, page 7].
Yet a proper materialism must be one of the foundation stones of economics. In fact, "without phosphorus no thought" (
Story of Atomic Energy, page 129) is an axiom that all philosophers and ethicists should be required to memorize. What mechanical science teaches economics is that
life derives the whole of its physical energy or power, not from anything self-contained in living matter, and still less from an external deity, but solely from the inanimate world. It is dependent for all the necessities of its physical continuance primarily upon the principles of the steam-engine. The principles and ethics of human law and convention must not run counter to those of thermodynamics[Cartesian Economics, page 9].
The last sentence is very significant because it provides the basis for many of Soddy's criticisms of the economy as a presumed perpetual motion machine. For men, like other heat engines, the physical problems of life are energy problems. Pre-nineteenth-century man lived on energy revenue (sunlight captured by plants, the "original capitalists"). Present-day man augments this revenue by consuming energy capital (coal, the "stored sunlight of palaeozoic summers"). While man can use fuel-fed machinery to lighten labor, he can feed his internal fires only with new sunshine, or rather the energy of new sunshine as transformed through the good offices of the plant. Life thus depends on a continuous flow of energy, and hence the enabling requisites of life must partake of the nature of a flow rather than only a stock. There are limits to the degree that this flow can be stored for future use. A significant part of the requisites of life must come to us as a current flow or "revenue" that cannot in any physical sense be converted to a stock and indefinitely stored for later use. Like the manna which God sent to the Hebrews in the wilderness, the revenue is renewed daily, must be gathered in amounts sufficient for the day (neither too much nor too little), and breeds worms and becomes foul if accumulated too much in excess of current needs (
Exodus16: 17-20). Stocks of assets, to the extent that we can maintain them against the ravages of entropy, are aids and accessories in improving our ability to tap the energy revenue, but the revenue itself cannot be significantly increased, and it cannot be saved except to a limited degree. Indeed, the very maintenance of our accumulated stock of physical wealth against the destructive force of entropy requires the renewing power of the low-entropy "revenue" flow. True, nature has stored energy in coal, but it took geologic epochs of time, and we are only able to unstore it. Furthermore the "flamboyant period" of using up the capital stock of coal was perceived by Soddy as a "very passing phase", after which the constraints imposed by living on energy revenue would be more clearly seen and unmistakably felt.
For Soddy the basic economic question was "How does man live?" and the answer was "By sunshine". The rules that man must obey in living on sunshine, whether current or palaeozoic, are the first and second laws of thermodynamics. This in a nutshell is "the bearing of physical science upon state stewardship". Wealth is for Soddy "the humanly useful forms of matter and energy" (
The Arch Enemy, page 6). Wealth has both a physical dimension, matter-energy subject to the laws of inanimate mechanism, and a teleological dimension of usefulness, subject to the purposes imposed by mind and will. Soddy's concept of wealth reflects his fundamental dualism and his belief that the middle world of life and wealth is concerned with the interaction of the two end worlds of physics and mind in their commonest everyday aspects. That Soddy concentrated on the physical dimension in order to repair the consequences of its past neglect should not be allowed to lead one to suppose that he proposed a monistic physical theory of wealth, a misinterpretation which, we will see, was fostered by Frank Knight.
III. The Major Confusion: Wealth Versus Debt
The fundamental error of economics is the confusion of wealth, a magnitude with an irreducible physical dimension, with debt, a purely mathematical or imaginary quantity. The positive physical quantity, two pigs, represents wealth and can be seen and touched. But minus two pigs, debt, is an imaginary magnitude with no physical dimension:
Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... For sufficient reason, the process of compound interest is physically impossible, though the process of compound decrement is physically common enough. Because the former leads with the passage of time ever more and more rapidly to infinity, which, like minus one, is not a physical but a mathematical quantity, whereas the latter leads always more slowly towards zero, which is, as we have seen, the lower limit of physical quantities[Wealth, page 70].
