Modern economic instability
and the problem of surplus distribution
from a natural science viewpoint
A.M. Makarieva, V.G. Gorshkov, 20 November 2011.
In October 2011 it was announced that the human population had exceeded seven billion and continued to grow. On this occasion here we will consider the interrelated ecological and economic problems associated with population growth and the strong resource-dependence of the modern market-based civilization.
1. Labor of animals and man: the surplus difference
2. Millionaires, billionaires and the human population size
3. Why is concentration of surpluses encouraged/tolerated?
4. Property over raw resources: An economic black hole
5. Crisis in the developed world: how oil corroded the U.S. from inside
6. Closing remarks: a biotic regulation outlook
Man is capable of doing some work to sustain himself. All animals can do the same. They provide themselves with food, compete with each other within their population, build homes and care for the young and so on. Observations reveal several peculiarities of animal labor. First, many animals spend working but a minor part of their time and energy budget. For hours, seals can be seen dozing on a rock, the sandpiper waiting motionless for the tide to come, a family of beluga whales enjoying peaceful communication in shallow waters under the sun… Indeed, the low rate of the baseline energy expenditures as compared to the maximum power output makes it possible for the organism to survive in critical conditions.
Second, all genetically similar individuals in animal populations perform similar work. They do not create surpluses that could be used by other (non-working) individuals of the same species. There are no individuals in animal populations that would be doing considerably larger amounts of work than their mates. There is no intraspecific parasitism in any animal populations.
The efficiency of human labor depends on technology. Modern technologies spread quite rapidly throughout the world, such that it is plausible to count, in the first approximation, that the technological component is roughly similar for all modern human workers. Similar to animals, there are no human individuals who would be able to perform exceedingly larger amounts of work than the human workers on average do. Whatever people do, they do it using the metabolic power of their body that constitutes on average about 102 Watt for an adult human. (Genius is a laborer who has performed some work at an ordinary power, but the product of his work turned out to be useful to all people of all generations.) Considering the universality of this biological basis of human labor, the pay for work should be similarly universal and independent of the type of labor. The global mean salary in the modern civilization can be estimated as the global gross domestic product divided by the total size of the global working population. This yields around seven U.S. dollars per hour, or 20 thousand dollars per year, or about 1 million dollars for half a century's labor. Thus, for a lifetime work an average Earth citizen is paid one million dollars.
The key difference between human and animal labor lies in the fact that human workers produce excessive amounts of goods, services etc. that they do not themselves consume — "the surplus" — at a rate of about 10% of the average production rate. This explains why, despite the universal biological working power of humans, the income of some individuals can be several million dollars per year (i.e., about hundred million dollars per lifetime or a hundred times the average income), while the most successful businessmen can accumulate over a hundred billion dollars. This occurs due to concentration in the same hands of the monetary value of surpluses produced by many working people.
In primitive societies, social groups did not exceed several hundred people (as is still the case in the primordial societies of the Papua and the Amazon), while the production surpluses were in the order of one percent. Therefore, in every social group, the number of non-working adults could not be higher than a few.
With the advent of technology the surplus production rate raised to the modern level of about ten per cent. This means that every society is able to maintain one tenth of its adult population in a vacant state: such that the vacant people do not perform any necessary or meaningful work but consume as much of the civilization products and services as the working members on average do. To refer to such groups of people the mass media sometimes use terms akin to "lazybones" or "parasites" (e.g., "non-market parasites on a market world"). We however believe that the term "vacant population" is more correct. A vacant existence can be enforced onto an originally quite industrious population, see section 5 below, while the status of a parasite or lazybone to a certain degree implies one's free choice to behave in that manner. Moreover, a vacant population may one day start working efficiently again. Parasites will hardly ever do.
Alternatively, at a 10% surplus rate, the society can support one thousandth (1/1000) of its adult population as millionaires, i.e. people having a hundred times higher income rate than the average working citizen. People with a ten thousand times higher than average income (billionaires) can be supported if only they constitute no more than one millionth of the adult population. These simple calculations show that neither millionaires nor billionaires can exist in small societies. Thus, by construction, these groups of people are economically interested in an unlimited growth of the global population. Likewise by construction, the reference group of a billionaire may lack a geographic or national identity in which situation the notion of "motherland" and the related behavioral norms are prone to erosion.
From the viewpoint of their energy budget, it makes no difference for a large population that exceeds a million people whether it supports one billionaire, a thousand millionaires or a hundred thousand of vacant people. As all other people, the millionaires and billionaires strive to raise their prestige within their, respectively, national and international reference groups. The millionaires signal about their high rank by demonstrating a maximally luxurious life style which effectively consumes most part of their income. The billionaires cannot do the same, because it is impossible to make a life style another thousand times more luxurious than the maximum. Billion-sized fortunes arise when the corresponding production cycle (e.g., production of automobiles, personal computers, mobile phones) has been saturated (corresponding goods consumed by the majority of the global population), such that further growth is not possible. Therefore, the only route to channel the billionaires' income into is the sponsorship of some non-productive (non-economic) activities of millionaires (sportsmen, artists etc.) and the vacant population. Again by construction, these activities can take any form, either good or evil, as they are dictated by the billionaires' wish and the ideals of their reference group. World war, modern terrorism, continent-scale health programs are but a few examples.
