Archive for June, 2011

Dollars and pence

June 24, 2011

This paper from the Levy Economics Institute offers a simply explained account, from a Chartalist perspective, of the US dollar’s unique and historically unprecedented status, plus some its consequences for e.g. funding defence expenditure:

[Even] the hegemon suffered from one particular constraint during the Gold Standard period and in the previous international monetary systems. Even though the pound was the key reserve currency, it was fixed to gold. In other words, debt was ultimately redeemable in an asset that was not directly controlled by the monetary authority. Default was a possibility, even if a remote one…

In fact, since the closing of the gold window the dollar became the first world fiat money. For the first time the international currency is akin to the domestic currency for the hegemon, since its central bank can always buy assets denominated in the domestic currency and finance government debt. There is no balance-of-payments constraint for the hegemonic country and the principles of functional finance apply on a global basis. In this sense, it is possible for the hegemonic state, in this case, the United States, to be a global debtor (as national states are in their domestic economies) and to provide a default-risk-free asset to facilitate global accumulation…

The reason the dollar remains and will remain the key currency is not that its value is stable, as Metallists would argue is necessary for fiat money, but because the United States does not incur debt in other currencies and the institutions that manage macroeconomic policy guarantee that a default in dollars cannot take place. This creates the capacity for the United States to incur international debt without any reasonable limit.

Note that an important part of that privilege is associated with the fact that key commodities, like oil, are priced in dollars in international markets. Not only does that imply that there cannot be an insufficient source of dollars to import key commodities, but also a depreciation of the dollar does not have the impact of increasing the price of imports.

These circumstances did not come about merely because Nixon ended the dollar’s convertibility for gold in 1971. Protecting the dollar’s special status, and preserving the privileges Washington thereby accrues, has required statecraft using military, diplomatic and other blunt tools.

In 1974 OPEC countries held around 15% of their foreign-exchange reserves in sterling. Following the oil price spike, this became an enormous proportion of total sterling holdings. Saudi Arabia and Kuwait alone held £1.8 billion out of global holdings of £4.9 billion, i.e. more than one-third of all sterling reserves.

A previous post described how in July 1974 US Treasury Secretary William Simon, together with State and Commerce Department officials, pressured the central banks and finance ministries of OPEC states to convert revenue from oil exports into purchases of US Treasury securities outside the regular auction.

Through diplomatic, commercial and security arm-twisting, the Saudi Arabian Monetary Agency was dissuaded from what the CIA called a ‘modest diversification program’ of its foreign-reserve portfolio. Lack of cooperation, US officials reportedly told their Gulf allies, would be interpreted as an ‘act of war.’

Along with explicit commitment to its regional military umbrella, Washington agreed in June 1974 to ‘supply of the Kingdom’s requirements for defensive purposes.’ Washington agreed to provide over $2 billion of military hardware to Saudi Arabia and Kuwait (on top of $4 billion, including F-14s, to the Shah’s Iran). The Saudi National Guard Modernization Programme commenced in 1975 with the contract awarded to US firm Vinnell (now a subsidiary of Northrop Grumman).

Riyadh was thus convinced to invoice oil sales exclusively in dollars, rather than in a basket of currencies including the British pound. (Around 25% of oil sales had hitherto been conducted using sterling.) Along with regular purchases of US Treasury issues in competitive auctions, the SAMA agreed in December 1974 to confidentially buy a further $2.5 billion of T-bills.

These secret dealings secured Washington an immense strategic victory. Unlike its rivals, the United States could now finance its global military programme, and imports of oil and manufactured goods, without external funding constraints.

The switch of oil exporters to the dollar precipitated a run on the pound. Over the next two years OPEC central banks reduced their UK Treasury bill holdings by £2 billion. The UK Treasury and media began to speak of a balance-of-payments crisis.

By 1976, on the advice of Treasury and Chancellor Denis Healey, the Labour Government was conducting negotiations with the IMF for a loan.

For the IMF read US Treasury – which at this time held 20% of voting rights and a veto. The conditions on Britain’s loan were thus drafted with the advice of Treasury Secretary Simon and Undersecretary Edwin Yeo, together with other officials from that department, the Federal Reserve (including Fed Chairman Arthur Burns) and Commerce Department:

In the last days of the IMF negotiations, Simon flew to London to meet secretly with Bank of England and UK Treasury officials and get their appraisal of where the Labour Cabinet stood. To maintain clandestinity, the meeting took place at an exclusive London tailor’s and cost Simon the price of three suits — well worth it, he said.

Simon had made his first million as a bond trader before he was thirty; Undersecretary Yeo was a former Pittsburgh banker. The connexions between Wall Street and the City of London undoubtedly smoothed their path. But it was only in their capacity as American state officials that Simon and Yeo could play the role they did.

It was not easy. Edwin Yeo later described how the Treasury had ‘sweated blood’ to get its way, not least against Henry Kissinger and the State Department who favoured gentler handling of such a key Cold War ally. As William Rodgers, Simon’s successor at the Treasury, later put it: ‘We all had a feeling it could come apart in a quite serious way . . . it was a choice between Britain remaining in the liberal financial system of the West as opposed to a radical change of course. I think if that had happened the whole system would have begun to fall apart. So we tended to see it in cosmic terms.’

This was a period of intense struggle between US federal departments of Treasury and State for primacy in international financial policymaking. By 1977 Treasury came out on top due its control over the institutional lever of the IMF. This body – and thus the US Treasury and its Wall Street constituency – would gain in resources and global influence in subsequent decades.

The loan conditions the IMF outlined to Downing Street involved a £2.5 billion reduction in public expenditure over the next two years, targeting of monetary aggregates, etc.