The ruling passion of the age is to convert wealth into debt in order to derive a permanent future income from it - to convert wealth that perishes into debt that endures, debt that does not rot, costs nothing to maintain, and brings in perennial interest (
Money Versus Man, page 25). No individual could amass the physical requirements sufficient for maintenance during his old age, for like manna it would rot. Therefore he must convert his non-storable surplus into a lien on future revenue, by letting others consume and invest his surplus now in exchange for the right to share in the increased future revenue. The revenue is "a river of perishable and consumable wealth, steadily flowing to waste whether consumed by human beings or by rats and worms" (
Inversion of Science, page 24). But since future annual revenue is limited, there is a corresponding limit on the extent to which present surpluses can be exchanged for perennial streams of future revenue. Soddy emphasizes that the present surplus accumulation can never be changed into future revenue in any physical sense, but only exchanged for it under social conventions. Although it may comfort the lender to think that his wealth still exists somewhere in the form of "capital", it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues to be generated by future sunshine. "Capital", says Soddy , "merely means unearned income divided by the rate of interest and multiplied by 100'' (
Cartesian Economics, page 27).
Although debt can follow the law of compound interest, the real energy revenue from future sunshine, the real future income against which the debt is a lien, cannot grow at compound interest for long. When converted into debt, however, real wealth "discards its corruptible body to take on an incorruptible" (
Money Versus Man, page 28). In so doing, it appears "to afford a means of dodging Nature" (page 24), of evading the second law of thermodynamics, the law of random, ravage, rust, and rot. The idea that people can live off the interest of their mutual indebtedness (
Wealth, page 89) is just another perpetual motion scheme - a vulgar delusion on a grand scale. Soddy seems to be saying that what is obviously impossible for the community - for everyone to live on interest - should also be forbidden to individuals, as a principle of fairness. If it is not forbidden, or at least limited in some way, then at some point the growing liens of debt holders on the limited revenue will become greater than the future producers of that revenue will be willing or able to support, and conflict will result. The conflict takes the form of debt repudiation. Debt grows at compound interest and as a purely mathematical quantity encounters no limits to slow it down. Wealth grows for a while at compound interest, but, having a physical dimension, its growth sooner or later encounters limits. Debt can endure forever; wealth cannot, because its physical dimension is subject to the destructive force of entropy. Since wealth cannot continually grow as fast as debt, the one-to-one relation between the two will at some point be broken - that is, there must be some repudiation or cancellation of debt. The positive feedback of compound interest must be offset by counteracting forces of debt repudiation, such as inflation, bankruptcy, or confiscatory taxation, all of which breed violence. Conventional wisdom considers the latter processes pathological, but accepts compound interest as normal. Logic demands, however, that either we constrain compound interest in some way, or accept as normal and necessary one or more of the counteracting mechanisms of debt repudiation. {2} As Soddy put it,
You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy][Cartesian Economics, page 30].
The perpetual motion delusion of living on debt has arisen in the following way, Soddy says:
Because formerly ownership of land - which, with the sunshine that falls on it, provides a revenue of wealth - secured, in the form of rent, a share in the annual harvest without labor or service, upon which a cultured and leisured class could permanently establish itself, the age seems to have conceived the preposterous notion that money, which can buy land, must therefore itself have the same revenue-producing power[Wealth, page 106].
If debt and money are the units of measure by which we account for and keep track of the production and distribution of physical wealth, then surely the units of measure and the reality being measured cannot be governed by different laws. Soddy's "acid test is that no monetary accountancy be allowed that could not be done equally well by physical counters" (
The Arch Enemy, page 24). If wealth cannot grow at compound interest for long, then debt should not either. If wealth cannot be created
ex nihilothen how can we allow money (debt) to be created ex nihilo (and just as easily destroyed)? Worse, how can we tolerate the fact that money is both created
ex nihiloand lent at compound interest, while at the same time serving as a unit of measure for wealth which is incapable of either of those "conjuror's tricks"? This brings us to money, the topic which most occupied Soddy's attention.