The well-known process of inflation, when the nominal price of all the products grow with time, is a unambiguous and unavoidable consequence of the existence of surpluses and vacant population.The produced surpluses are transferred to billionaires, who, in turn, freely distribute them among the millionaires and the vacant population. As a result, the buying capacity of people actually participating in the production process (the workers) is diminished — for their salary, they can now buy only a fraction (minus the share given away to the non-working population) part of the products they manufactured. That is, the money that correspond to 100% produced goods and are paid as wages to the workers are used to buy, say, 90% of the produced goods (minus ten per cent freely distributed among the non-workers). (Note that formally the vacant population is paid wages for some non-productive labor; they then use this money to buy real goods and services from the working population thus returning the money back to them. In the result, the workers remain with 100% money for which they can only buy, say, 90% of the produced goods and services.)
It is important to discuss on the biological significance of the two inherent human properties mentioned above. The first one is the desire to increase one's rank and prestige in one's reference group. This property is a consequence of the ultra-complex nature of life organization and is, in one form or another, common to absolutely all biological species. The complexity of life organization that is unprecedented in the inanimate nature is characterized by an ultra-high rate of decay (chaotization). The living matter has a unique way of preventing disorder accumulation that have no precedents in the inanimate world. It consists in the formation of populations of genetically similar individuals of the same species and switching on competitive interaction among them. In the course of competitive interaction that takes a huge variety of forms in the living world individuals with eroded genetic program are identified and forced out from the population in one way or another. Therefore, it is the basic property of all living objects to try to show a high competitive capacity, i.e. achieve a high social rank and prestige in the social group they belong to. (It is clear that unlike during the natural competition the high social rank acquired on the economical basis of surplus concentration does not guarantee that all the important properties of human genetic program are in order.)
The second property of human beings, the desire to do something all the time rather than simply rest as animals do, is an exclusive peculiarity of our species. It appears to be connected to our poor adaptation to those environments where our species originated, a kind of an evolutionary error. Most of such errors were eliminated from the biosphere in the course of evolution. Homo sapiens has apparently compensated his poor adaptation by an increased working capacity, which resulted in a chronic overheating and the loss of body hair that is present in the overwhelming majority of other mammalian species. A further evolutionary compensation was provided by human brain development that enabled people to participate in an infinite diversity of productive activities.
We conclude that the existence of wealth and poverty in the modern society is based on the genetic program of Homo sapiens. People wish to work (they simply cannot live where there is "nothing to do"); they also wish to continuously increase their rank in the social hierarchy. These two properties lead to surplus production and the inherent non-stationarity of the civilization and modern economy that are manifested as population growth, economic growth (exponential GDP increase) and the destruction of habitable environment. Stationarity in modern economics is understood as the end to successful entrepreneurship, crash of the bank system and disappearance of the opportunity for every citizen to make a fortune and become rich. Stationarity is labeled with a negatively connotated term — "stagnation"; governments strive to prevent it by any possible means.
The concept of free market in the modern society presumes that a private economic initiative of successful citizens can ultimately endow the latter with million- and billion-sized fortunes. Any person is free to organize some productive economic activity. If the product turns out to be attractive to many consumers, then, until the demand is saturated, the entrepreneur is free to set any price of his choice for the new product — a price that can be much higher than the production cost. This freedom to choose a price is legally formalized as the property right of the entrepreneur over the products he manufactures and the facilities he uses to manufacture it. In the time window from the onset of production and to the moment when all potential consumers have been saturated with the new product, the entrepreneur is able to accumulate a huge fortune. World-known fortunes were born at the dawn of automobile industry, with the advent of personal computers, mobile phones, the Internet. On a smaller scale, the same process happens any time one sells a bestseller, a new movie or a popular song. As soon as the demand is saturated, the inevitable competition among independent manufacturers drives the market price of the new product down towards the production cost. A further increase of the fortune associated with the new product is no longer possible.
It is not possible to know in advance, let alone to plan, which new economic enterprises could yield attractive products. Besides being unfeasible, any regulatory attempts of such kind strongly discourage the private economic initiative. Striving for a higher rank in his reference group, a successful entrepreneur will inevitably try to grow rich. As we know from history, all large-scale efforts aimed at economic equality of all individuals in a population resulted in a slow-down or even complete disintegration of the production processes.