Members of Prime Minister Callaghan’s ministry blanched at these terms. They sought, instead, support for the pound from West German Chancellor Helmut Schmidt and his Bundesbank. Meanwhile Brent Snowcroft, then National Security Advisor, described a possible British turn towards trade protection and capital controls as ‘the single greatest threat to the Western world.’

As it turned out, the loan was never taken up, though the would-be creditor’s conditions were imposed: Healey had sent a letter of intent accepting borrowers’ terms.

And this too produced another stunning strategic victory for Washington in the mid-1970s. Austerity terms brought about the destruction of the British Labour Party’s Bevanite wing, the ascent of Margaret Thatcher, the Conservative victory of 1979, and the destruction of the UK’s manufacturing base, just as North Sea oil was about to come online and Britain became the world’s fourth-largest oil exporter.

In several ways, too, this was a triumph for the US Security State in particular.

Various intelligence figures (including CIA counterespionage chief James Jesus Angleton, who apparently thought Prime Minister Harold Wilson a Soviet mole) did not consider high-ranking Labour figures sufficiently trustworthy or committed to Atlanticist goals.

For decades the CIA had cultivated right-wing trade-union bureaucrats and MPs (the ‘Gaitskellite wing’ of Labour) via the International Confederation of Free Trade Unions, and these were the preferred satraps. Throughout the mid-1970s MI5 played a substantial role in destabilizing Harold Wilson’s Labour government (and Ted Heath’s Conservative leadership), with disinformation and smears leaked to the press in Northern Ireland.

Amid a growing sense of unease in elite circles following the 1974 miner’s strike and several years of high inflation, dubious figures like Airey Neave and George Kennedy Young helped to parachute Thatcher into the Conservative leadership. The disorder brought about by structural adjustment – freeze on public-sector pay leading to the Winter of Discontent, etc. – then brought Thatcher to power.

The split of the Gaitskellites from the Labour Party, and the final defeat of the figures around Tony Benn, led ultimately to the ascendancy of New Labour and the impeccably Atlanticist Tony Blair. (Meanwhile the ‘Europeanist’ wing of the Conservatives, their avatar in Cabinet being Michael Heseltine, was held at bay.)

Not coincidently, around the same time Australia saw the rise of a new cohort of Washington-inclined, staunchly pro-Zionist ALP leaders – Hawke, Keating, Beazley, Gillard – as well as the likes of Paul Howes, Mark Arbib and Michael Cooney.

The geostrategic consequences were many, but within Britain these measures also involved reasserting the privileges of the propertied classes against those of the employed population and related social layers. For this see Prime Minister Callaghan’s extraordinary speech, in September 1976, to the Labour Party Conference:

When I say there is no other way, that does not mean that it is going to be quick or easy. That has been promised before. It is neither. Britain has lived for too long on borrowed time, borrowed money, borrowed ideas…

For too long, perhaps ever since the war, we postponed facing up to fundamental choices and fundamental changes in our society and in our economy. That is what I mean when I say we have been living on borrowed time. For too long this country – all of us, yes, this Conference too – has been ready to settle for borrowing money abroad to maintain our standards of life, instead of grappling with the fundamental problems of British industry…

The cosy world we were told would go on for ever, where full employment would be guaran­teed by a stroke of the Chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone. Yesterday delegates pointed to the first sorry fruits: a high rate of unemployment. The rate of unemployment today – there is no need for me to say this to you – cannot be justified on any grounds, least of all the human dignity of those involved. But Mr. Chairman and comrades, I did not become a member of our Party, still less did I become the Leader of our Party, to pro­pound shallow analyses and false remedies for fundamental economic and social problems.

When we reject unemployment as an economic instrument – as we do – and when we reject also superficial remedies, as socialists must, then we must ask ourselves unflinchingly what is the cause of high unemployment. Quite simply and unequivocally, it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. This is as true in a mixed economy under a Labour Government as it is under capitalism or under communism. It is an absolute fact of life which no Government, be it left or right, can alter. Of course in Eastern Europe you cannot price yourself out of your job, because you cannot withdraw your labour. So those Governments can at least guarantee the appearance of full employment. But that is not the democratic way.

We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment…

Now we must get back to fundamentals. First, overcoming unemployment now unambiguously depends on our labour costs being at least com­parable with those of our major competitors. Second, we can only become competitive by having the right kind of investment at the right kind of level, and by significantly improving the productivity of both labour and capital. Third, we will fail – and I say this to those who have been pressing about public expenditure, to which I will come back – if we think we can buy our way out by printing what Denis Healey calls ‘confetti money’ to pay ourselves more than we produce. I do not care what economic system we live in – at least, I do care very much – but the moral I want to draw is this that whatever system we live under these fundamentals are at the heart of the standard of life of the people of the country concerned, and we ignore them at our peril. They are also at the heart of the Social Contract and of our industrial strategy.

Britain is now at a watershed. We have the chance to make real and fundamental choices about priorities which are absolutely necessary to achieve a growing and prosperous manufac­turing industry, with all the advantages and easements that can follow…

[The] first priority of the Labour Government must be a determined attack on inflation. That remains; we have halved it in the last twelve months but we must do more yet. The Government’s objec­tive must be to reach inflation rates comparable with those of our major competitors by the end of next year. We are already getting there….

Let me add one more thing about how to get a strong manufacturing sector of industry. Hold on to your seats. The willingness of industry to invest in new plant and machinery requires, of course, that we overcome inflation, but also that industry is left with sufficient funds and has suf­ficient confidence to make the new investments. When I say they must have sufficient funds, I mean they must he able to earn a surplus and that is a euphemism for saying they must be able to make a profit.