IV. The Monetary Flaw
The main defect in the economic system was, for Soddy, the practice of fractional reserve banking whereby the private banking system was enabled to create money, thus appropriating what he called the Virtual Wealth of the community, which it then lent at interest. The concept of "virtual wealth" plays a key role in Soddy's analysis. Essentially it is the aggregate value of real wealth which individuals in the community voluntarily abstain from holding in order to hold money instead. In order to escape the inconvenience of barter everyone must hold money, which could be exchanged for real wealth, but is not. In Soddy's words, "This aggregate of exchangeable goods and services which the community continuously and permanently goes without (though
individualmoney owners can instantly demand and obtain it from other individuals) the author terms the Virtual Wealth of the community" (
Role of Money, page 36).
If everyone tried to exchange his money holdings for real assets it could not be done, because all real assets are already owned by someone, and in the final analysis someone has to end up holding the money. So Virtual Wealth does not really exist as actual wealth over and above the value of real assets, which is why it is called Virtual. Yet people behave as if Virtual Wealth were real, because at an individual level money is easily exchangeable for physical assets. The phenomenon of Virtual Wealth must occur in a monetary economy, unless the money is itself a commodity that circulates at its commodity value.
The value of each unit of money, or the inverse of the "price-index", is simply the Virtual Wealth divided by the total aggregate of money held.
Soddy gives the following summary of the nature and importance of Virtual Wealth:
Money is now a form of national debt, owned by the individual and owed by the community, exchangeable on demand for wealth by transference to another individual. Its value or purchasing power is not directly determined by any positive or existing quantity of wealth, but by the negative quantity or deficit of wealth, the ownership and enjoyment of which is voluntarily abstained from without the payment of interest, by the owners of the money, to suit their individual business and domestic affairs and convenience. The aggregate of this deficit is called the Virtual Wealth of the community, and it measures the value of all the money owned by the community, which is forced by the necessity of exchanging its produce to act as though it possessed this amount of wealth more than it actually does possess. The Virtual Wealth of a community is not a physical but an imaginary negative wealth quantity. It does not obey the laws of conservation, but is of psychological origin[Wealth, page 295].
Virtual Wealth varies with the size of population and national income and the business and payment habits of the community. It is only when Virtual Wealth is constant that we can equate the value of a unit of money to the ratio of Virtual Wealth to aggregate money held. Soddy believed that Virtual Wealth, though not constant, was far less variable than the money supply.
Who benefits from Virtual Wealth? In a sense the whole community does, since it is the price of avoiding barter, or more precisely the price of avoiding the waste of a full commodity currency which uses costly resources (gold) to perform a function that could be performed by paper or by abstract accounting units. In another sense, Virtual Wealth is like seigniorage, the difference between the monetary value and the commodity value (cost of production) of the money token. With the advent of credit money the commodity value of the token becomes nil and seigniorage or Virtual Wealth is the full monetary value of the money issued - or rather the equivalent in forgone utility. The analogy with seigniorage suggests a further answer to the question of who benefits from Virtual Wealth. It is the issuer of fiat money, whoever first puts it in circulation, that gets the seigniorage. The ancient prerogative of the crown has been usurped, not by the modern State, the crown's legitimate heir, but by the private banking system, which "has corrupted the purpose of money from that of an exchange medium to that of an interest-bearing debt'' (
Wealth, page 296). Moreover the very existence of the bulk of our money depends upon this debt never being liquidated. The very existence of money now becomes a source of private income, and the total money supply becomes a "concertina" expanding to fuel a boom, and contracting with debt repayment and default thereby reinforcing a slump.