On the other hand, the time period from the onset of production of a new successful product to the moment when the demand has been saturated is typically quite short. The number of businessmen who manage to accumulate exceedingly large fortunes on new products is rather low. Moreover, the technological successful entrepreneurship as we have known it for a long time may be currently eyeing its end. Compared to the preceding half a century, the last fifty years did not see any conceptual breakthroughs in the auto-, avia-, space or nuclear technologies. First, the now near instantaneous spread ("leak") of new technologies deprives their discoverers of much of the financial profit and prestige that has been traditionally associated with innovations. This naturally discourages people, such that the innovative efforts become weaker. Second, lasers, personal computers, the Internet, mobile phones and the nano-scale biotechnologies are all physically based on electromagnetism — the only long-range action besides gravity. They may well represent the last great non-dangerous technological achievements of modern civilization.
In summary, concentration of production surpluses in the hands of successful manufacturers has never constituted a noticeable burden on the population. Nor had it ever threatened the civilization as a whole.
A principally different set of problems surrounds the use of raw resources (energy and materials) that are indispensable for any productive economic activity in the modern world. Formally, the property rights over land areas where the resources are located and the resources themselves are recognized and protected by the law in very much the same manner as the property rights over the manufacturing facilities (plants, factories) and the land areas occupied by them. Means of production (arable lands, plants, factories, printing houses etc.) have a market price if only the product that they yield is economically competitive. Nobody is interested in owning land in desert, where nothing can be grown and where there is no infrastructure that is necessary to organize a technological process. However, if there are deposits of important mineral resources or fossil fuel in that desert, then the market price of land will be determined by the market price of those resources, irrespective of how low the production costs (e.g., mining) could be. The owner of land where such low cost natural resources are located is able to sell those resources at a market price that may greatly exceed the cost of production.
The amount of low cost sources of agricultural production (food), raw materials and energy on Earth is limited together with the number of their owners. As long as the low cost sources are sufficient to meet the demand of the global population the development of the more expensive and laborious sources remains unprofitable. Consumption of life essentials — food, raw materials and energy — is always saturated in the same manner as is oxygen consumption by a breathing organism. However, none of the existing sources of food, energy or materials happens to be large enough to saturate the global demand on its own (unlike the Microsoft, for example). Thus, no owner of a low cost resource is able to force the competitors out from the market by reducing the price of his product. There is no sense in lowering the price when you cannot elevate your production in any case. Market competition among the owners of low cost resources is not possible. When united, such owners gain an absolute monopoly over the global market; they can set an arbitrarily high price for the resources they sell and this price will never go down.
Such a speculative monopolistic deficit-based price is determined by the resilience limit of the global economy, i.e. it will be as high as the civilization will be still able to pay at the verge of a collapse and much higher than the production cost. This situation is realized today with respect to oil, natural gas and some types of agricultural production. With oil price kept in the vicinity of the resilience limit, the global economy cannot be stable and the crises must occur one after another. When the price over an essential resource like oil is elevated beyond the limit the economy crashes. Plants and factories have to be closed and the economic growth is slowed down. Then, as the demand for oil and gas diminishes, their price goes down as well. (A collapsed economy cannot pay much.)
The painful process of economic recovery culminates in new highs for energy prices, which pushes the economy back to a new collapse. The global economic crisis that burst out in 2008 and is still there is a vivid illustration of all the above.
Let us now fill the same arguments with a more specific content using the U.S. economy as an example. Until the 1950s the United States — world's champion in energy consumption and a global leader in energy production — had been self-sustainable in terms of energy. The needs of the growing American economy were met by domestic energy sources. Likewise across the globe the growth of energy consumption was more than compensated by the continuous process of discovering new deposits of fossil fuels here and there. There was no energy deficit. Competition among the oil owners under conditions of an ever-growing low cost resource base kept the oil price at a relatively low level. It had remained in the vicinity of the production cost for near a century after a short peak in the very beginning of entering the market — a feature common to all new market products, Fig. 1.
In the end of the 1950s the U.S.A. lost their energy independence and began to import energy (mostly oil), Fig. 2. (From 1970 to 1973 the share of import in total energy consumption tripled, hit the ten per cent mark and approached 20%.) Upon seeing such developments, the oil owners worldwide united very quickly. In a short time prices for oil and natural gas rose manifold having greatly exceeded the production cost. The huge difference between the market price and production cost began to flow into the hands of oil owners, then to vacant populations both outside and, predominantly, inside the U.S.A. Domestic oil owners continued to supply most part of energy, such that it was namely within the American economy that the rise of oil prices was felt most painfully. The proportion of vacant population in the US society began to grow. Real economy of the country was not able to cope with this unexpected, unanalyzed and rapidly growing burden. The government was forced to borrow money both outside and, primarily, inside the country, ultimately from the oil owners with whom the money were rapidly concentrated taken from the productive working population. Public debt started rapidly climbing up ever since, Fig. 2. Similar processes occurred in the meantime in Western Europe and the developed world as a whole.