Whether you call it a surplus or a profit, it is necessary for a healthy industrial system, whether it operates in a socialist economy, a mixed economy or a capitalist economy. If industry cannot retain and generate sufficient funds as a result of its operations, and replace old plant and machinery, then you will whistle in vain for the investment and we shall continue to slide downhill. These are elementary facts of life. They are known to every trade unionist. Who would they sooner go and negotiate with when they want an increase in pay: a firm that is bankrupt or a firm that is doing well and generat­ing a good surplus?

The primary concern of our industrial strategy and our economic policy for the next three years is quite simple. The strategy and the priority is to create more wealth, and to do it with the agree­ment and the support of the trade union move­ment.

Soon after this speech, however, it became clear that the British Treasury forecasts of public-sector borrowing requirements and the current-account deficit, used by Chancellor Denis Healey to persuade Cabinet of the looming emergency, had been overblown.

The balance-of-payments constraint rapidly receded. Production from Britain’s North Sea oilfields had begun in 1975, and within three years the largest field, Forties, had reached peak daily output.

With export receipts flowing, the new Conservative government allowed the pound to appreciate, deliberately wiping out much manufacturing industry.

From late 1979 sectoral output fell off a cliff; by 1982 the number of workers employed in manufacturing had dropped by 1.5 million.

During the 1980s the trade surplus and the removal of regulatory controls allowed the export of capital: firms and institutional investors buying up overseas assets, both equity and bonds, and the City of London increasing its social influence and control over policy making.

The return to dominance of the financial sector had several implications.

The first was that the earnings of industrial and commercial firms retained after interest and dividends had been paid out was reduced. This meant less was available for productive investment.

The following two charts show (1) the reduced share of profits that went towards productive expenditure; (2) the effect this had on growth in the fixed capital stock. For several years gross investment in buildings, machinery and equipment was insufficient even to cover depreciation and the total real-asset base contracted.

Slow growth in the stock of accumulated capital raised the output/capital ratio, increasing the rate of profit from its mid-1970s nadir.

Over time, the high proportion of the surplus drained by unproductive expenditure, and the consequent slow productivity growth, has made British industry high-cost and uncompetitive, leading to persistent trade deficits over the past two decades as domestic energy production has begun to decline.

This has helped British integration into the European continental economy. The highly unproductive offshore island, in which the financial sector has a disproportionately large weight, neatly complements the export-oriented Mitteleuropa centred on Germany and incorporating Sweden, the Netherlands, Austria and the Czech Republic.

Mohun and Veneziani

This closer integration of Britain with mainland Europe has not threatened the Atlantic alliance or damaged Washington’s overriding objective, pursued via the NATO umbrella, of preventing the European superstate from developing the military capacity to independently pursue its own strategic or ‘security’ interests. Quite the opposite.

Washington has since the 1970s encouraged Britain’s economic and diplomatic incorporation into Europe, where it functions as a beachhead and Trojan horse. With the opportunity (and risk) presented by North Sea oil, from the mid-1970s this project took the form of tempting a wing of the British ruling elite to weaken the labour movement by destroying domestic industry and running down the capital stock.

This task achieved, the inveterately pro-US Thatcher was subsequently despatched when her Europhobia became an obstacle to further progress, and she was eventually replaced by the Europhiles of New Labour, foremost among them Blair, Peter Mandelson, and George Robertson, among whom the latter two were notable members of the British-American Project.

Thus, notwithstanding its current pose in the forefront of the “international community”, Britain is a third-rate power. Not only is it dependent on the US in military, intelligence and strategic matters, but its chronic current-account deficits now reflect Britain’s subordination to the leading EU economies.

Harold Wilson, Labour PM during the 1967 and 1976 balance-of-payments crises, traced the UK’s problems back to Lend-Lease and the end of Imperial Preference. We could go further back.

The disproportionate weight of the rentier class arose in the Edwardian era, during which period Britain’s capitalist class first abjured productive investment, retiring to coupon-clipping in stately homes.


Voices in the air

June 22, 2011

In his General Theory, Keynes famously wrote that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood’:

Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back… [The] ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.

Knowing the intellectual provenance of a public policy or political slogan can give you some idea of its substance. This is the case for the the Australian government’s proposed carbon tax.

Thirty years ago it was possible to describe the environmental-policy debate between economists (within government agencies and without), as an asymmetric contest between:

  1. Those who would rely on price signals to abate pollution, either through imposition of a Pigovian tax, or through the delineation and assignment of property rights, and Coasean bargaining.

    This position harked back to the market-as-superior-information-processor arguments of Mises and Hayek;

  2. An ecological economics concerned with physical quantities, and based on the matrix notation of Sraffa, Von Neumann and Leontief.

    This group considered production to be a circular process using its own outputs (and natural resources) as physical inputs and creating pollution/waste as a joint product.

    It suggested reducing or setting targets for pollutant emissions through absolute physical limits expressed in non-price units, gesturing towards the in-kind calculation of Otto Neurath and Frederick Soddy, and socialist planning.

The argument of the first group against the second was that prices were the best indices of scarcity or social cost.

Benevolent policymakers who wanted producers in a market economy to substitute a ‘clean’ technology or production process for an environmentally-damaging, resource-depleting or pollution-intensive one should do this by allowing prices to incorporate information on the environmental effects of the respective activities (e.g. by levying a Pigovian tax).

Firms would then adjust the quantity used of a physical good or process in response to these changes in relative prices. With a tax levied on pollution, profit-maximizing firms could be expected to choose production methods that were more favourable to the environment.

The technical argument of the second group against the first rested, among other things, on the possibility that introducing ‘green taxes’ could have ‘perverse’ effects involving reverse substitution or reswitching.