Soddy's concept of Virtual Wealth bears an interesting relation to the modern debate about whether fiat money is a part of the net wealth of the community. Pesek and Saving (1967) argue that it is, whereas others, such as James Tobin (1965), argue that it is not. Soddy says that fiat money is Virtual Wealth. Individuals voluntarily hold money balances rather than an equivalent value in real assets in order to escape the enormous inconvenience of barter. Virtual Wealth is the utility cost of holding money. The fact that the benefits are worth more than the costs does not make the costs disappear, and does not convert money into wealth. The social institution of money may be regarded as a form of collective patrimony in the same sense as an efficient legal code or an advanced technology. But the money commodity itself need not be, and in the case of fiat money is not, a productive asset. Indeed, the very advantage of fiat money is to free resources from being tied up in money so that more real assets may be produced with the resources. We count the extra real assets made possible by fiat money as a part of the aggregate wealth of the community, but not the paper chits themselves. Soddy's notion of Virtual Wealth is actually very close to what James Tobin terms the "fiduciary issue":
The community's wealth now has two components: the real goods accumulated through past real investment and fiduciary or paper "goods" manufactured by the government from thin air. Of course, the nonhuman wealth of such a nation "really" consists only of its tangible capital. But, as viewed by the inhabitants of the nation individually, wealth exceeds the tangible capital stock by the size of what we might term the fiduciary issue. This is an illusion, but only one of the many fallacies of composition which are basic to any economy or society. The illusion can be maintained unimpaired as long as the society does not actually try to convert all of its paper wealth into goods[Tobin, page 676].
For Soddy, banks do not really make loans, because a loan implies that the lender gives up what the borrower receives. When a bank lends money it gives up nothing, creating the deposits
ex nihiloup to the limit set by reserve requirements. {3} The real "lender" is the community at large whose money balances lose in purchasing power with the issue of new money. We know the new money will be spent and increase demand, because the borrower who gets it would not pay interest just to increase his idle balances. Prices are bid up since
ex nihilocreation of money (demand) can increase much more rapidly than can the
ex materiacreation of new physical wealth (supply). But the more direct line of causation is simply that relatively constant Virtual Wealth divided by more pounds means each pound is worth less. Money should not bear interest as a condition of its existence, but only when genuinely lent by an owner who gives it up to a borrower. Banks are like counterfeiters who lend false money, accept their own false money in repayment and destroy it, but receive the interest in real money transferred to them by the rest of the community, and which is not destroyed. Banks create and destroy money with no understanding of the "laws that correlate its quantity with the national income" (
Wealth, page 296). Also by continually changing the value of money as they create and destroy it, the banking system converts the pound sterling into a rubber yardstick, in effect making a mockery of all physical measurement standards, since "yards per pound" or "gallons per pound" become variable magnitudes, even though yards and gallons be fixed.
At first sight it may seem odd that one who analyzes the economy with the concepts of physical science should focus so much on money, instead of real resources, matter, energy, and the rest. But, of course, it is precisely the fact that money seems to have escaped the laws of conservation and entropy that led Soddy to conclude that the flaw in the system must lie with the "conjuror's tricks" of modern bankers, who
have been allowed to regard themselves as the owners of the virtual wealth which the community does not possess, and to lend it and charge interest upon the loan as though it really existed and they possessed it. The wealth so acquired by the impecunious borrower is not given up by the lenders, who receive interest on the loan but give up nothing, but is given up by the whole community, who suffer in consequence the loss through a general reduction in the purchasing power of money[Wealth, page 296].
A further contradiction arises from the interest-bearing national debt being used as collateral security by bondholders who borrow from banks. Banks create a deposit (new money) for the borrowing bondholder and charge him interest. The public is taxed to enable the government to pay interest on the bond to the bondholder who, in effect, passes the interest on to the bank. Soddy draws the conclusion that "taxes are thus paid to the bank for doing what the taxes were imposed to prevent being done, namely, the increase of the currency. Otherwise, there would have been no reason for the State to borrow at interest if it had not wished to prevent the increase of the currency" (Wealth, pages 195, 298). Soddy considers this the final
reductio ad absurdumof the monetary system.
V. Reform Measures
Three basic reforms are suggested by Soddy to restore honesty and accuracy to the economic system: a 100 percent reserve requirement for banks; a policy of maintaining a constant price-index; and freely fluctuating exchange rates internationally.