Fig. 2. Energy dependence, oil price and public debt in the U.S. over the last sixty years. Data of Energy Information Administration (imported energy = consumption minus production), oil price as in Fig. 1) downloaded 19 November 2011. Public debt data come from http://www.usgovernmentspending.com. Numerical data can be found here and here.
A conspicuous pause in the oil price growth occurred in 1990s, Fig. 2. It was caused by the collapse of Soviet Union. Then the industrial production in Russia was near totally disintegrated and virtually ceased to exist. A significant part of the population became vacant. During this time of low state control Russian oil was poured into the international energy market at a low price with practically no revenue for the country. This drove the people to poverty as they no longer had where to work due to economic disintegration. Later towards the 2000s the state took all the resources back under its control and began to feed the now non-working population with oil dollars. This resulted in an explosive rise of oil price, Fig. 2. The status of Russia as an oil owner country with predominantly vacant population was solidified.
The increasing social chaos and tension that are gradually spreading over the developed world are largely due to the widespread lack of understanding of what is going on. Western mentality is experiencing difficulties in drawing a clear distinction between fortunes made in a productive way (e.g., due to innovations) and those made in a non-productive way (speculation-monopoly-deficit-based). In quite a remarkable opinion mess, some people in the Western society now call to "celebrate the rich" as if all the rich were the drivers of economic prosperity and not noticing that quite a few of them are responsible for the appearance of lazybones (vacant population). Others, on the contrary, call to raise the tax for all the rich, similarly with no distinction, not noticing that they can indeed be targeting the pillars of real economy — the most active part of the working population. (The workers, on the other hand, do not quite understand where all these lazybones suddenly come from who are not used to work at all.) The traditional acutely polarized consideration of any regulation measures as strongly opposed to market freedom (see the previous section) stands in the way of a meaningful discussion as to how the suffocating energy monopolies could be efficiently fought with to the benefit of the market.
The economically intolerable price of oil and any other essential resources will inevitably push the country-importer towards trying to redistribute the resources by means of a military conflict with the current owners. However, as long as the new (post-war) national owners continue to sell oil at the same high price, the burden on the developed world economy cannot lessen. (For precisely this reason, for example, oil prices did not drop when the U.S. oil owners took Iraq's oil wells under control. It should be emphasized that oil corroded America from inside rather than from outside.)
To solve this problem is only possible via a series of international treaties that would set a ceiling to the oil price and ultimately abolish the property right over oil and other life essential resources on a global scale. There should not be property over oil as there is no property over air that all people breathe. Abolishment of the property right over essential resources like oil would lead to an economic boom comparable to what happened in America upon the abolishment of slavery (the property right over human bodies).
At a first glance one could think that the existence of a 10% vacant population burden on the global economy is a good thing for the ecosystems and our still habitable environment that they maintain. Indeed, this burden apparently slows down the whole of global economy, including those branches of it that are directly responsible for the destruction of the biosphere. With oil sold at a reasonable price and petrol costing several times less than it does today one can imagine how much faster the unique Siberian forests would have been turned into wrapping or toilet paper or other single-use stuff. But the reality is not as straightforward. The recent economic crisis that drove gold prices up accelerated the gold rush in South America in Peru, where rainforests are eradicated for gold mining with an unprecedented pace. The economic instability creates a chaos where measures towards nature protection cannot be taken.
In the animal world in natural ecosystems the number of individuals in stable social structures is strictly limited by a few hundred at most. Larger social groups form for a short important period of the life cycle (migrations, locust invasions etc.) This ensures animal species against the intraspecific parasitism (when some individuals would occasionally use the randomly occurring production surpluses to raise their rank) and provides for stability of the biota and its environment. Population density in animals is confined by the resilience limit of the food production base, i.e., the ecosystem stability. Stable population density of animals is an indispensable condition for the habitable environment to remain stable. Should the humanity obey the universal natural laws or the non-stationarity of our population and the inevitable destruction of the biosphere together with the civilization collapse cannot be prevented?
Unlike animals, humans are able to analyze any problems from the scientific viewpoint. Only a wide and detailed analysis of these issues can result in elaboration of a global strategy of human behavior when the democratic choice of the majority of people could lead our civilization away from the crisis.
This text can be discussed on our blog.
Makarieva A.M., Gorshkov V.G., Li B.-L. (2010) Comprehending ecological and economic sustainability: Comparative analysis of stability principles in the biosphere and free market economy. Annals of the New York Academy of Sciences, 1195, E1-E18. Abstract. PDF (1.1 Mb). doi:10.1111/j.1749-6632.2009.05400.x, first published as PNPI Preprint No. 2763.