This could lead to increased employment of pollution-intensive production techniques even as the ‘price’ of pollution rose, implying the non-existence of what was commonly termed an inverse (i.e. monotonically downward-sloping) ‘pollution demand function’. (Empirical examples of ‘environmental reswitching’ were given by economists such as Peter Albin and J. Barkley Rosser Jr.)

This fact about choice of technique meant that, at a given level of pollution, the elasticity of pollution with respect to a pollution tax would be indeterminate. On the other hand, and notwithstanding the claims of Morris Adelman and others, there were definite limits to the substitution between inputs, and to changes in the technical conditions of production, that could be induced by changes in relative prices (such as those resulting from a pollution tax).

Firms could deploy resources between sectors in response to price signals, but there was no equivalent substance for nature to re-allocate between branches of the ecosphere.

More generally, the projection of the physical conditions of production (a two-dimensional input-output matrix, whose coefficients specified how much of the output of each industry was technically required as an input for each other industry) on to a one-dimensional price vector represented a loss of information content. The former contained all the information necessary to compute the latter, but the reverse operation was impossible.

Price accordingly was not the ultimate bearer of information on which decisions should be based. Planning in physical units might be a better way to deal with the environmental consequences of economic activity.

Since then, the second group has largely been consigned from mainstream environmental economics to the theoretical boondocks of industrial ecology and life-cycle assessment.

The first group has secured complete scholarly ascendancy – essentially by banishing its opponent from the field. This is why the Australian Prime Minister has repeatedly seen fit to describe an ‘economic consensus’ on the need for a ‘market-based mechanism to price carbon’ and limit pollutant emissions. (So too have the Treasurer and the Minister for Climate Change).

The total victory of group (1) in the arena of ‘environmental economics’ (specifically the problem of pollution-emission abatement) has coincided with the intrusion during recent decades of the capitalist market, its characteristic modes of valuation, and private-property rights into new social domains, including higher education, health, retirement provision, entire countries, charity and now the atmosphere.

The latter item is perhaps the most tricky, presenting a high chance of instinctive resistance from the populace. People may have been taught to believe that ownership of land is natural and universal, and that essential services can be delivered more efficiently by private firms, but they have not yet absorbed the same lessons about the air above them.

One step towards accomplishing the latter task was for environmental economics to became a subset of mainstream welfare economics, concerned with intergenerational equity, externalities, public goods, bargaining games and informational asymmetries, etc. Scholars could then apply to natural resources the lessons of the Coase theorem on the need for well-defined property rights.

More than for most academic disciplines, the survival and successful transmission of a particular economic idea depends quite clearly on its utility for this or that social group.

If, as Keynes said, ruling elites and state managers are conscious or unwitting hosts of economic ideas, which dwell in books, brains and hard drives, over time the differential survival and use of these ideas will derive from how well each can be used to advance the interests of contending classes. The ‘scribbled’ ideas of some long-dead economists are evergreen; others fall by the theoretical wayside. Some are banished, sharing the fate of their unlucky constituencies; others are elevated alongside the fortunes of their backers.

This is less true for those economists who advance narrow policy prescriptions than for those propose who broad shifts in conceptual outlook. The names of Smith, Ricardo, Henry George and Keynes himself have each been closely aligned with sectional interests (e.g. urban manufacturers versus agricultural landowners, industrial and commercial firms versus bondholders). The movement of their stocks in the journalistic and political world, if not within the academy, have corresponded closely to social-political trajectories (though recently Wayne Swan namechecked Keynes, rather pathetically, for PR purposes).

Alongside the achievement of a scholarly pseudo-consensus on ‘price signals’ and ‘property rights’ as the best way to limit pollution, contemporary Australian politics has developed an ever-more attenuated ideological spectrum, in which each party with parliamentary representatives shares a common set of background assumptions regarding the role of the market.

(The Greens, who sometimes add anti-market rhetoric to their social liberalism, nonetheless officially consider themselves ‘beyond left and right’ on economic matters, and support key neoliberal nostrums. Their record as part of several state coalition governments illustrates this commitment; Tasmanian leader Nick McKim recently promised to implement ‘tough decisions’ on ‘savings and productivity improvements’ in health and education, following the savage budget of Premier-Treasurer Lara Giddings. In agreeing to the closure of 20 schools, firing of nearly 2000 public-sector workers, and a $100 million cut in public health expenditure, McKim nodded towards the previous efforts of Christine Milne and Bob Brown during the 1989-92 Labor-Greens government: ‘Once again the Greens have been prepared to help to haul the budget back on track after the spending sprees of majority governments.’)

With all members of the political class agreeing on the economic fundamentals, there is little need for any public figure to discuss them seriously, any more than there is reason for fish to debate the merits of water.

When we add to this fact how boring and forbidding contemporary economics appears to the non-specialist, we can see why public debate (i.e. that conducted outside the business media and Productivity Commission reports) surrounding the Australian government’s proposed carbon tax has been, to a truly remarkable extent, shorn of economic substance.

Both advocates and opponents have contended largely on the ground of natural science, seeking to capture its authority for their respective positions, which are supposed to follow automatically from ‘the science’.

Representatives of the government have, of course, been explicit in identifying the application of a ‘carbon price’ as a microeconomic reform in the tradition of the Hawke-Keating regulatory changes of the 1980s and 1990s: compulsory subscription to pension schemes, union-imposed wage restraint and enterprise bargaining, capital-market liberalization, tariff reduction and removal, etc.

The Hawke-era economic advisor, Ross Garnaut, has had a key public role (though I suspect his area of professional expertise is confused by many casual observers).

But these are not the sort of unwitting intellectual influences by long-dead economists, with ‘the gradual encroachment of ideas…after a certain interval’, which Keynes wrote of.