With a 100 percent reserve requirement banks could no longer create money, and that basic function, along with the seigniorage prerogative, or the ownership of Virtual Wealth, would be restored to the State, which would again become the sole "utterer" of money. Banks would have to exist by charging for their legitimate services, that is, those that do not require the creation of money.
What principle is to govern the State in issuing money? Money is to be created or destroyed by the State as needed in order to keep the purchasing power of money constant. A price index will be devised by the National Statistical Authority. If the index has a tendency to fall over time, the government will finance its own activities by printing money. Alternatively it might lower taxes, or use the newly created money to redeem interest-bearing national debt. In other words deflation would be corrected by some form of money-creating government deficit. If the index shows a rising tendency the government will raise taxes (or issue interest-bearing national debt) and not spend the revenue. Inflation would be corrected by a money-destroying government surplus. Soddy makes an analogy between the price index and the governor on a steam engine. Both provide a mechanism of stabilizing feedback. The then existing system suffered from destabilizing feedback, since the money supply would expand during a boom and contract during a slump, thereby reinforcing the original tendency.
Equilibrium in balance of payments with the rest of the world would be achieved by freely fluctuating exchange rates which would tend to establish a kind of purchasing power parity among currencies. International flows of gold and the consequent inflationary and deflationary pressures on national economies would thereby be eliminated, thus easing the task of keeping the internal purchasing power of the currency constant. Furthermore, the need for tariffs and other interferences with free trade designed to correct international payments imbalances, major causes of international conflict, would have been eliminated.
Soddy's proposals have nothing in common with those of Silvio Gesell or Major Douglas, or other famous "monetary cranks". Soddy respected these men for raising important questions, but concluded that in their proposals for reform they were just as guilty of appealing to "conjuror's tricks" as were the orthodox money men. Far from advocating "funny money schemes", Soddy considered the existing canons of sound finance to be elaborate mystifications obscuring the most blatant "funny money" practices carried on in the interest of the bankers and their class, to the detriment of society. These socially dishonest though perfectly legal practices, along with the attempt to convert wealth into debt internationally and live off the interest received from other countries, plus the waning of the "flamboyant period" of energy capital consumption, of which "imperialism marks its final bid for survival" (
Cartesian Economics, page 12), would lead inexorably to international conflict and to the misuse of the gifts of science in warfare.
Reform of both economic understanding and the economic system in the light of physical and moral first principles is the sine qua non of a civilization capable of using knowledge for good rather than evil. "Let us have an end of the pretence that economics should not be concerned with morals" (
Role of Money, page 214). As a minimum morality, economics must surely insist on a system of honest weights and measures underlying exchange; yet the current monetary system with its fluctuations in purchasing power subverts honest measure and gives a false accounting of the physical realities underlying the production and distribution of wealth.
VI. The Relevance of Soddy's Economic Thought Today
Soddy's insistence that the first and second laws of thermodynamics must be the starting point of economics (
Role of Money, pages 4, 5) is a fundamental insight the relevance of which has grown as we have come to discover that neither the sources of low entropy inputs nor the sinks for high entropy waste outputs are infinite. Probably the most important economic treatise of the last forty years is Nicholas Georgescu-Roegen's
The Entropy Law and the Economic Process(1971), which demonstrates that the economic process is entropic in its physical coordinates; that wealth is an open system, a structure maintained in the midst of a throughput that begins with the depletion of low entropy matter-energy and ends with the return of an equal quantity of polluting high entropy matter-energy back to the environment; that in contrast to the reversibility of mechanical phenomena, entropic phenomena are characterized by irreversibility, a fatal weakness of the mechanistic epistemology of standard economics; and that there is a critical asymmetry between our two sources of low entropy. The last point refers to the fact that solar low entropy (Soddy's revenue) is nearly infinite in total amount but strictly limited in its rate of flow to earth, whereas terrestrial low entropy (concentrated minerals in the earth's crust) is strictly limited in total amount, but can be used up at a rate of our own choosing. Economic development since the industrial revolution has been in the direction of ever less reliance on the abundant solar flow and towards dependence on the relatively scarce terrestrial stock. This is what Soddy called the "flamboyant period", destined to be short-lived.
Evidently Georgescu-Roegen was unaware of the writings of Soddy on this subject, because he never cites Soddy. No one is more scrupulously honest and painstaking in citing the work of others than Georgescu-Roegen, and this omission is pointed out only to indicate the extent of Soddy's obscurity as an economist. Similar comments apply to Kenneth Boulding, {4} who has also related economics to thermodynamics, without mentioning Soddy, and to the present author as well. This omission is understandable because after all Soddy was a chemist not an economist, and his economic writings all bore titles indicating only the monetary nature of his economic work, or such uninformative titles as
Cartesian Economics. Only the subtitle of the latter, "The Bearing of Physical Science Upon State Stewardship", gives any hint of the nature of his most important and original contribution to economics. But the fact remains that Soddy anticipated the basic insights of Georgescu-Roegen and Boulding regarding the relation of economics and thermodynamics, and deserves recognition as a pioneer in a line of thinking which I believe will one day be dominant.
Soddy was also a pioneer in recognizing the moral responsibility of science, and in realizing ahead of others that new knowledge, while it might not be permanently "forbidden", can certainly be "inopportune" under existing social and moral conditions, even to the extent of being lethal to the civilization that made it possible (Sinsheimer, page 24).
Was Soddy successful in his effort to discover the flaws in the economic system that corrupted the fruits of science and led to war? Would 100 percent reserves, a constant price index, and flexible exchange rates make the world safe for atomic energy? Is it true that whether science emancipates or destroys humanity depends on a "minor technical point in a banking system", as Soddy claimed (
Inversion of Science, page iv)? One may reasonably doubt it. In fact it seems that at this point Soddy himself was "seeking the solution to insoluble problems in some field other than that of which the philosopher has firsthand acquaintance" - to recall his own jibe at the mechanistic biologists. But the fact that Soddy exaggerated the efficacy of his suggested reforms does not mean that his analysis is unimportant. Neither the specific proposals nor the reasoning underlying them can be fairly dismissed as those of an outsider or a monetary crank who just does not understand economics. {5} Flexible exchange rates have come into being already, and Soddy was arguing their virtues at a time when most economists were wedded to the gold standard. The new humility born of the theoretical anomaly of simultaneous inflation and unemployment and the demonstrated inability of orthodox "monetary cranks" to deal with persistent inflation could conceivably lead to a reconsideration of the constant price-index and 100 percent reserve requirements. Of course some of these policies have had other champions besides Soddy, some with very respectable academic credentials, such as Henry Simons and Irving Fisher (see Simons 1948 and Fisher 1935).
It is curious that Irving Fisher never mentions Soddy in his writings on 100 percent money. Soddy, however, in a pamphlet written in 1943 refers to Fisher: "Some years later, after the great depression in the USA, an American economist, Professor Irving Fisher of Yale University, put forward a scheme which in its original form was practically identical [to Soddy's "pound for pound banking" plan] and which he termed 100% money" (
The Arch Enemy, page 11). Soddy's plan was published in 1926, Fisher's in 1935. Soddy seems to regard the near identity of plans as an interesting and encouraging coincidence and in no way suggests that Fisher had copied or even been influenced by him.
Although a great enthusiast for science and technology, Soddy could not share the popular obsession with unlimited growth. Even if continual economic growth were possible, it would at some point become senseless. On this point Soddy quotes John Ruskin, whom he greatly admired as an economist: "Capital which produces nothing but capital is only root producing root; bulb issuing in bulb, never in tulip; seed issuing in seed never in bread. The Political Economy of Europe has hitherto devoted itself to the multiplication ... of bulbs. It never saw or conceived such a thing as a tulip" (
Money Versus Man, page v).