When Greens Senator Christine Milne speaks of the need for ‘price signals’ to deal with the problems of climate change, she is not repeating the distilled wisdom of Ross Garnaut or Nicholas Stern. She is, consciously or not (!), repeating the right-wing arguments from the 1920s of Mises and Hayek against the claims for in-kind calculation favoured by the socialist Neurath, the Nobelist Soddy, Karl William Kapp, Popper-Lynkeus and Ballod-Atlanticus.

Green can be gold

June 15, 2011

Behind GetUp! stand creepy figures like Evan Thornley, who among other things is a co-founder and board member of Per Capita, a ‘progressive’ think tank modelled jointly on Peter Mandelson’s Policy Network and Will Marshall’s Progressive Policy Institute.

As with its British and North American cousins, the Australian body (Per Capita) secretes an unappealing centrist brew, combining economic liberalism with the authoritarian paternalism put forward by people like Cass Sunstein (designing ‘choice architectures’, etc.).

Thornley is CEO of Better Place Australia, a company that produces battery-charging stations for electric cars.

Better Place is a key source of funding for the Climate Institute, which together with GetUp! has been the chief organizer of the public campaign ‘Say Yes to a Price on Pollution’.

In this latter enterprise, Better Place stands alongside firms including energy retailer AGL, Jemena (a privatized wing of the WA State Energy Commission), Pacific Hydro, General Electric (the world’s largest producer of gas turbines), and OgilvyEarth, a PR company specializing in greenwashing; or as its website puts it, ‘sustainability communications’ that demonstrate ‘green can be gold’:

We help brands harness the power of sustainability. Sustainability is not an abstract concept, it’s about identifying smarter ways to do more with less. OgilvyEarth partners with brands to use sustainability to drive brand value, achieve long-term growth and increase profits.

We help global brands become category leaders and change agents. We work with visionary companies that want to make sustainability a growth driver for both their business and the communities they serve. We believe that sustainability is the new path to prosperity, and in the power of communications to change everything.

To date, we’ve helped the world’s biggest organizations, including Coca-Cola, Unilever, DuPont, the Environmental Defense Fund, Kraft, IBM, the WWF and the United Nations.

Together with groups such as the Australian Youth Climate Coalition, GetUp! and the Climate Institute organised Price on Pollution rallies held in March, to build public support for the federal government’s proposed ‘carbon tax’ (promotional leaflets and videos for the events sneakily described them as supporting ‘climate action’, a purpose which organisers then described in decidedly narrower terms after the fact).

A second wave of public demonstrations took place ten days ago across major Australian cities.

It attests, among other things, to the political desperation that many people feel, and the seriousness with which they take the problem of global warming, that many thousands of people turned up to each set of events. Few are convinced by glib promises from the political right that human societies will readily adapt to climate change.

In a paper published last year in Proceedings of the National Academy of Sciences (‘An adaptability limit to climate change due to heat stress’), the authors suggested that, under increased local temperatures projected in the more pessimistic scenarios of some global-warming models, humans would find themselves unable to thermoregulate. Were wet-bulb temperatures to stay above 35 °C for extended periods, the thermal gradient allowing bodies to dissipate heat via sweating or vasodilation would be lacking, with lethal results. Under such conditions, imaginable in some currently habitable regions, continued human settlement would be impossible.

Research like this, when it reaches public ears, rightly terrifies many. So, for example, does the risk of regional inundation for various ranges of sea-level rise.

But the presence of thousands of unaligned people at the Price on Pollution rally (which was not clearly publicized as such) and Say Yes demonstration also reveals political confusion, and the effect of intense propaganda efforts. The result is that most people can’t distinguish friends from enemies.

This is by design: a feature rather than a bug. It is how popular criticism of inaction by the political class, and business-as-usual for conventional electricity generators and other commercial and industrial users of coal, gas and oil, is absorbed and diverted into partisan backing for Labor and the Greens, and lobbying for that competing sector of capitalist firms which produces wind turbines and photovoltaics.

Ordinary people are bombarded, by those such as GetUp’s Simon Sheikh, with sales talk about the renewable-energy sector as a ‘new engine of prosperity’, and exhorted to help ‘kick start investment in clean energy’ and ‘unlock clean energy’. They are informed that ‘a price on pollution’ will swiftly bring on the ‘opportunities’, ‘thriving economy, ‘green jobs’ and ‘abundance’ of a ‘clean-energy economy’.

And they are placated, told to put away the pitchforks: according to the co-founder and Chair of the Australian Youth Climate Coalition (who also works in advertising/PR), ‘[the] good news is that all the technological solutions we need to solve climate change exist today. They are already being implemented globally; from China to California, Germany to Brazil.’

The only problems are ‘old, out-of-touch men’ and ‘fear of change.’

The political character of these people is demonstrated by the national director of AYCC’s ghastly description of ‘a full-blown generational war…between young and old, past and future’:

Firstly, this debate is pitting the voices of the past against the views and perspectives of younger generations. Secondly, it’s a fight between staying locked into ancient 19th century energy technology versus unlocking the clean, renewable energy resources that will power Australia into tomorrow…

When you know that you will be directly affected by decisions made by those in  power, you think about things in a new light. It’s an entirely different  world-view to those who are only a decade or two away from leaving this world  behind…

Of course, it’s obvious why our generation supports putting a price on pollution. We need this legislation to pass to give business a reason to clean up their act and switch to more efficient ways of doing things. Unless this happens, we can wave goodbye to our futures as they drift away in carbon-filled smoke plumes emitted by polluting industry.

The other reason that young Australians  and any Australians who support the idea of progress  support a carbon price is that we want to see Australia move forward into the 21st century with a modern clean energy economy.

When I was at school, most people owned landlines! Now, few young people can fill out the “home phone” section on a form. Instead, we’ve seen the evolution from computers to mobile phones to smart phones and beyond within just a few years.

We know the same kind of progress can happen in our energy systems if only the vested interests of the past would let go. Once a carbon price and some solid renewable energy investment levels the playing field, we’ll unlock new technologies, industries and jobs that have been waiting for years to come on-stream.

This inane, polyannish pose has not been adopted to win over a newspaper readership. It is repeated on the AYCC’s webpage (as is the divisive attempt to promote an age-based identity politics, a flimsy vehicle indeed on which to carry the weighty ambitions of the body’s leaders).

Nor does it spring merely from some naive youthful optimism. Identical sentiments are expressed by representatives of the Australian Conservation Foundation, Climate Institute, etc.

The Climate Institute, which expects a ‘thriving economy’ as Australia ‘cuts pollution and modernises industry’, nonetheless cites with approval a meta-report commissioned by the CFMEU, showing the Australian coal industry also continuing to ‘thrive’ under the Labor Government’s proposed emissions-abatement policies.

And it is not merely for reasons of political salesmanship that climate change is presented as an exciting opportunity to be seized.

Indeed, the ‘level playing field’ incessantly called for by advocates of ‘renewables’ would begin via a stream of transfer payments from the state bureaucracy to the non-fossil energy sector.

This is to be expected. Like many costly public goods (railways, road tunnels etc.) and utilities, energy infrastructure is an uninviting prospect for private investors. A conventional coal-fired power station requires large fixed-capital outlays; the stock is long-lived and depreciates slowly over many decades. Stacks, cooling towers, turbine rotors, boiler tubes, coal conveyors etc. can remain functional for 40-50 years, during which period capital is immobile, even while technological innovations may occur elsewhere. The depreciation allowance then sets a limit on the rate at which costs can be recovered, capital withdrawn and transferred to new facilities or to more profitable lines of production.

Firms in this sector derive more benefits from limiting installed capacity, so that it falls short of demand, prices are bid up and profits are higher. (This is why each Australian state except Tasmania is expected to fall short of its reserve reliability margin, a safety benchmark of available excess capacity over and above peak electricity demand, within the next few years. South Australia and Victoria have already had inadequate supplies during recent summers).

For this reason, such capital-intensive projects have historically been undertaken by the public authority. More recently, government subsidies have been required to induce private involvement: these may take the form of guaranteed cash flows, as with PFI/PPPs, or tax breaks, or sale of costly assets at very favourable terms (e.g. NSW electricity).

This is also and especially the case with ‘renewable energy’, expansion of which would require huge levels of investment at comparatively high capital costs (according to all estimates from the US, UK, Australia and the International Energy Agency).

A concentrating-solar thermal installation, like those being constructed (including on US Army land) in the Mojave Desert, requires a steam turbine and power block, fields of heliostats or parabolic mirrors, as well as high-voltage transmission lines to send power to low-insolation regions. In Australia, connection to the grid is estimated to cost up to $15 per megawatt hour in remote areas.

In general, the lower energy density of renewables (energy per unit of volume or mass) compared to oil, coal and gas, plus problems with intermittency, transport and storage, mean that productivity will be lower, and cost per mW hour higher.

If ‘renewable’ operating capacity is ever to be installed, uncompetitive high-cost producers must be made confident of somehow recouping the investment of vast sums of capital. Thus the Australian government’s Mandated Renewable Energy Target provides guaranteed wholesale demand for wind, geothermal and hydro-electric electricity generators at premium long-term prices (generating units are issued with tradable certificates, the price of which is set at the marginal production cost of the least-efficient producer, allowing more efficient producers to earn differential rent).

The ‘price is set in such a way that the marginal plant coming into the market earns enough from electricity market and certificate transactions to recover the long run marginal cost of generation.’ This is to encourage a desired $11 billion investment in new renewable capacity by 2020. Feed-in tariffs, meanwhile, offer a state-level subsidy.

These public funds grant part of the ‘opportunity’ to be ‘seized’.

Of course, few people will be concerned that a maker of wind turbines is primarily concerned with his own enrichment, if his work leads to emissions abatement or the mitigation of climate change. After all, as the saying goes, it’s not from the benevolence of the butcher that we expect our nightly dinner.

Sadly, in this case, the invisible hand is not nearly so dextrous. For there are solid physical and economic reasons to suppose that growth of ’emissions-free’ electricity-generating capacity will not cause a net reduction in greenhouse-gas emissions at all.

Given the Ivanpah project that US firm BrightSource Energy, together with Bechtel, is currently developing in the desert of California’s Inland Empire, and the still-more-impressive efforts of various German firms around the Mediterranean coast, it does seem that ‘renewable’ plants will be installed up to a utility scale, that some of these plants could be commercially successful, and that ‘clean energy’ may become a ’new engine’ of profitability for some.

But, if so, this will occur even as carbon dioxide emissions increase, (thaw-assisted) drilling for gas and oil goes ahead in the Yamal Peninsula, the South Kara Sea and Alaska’s North Slope, research is explored on how to liberate methane clathrates from beneath permafrost, and fossil fuels continue to provide most of the primary energy supply for the countless conversions, reconfigurations of matter and entropy reductions that make up the productive processes of a capitalist world economy. (Thus Chevron has contracted BrightSource to build a field of solar thermal collectors to generate steam injection for enhanced oil recovery.)

Too see why, we need only look at the structural materials  steel, aluminium, plastics, cement, fibreglass  that are used in producing ’renewable’ energy.