Soddy held that "economic sufficiency is the essential foundation of all national greatness and progress" (
Money Versus Man, page 12). But sufficiency means "enough" and growth beyond "enough" is just "seed issuing in seed never in bread". Soddy does not define "sufficiency", but it is clear that any definition must respect the limits of energy revenue from the sun as captured by plants, and the entropic limits on the possibility of storing up wealth for future use, as well as the teleological constraint implied by a defined (that is, limited) purpose from which low entropy matter-energy derives its value dimension, and thus becomes wealth. Not all matter-energy is capable of becoming wealth; only low entropy matter-energy has the physical potential for usefulness, for receiving the imprint of information and purpose. Since the entropy law says in effect that potential gets used up, then scarcity must increase over the long run. But what bothered Soddy was not the scarcity implications of entropy, since he believed that science could more than offset increasing scarcity for a very long time yet. The truly scarce factor for Soddy was not low entropy, but our ability to keep from blowing up scientific civilization with the increasing power that science made available. We persist in applying those powers toward the impossible goal of making the real world of matter-energy conform to the purely mathematical law of compound interest. This leads to debt cancellation, conflict, and war. Orthodox growth economics notwithstanding, the best evidence is that the earth is not growing at all, much less at a rate equal to the rate of interest. The attempt to pit an absurd human convention against a natural law is not only foolish, but highly dangerous.
The absurdity of infinite growth has been the most carefully ignored anomaly in the paradigm of modern economics. As Soddy put it,
If Christ, whose views on the folly of laying up treasures on earth are well known, had put by a pound at this rate, it should now be worth an Octillion, and Tariff Reform would be of little help to provide that, even if you colonized the entire stellar universe ... It is this absurdity which inverts society, turns good into evil and makes orthodox economics the laughing stock of science. If the consequences were not the familiar atmosphere of our daily lives they would be deemed beyond the legitimate bounds of the most extravagant comic opera[Inversion of Science, page 17].
A contemporary unsympathetic reviewer, economist A G Silverman, was at least forthright enough to face the issue and to attempt a reply:
In criticism of the above theory, it may be asked how can the receivers of interest, if they live on this income, take advantage of the law of compound interest; and if they reinvest this "unearned" income why cannot the law of compound interest approximately hold for physical capital as well as debt [Silverman, page 277]?
The first question is sensible but irrelevant because Soddy never suggested that one could take advantage of compound interest without reinvesting at least part of the interest income. The second part of the question, however, reveals that the questioner had no conception of the difference between physical and purely mathematical quantities, and must have made Soddy despair of ever communicating with economists. Perhaps by "approximately" Professor Silverman meant "for a limited time period". But then we must ask what happens at the end of that limited time period, and how long it is.
Probably the most favorable review that Soddy got from an economist came from none other than Frank Knight, who began by confessing that
Somewhat to the reviewer's surprise this book [Wealth, Virtual Wealth, and Debt]
has proven well worth the time and effort of a careful reading. Surprising because, in general, when the specialist in natural sciences takes time off to come over and straighten out the theory of economics he shows himself even dumber than the academic economist, and because, in particular, Soddy's Pamphlet on Cartesian Economics
which we read some years ago did not promise to set a new precedent in this regard[Knight, page 732].
Knight went so far as to call the book (page 732) "brilliantly written and brilliantly suggestive and stimulating". I would like to be able to appeal to the authority of Frank Knight to support my own favorable evaluation of Soddy's economics, but unfortunately our particular appreciations of Soddy conflict. Knight considers Soddy's practical theses concerning money to be "highly significant and theoretically correct" (
ibid), a judgment with which I do not basically disagree, but consider a bit too kind, since Soddy certainly exaggerated the significance of his practical theses, however correct they may be. Concerning the physical basis of economics and the relation to thermodynamics, however, Knight is very negative (
ibid):
His effort to establish a conception of physical wealth, subject to a principle of conservation and interpretable in relation to physical energy, must be briefly dismissed.