This allows us roughly to calculate what is called embodied energy, a life-cycle assessment of the direct and indirect energy needed to produce some output, summed over each step from raw-material extraction to transport, assembly, installation and final decommissioning. Ferrochrome, the main feedstock for stainless steel, is usually held to require over 50mJ/kg; aluminium costs around 200mJ/kg.

Though domestically most Australian coal (~80%) is used for electricity generation, once exports are taken into account the majority of bituminous coal mined is used as an input in steel production. Steelmaking requires the smelting of iron in giant blast furnaces, into which coke (derived from black coal) is introduced as a reducing agent. The ThyssenKrupp steel mill at Schwelgern in Duisberg goes through 2.5 million tonnes of coke each year. Its 140 huge coke ovens, each with a 93 cubic-metre capacity, are fed with 79 tonnes of coal at a time, a cycle repeated 135 times per day.

It is almost impossible to imagine a capitalist economy without a steel industry. Not only is steel a key constituent of everything from kitchen cutlery to the reinforced concrete of buildings, but almost every production process uses machines or tools containing the material.

In concentrating-solar thermal stations, two-thirds of the material making up a heliostat is steel, as with the pylons, thermal storage tanks and pipes. And, just as in coal-fired plants, the steam-generating boilers and turbogenerators that produce electricity are usually composed of a high-chromium steel alloy. Finally, the transmission towers that support lines connecting to the power grid are built mostly of steel.

Thus one of the chief investors in the Andasol 3 plant in Spain is MAN Ferrostaal. The DESERTEC Foundation that wants to dot concentrating-solar plants across North Africa and the Middle East, then lace high-voltage direct-current transmission lines to Europe, is made up of the cream of German industrial, power-supply and engineering firms, including some of the world’s biggest companies: E.ON, RWE, MAN and Siemens as well as Deutsche Bank, Swiss-Swedish firm ABB (the world’s biggest builder of transmission and distribution grids, including substations, cables, transformers, circuit breakers, etc.) and several of their Italian counterparts.

Wind turbines, parabolic-trough collectors and electricity transmission lines themselves, on the other hand, are composed mostly of aluminium (the cables are reinforced with steel), the light, highly malleable and ductile material that is used widely in construction, transportation (jet airliners have aluminium-alloy airframes, and carry freight in aluminium ULD containers and pallets), packaging, household items, and as a heat sink in electronic goods.

As we have seen, smelting of aluminium from bauxite ore requires huge amounts of energy (more than three times as much as steel production) and water. The Alcoa plants in Victoria accordingly have their own lignite-fired power station, along with government-subsidised electricity, and other remarkable concessions, provided for in a deal signed by the ALP state premier John Cain in 1984.

To be ‘clean’, the construction of ‘renewable’ electricity-generating infrastructure would thus imply an impossible kind of bootstrapping: requiring a huge expansion in aluminium production, with the latter powered by the non-fossil energy for which it is itself the key material input. This, more or less, is the problem of energy cannibalism.

Many of the remaining industrial components of the ‘clean-energy sector’ are derived from crude oil.

Some are made from plastics (besides their more well-known use in clothes and women’s stockings, polymers of propylene and ethylene make piping and electrical-wire insulation) or use hydrocarbon feedstocks for solvents (xylene and benzene), epoxy resins and adhesives (polyurethane), insulation and lubricants.

Meanwhile, given the nature of the energy conversions involved, solar thermal plants, wind farms and geothermal are usually located far from high-load urban areas (farther, the residents of Silesia and northern Bohemia may regret, than lignite-fuelled power stations sometimes are).

The low transport costs that underlie their supply logistics are made possible by internal-combustion engines using petroleum-derived liquid fuels.

The two key prime movers of the post-1950 world economy are diesel engines and gas turbines.

All cargo ships  container ships, tankers and dry-bulk carriers  merchant fleets, and military vessels, except the largest submarines, are propelled by diesel engines. So too are the cranes that deposit and offload cargo and the trucks and trains that transship it.

The world economy of distinct production units interacting via commodity trade  tracing freight routes between terminals, entrepôts and ports in Shanghai, Singapore, Hong Kong, Rotterdam, Hamburg, and Long Beach  is unthinkable without these enormous engines. The largest specimens from Wärtsilä and MAN can weigh up to 2300 tonnes.

Meanwhile the widebody commercial jet aircraft that carry passengers and cargo between continents depend on massive turbofan engines that burn fuel derived from kerosene. The largest of these turbofans, installed on Boeing 777s, is produced by General Electric, the Climate Institute’s supporter.

The single-minded and convenient focus of activists, lobbyists, administrators and legislators on electricity generation has thus obscured some of the deeper problems posed by climate change.

The problem of fossil-fuel-based economy is not limited to coal’s use for heating and electricity, nor even that of oil for private passenger transport. The economic ‘miracle of compound growth’ has always been based on the provision of apparently free natural inputs, whose only costs are due to the labour and other commodities used in extracting them.

Indeed, under a conventional input-output analysis the economy’s productive process seems to make matter appear from nowhere, as it does not include entries for energy reserves or unused natural resources (i.e. ‘oil remaining in the ground’), depleted resources or waste produced as either inputs or outputs of the petroleum/energy industry. But, despite appearances, such a production process is conservative.

Historically, productivity growth has depended on finding fuels with successively higher ratios of energy delivered to energy costs (EROI).

A capitalist economy built on increasing labour productivity (output per unit of labour) depends on constantly raising energy intensity (energy per unit of labour) or energy productivity (output per unit of energy).