Knight's grounds for dismissal are opaque:
Magnitudes of wealth and productive capacity ... change absolutely whenever a human being changes his (or her!) mind; and the mass-energy relations of mind-changes are as unimportant in this connection as they are obscure - if their very existence is anything but a metaphysical inference based on the monistic bias of the scientific intellect[Knight, page 732]
Whatever that may mean, it is surely odd that anyone who read
Cartesian Economics(recall the first two quotations in Section III above) could even obliquely accuse Soddy of "monistic bias". Furthermore Soddy had no theory of conservation of the
valuedimension of wealth (which may change with mental states), but only insisted that the physical dimension of wealth is subject to the laws of thermodynamics regardless of mind changes or financial conventions, and that this fact is not trivial. If the fact that magnitudes of wealth and productive capacity change absolutely whenever a human being changes his mind were the whole truth, then how easy it would be to make everyone wealthy - all we would need do to double wealth would be to change our minds! Then wealth could grow as fast as debt, since it would be free from its physical body. It would be quite unfair to accuse Knight of such simple-minded angelism, but it strikes me as equally unfair of Knight to treat Soddy as a simple-minded physical reductionist. It is true that Soddy emphasized the physical aspect of wealth in order to correct for its neglect by economists, a procedure which, if Knight's attitude is representative, Soddy was certainly justified in adopting.
In view of the fact that Soddy's critique of money stemmed directly from his prior physical analysis, it is strange that Knight could so categorically reject the latter while enthusiastically embracing the former, although it is conceivable that one could arrive at the right monetary conclusions for the wrong physical reasons. Knight offers the following support for Soddy's views on money:
In the abstract, it is absurd and monstrous for society to pay the commercial banking system "interest" for multiplying severalfold the quantity of medium of exchange when (a) a public agency could do it at negliglible cost, (b) there is no sense in having it done at all, since the effect is simply to raise the price level, and (c) important evils result, notably the frightful instability of the whole economic system [ibid]
.
Knight deserves much credit for having been the only reputable economist to have taken Soddy seriously, even though in my opinion he missed Soddy's main contribution. But then so did everyone else until now, when, in the light both of Georgescu-Roegen's masterly reuniting of economics with its physical base and of the current recognition of the critical importance of energy, the prior contribution of Soddy has become visible enough for anyone to see. Soddy was in many ways fifty years ahead of his time.
Notes:
1. In fairness to Millikan it should be noted that in concluding his vigorous defense of science he did temper his optimism with the following caution: "I am not in general disturbed by expanding knowledge or increasing power, but I begin to be disturbed when this comes coincidentally with a decrease in the sense of moral values. If these two occur together, whether they bear any relationship or not, there is real cause for alarm" (Millikan, page 129).
2. This point has been forcefully made by biologist Garrett Hardin. See his (with Carl Bajema)
Biology: Its Principles and Implications, third edition (San Francisco, 1978), page 257.
3. When a bank lends to A it forgoes the opportunity of making the same loan to B, so in that sense there is an opportunity cost in allocating the virtual wealth among borrowers, but there is no opportunity cost to the bank in acquiring the Virtual Wealth in the first place.
4. In fact, Boulding told me he was very much aware of Soddy the scientist, having slept through his chemistry lectures at Oxford, but knew nothing of his economic writings. As for sleeping through chemistry lectures, even the writer of one obituary tribute remarked that it would be idle to pretend that Soddy was a successful classroom teacher.
5. For such a dismissal see A G Silverman (1927).
_____
The author is grateful for support from the Rockefeller Brothers Fund during the period in which this article was written. Helpful comments on an earlier draft were received from T Beard, W Campbell, E Cook, G Hardin, S Farber, G Smith, and an anonymous referee. The author, of course, is solely responsible for all contents of the article.
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The Entropy Law and the Economic Process. Cambridge, Massachusetts, 1971.
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