This is why, in the potted history of IG Farben that Thomas Pynchon includes in Gravity’s Rainbow, he describes industrial capitalism using the imagery of Kekulé’s famous dream about benzene’s molecular structure, in which it resembled a snake eating its own tail:

Kekulé dreams the Great Serpent holding its own tail in its mouth, the dreaming Serpent which surrounds the World. But the meanness, the cynicism with which this dream is to be used. The serpent that announces, “The World is a closed thing, cyclical, resonant, eternally-returning,” is to be delivered into a system whose only aim is to violate the Cycle. Taking and not giving back, demanding that “productivity” and “earnings” keep on increasing with time, the System removing from the rest of the World these vast quantities of energy to keep its own tiny desperate fraction showing a profit: and not only most of humanity – most of the World, animal, vegetable and mineral, is laid waste in the process. The System may or may not understand that it’s only buying time. And that time is an artificial resource to begin with, of no value to anyone or anything but the System, which sooner or later must crash to its death, when its addiction to energy has become more than the rest of the World can supply, dragging with it innocent souls all along the chain of life. Living inside the system is like riding across the country in a bus driven by a maniac bent on suicide…

Of course, socialists do not get off as easy as many like to think. Any society that wants to provide its members with a decent material standard of living must consider (for it is constrained by) the technical conditions of production: the material relations between product types indicating how much of an industry’s product is needed as input for each other industry.

At any given time, the existing technical coefficients constrain the available material transformations that economic actors may perform, e.g. the particular way in which a specific good may be made. This appears to those actors as a dependence on certain material inputs.

This dependence will not disappear with capitalism.

But it is this in-kind (i.e. non-monetary) technology matrix (of which the price list for all goods is just a one-dimensional projection, with much information lost) that must form the basis of dealing with the problems of climate change and carbon dioxide emissions.

The prevailing wisdom says that a ‘price on pollution’ will allow cost-minimizing firms to incorporate ecological information into their decisions: as individual firms maximize profit by minimizing costs, and as pollution becomes a cost expressible in monetary units, the (properly regulated) market will coordinate an environmentally rational outcome.

Similarly, in 1920 the Austrian liberal Ludwig von Mises wrote that, given the choice ‘whether we shall use a waterfall to produce electricity or extend coalmining and better utilize the energy contained in coal’, calculation must occur in terms of a single common unit.

‘Technology and the considerations derived from it would be of little use’, he wrote, ‘if it were impossible to introduce into their schemes the money prices of goods and services. The projects and designs of engineers would be purely academic if they could not compare input and output on a common basis:

The practical man, eager to improve human conditions by removing uneasiness as far as possible, must know whether, under given conditions, what he is planning is the best method, or even a method, to make people less uneasy…Such comparisons can only be made by the use of money prices.

On this view, there can be no rational decision between alternatives (say between building a new coal-fired power plant or investing in a hydroelectric turbine), without the presence of a single scalar unit by which the two alternatives can somehow be made commensurable.

To this Mises’s great opponent, Otto Neurath, replied that such a comparison took place across multiple dimensions. And for such problems ‘no longer sums of money, but things themselves [should be] taken as the basis for our decisions’:

The question might arise, should one protect coal mines or put greater strain on men? The answer depends for example on whether one thinks that hydraulic power may be sufficiently developed or that solar heat might come to be better used, etc. If one believes the latter, one may ‘spend’ more coal more freely and will hardly waste human effort where coal can be used. If however one is afraid that when one generation uses too much coal thousands will freeze to death in the future, one might use more human power and save coal. Such and many other non-technical matters determine the choice of a technically calculable plan.

We can see no possibility of reducing the production plan to some kind of unit and then to compare the various plans in terms of such units…

How can one numerically compare, beyond the amounts, things like the protection of man power with the protection of coal deposits? In spite of the most careful assessment of all qualities, with due regard to numerically estimated coal deposits yet unexploited, one can still not mark each plan by a number obtained through additions and subtractions, etc., and then take the plan which gives the biggest number.

Economic plans can be compared only in the way one compares pears and books; one can prefer one plan to another only on the basis of a total estimate.

This shouldn’t be read too hastily, as it might be, as a rejection of quantification, numerical calculation or formal decision procedures. It is rather a demand that the decisionmaker attend to the particulars themselves in natural units, rather than reduce all the multifarious dimensions to a single one (i.e. monetary magnitudes. A similar charge would later be levelled against neoclassical economists during the Cambridge capital controversy, which concerned the adequacy of aggregate measures of the productivity of heterogeneous capital goods).

The latter method (i.e. money-price calculation) is a poor surrogate for in-kind calculation, for it involves a loss of information, only taking into account things bought and sold as commodities, and neglecting the technical dependencies existing between various inputs and outputs.

Assessing a hierarchy of needs, and determining how future costs and benefits are to be discounted relative to those of the present, are political decisions that cannot be left to the profit motive:

Savings in coal, trees, etc., beyond amounting to savings in the displeasure of work, mean the preservation of future pleasure, a positive quantity. For instance, that coal is used nowadays for silly things is to be blamed for people freezing in the future. Still, one can only give vague estimates. Saving certain raw materials can become pointless if one discovers something new. The future figures in the balance sheets of the capitalist order only in so far as the demand is anticipated. The freezing people of the future only show up if there is already now a demand for future coal. Just as before, capitalism would cut down the forests even if the consequence were karstification in a hundred years. In the tropics, and elsewhere, capitalism engages in over-exploitation without any disturbance. In short, for it savings would be a loss of profits.

So it appeared in 1925, and indeed we have got erosion and sinkholes, and much else besides.

To suppose today that the profit motive is the best instrument to wield against the physical effects of climate change is a hallucination induced by the profit system itself. And the hallucination is encouraged, even among the doubtful, by media touts, political placemen and the moneyed interests that both represent.

It should be resisted.