Economics: Seeking Optimal Balance

In the previous post I drew heavily on the Report of the Club of Rome EU Chapter entitled Money and Sustainability: The Missing Link (2012) to point out that industrial civilization is defying a law of nature by using excessive quantities of energy that continuously create new conditions on the planet to which we must continuously adapt or perish.  Adaptation is becoming increasingly difficult and problematic as the rate of change accelerates.  We are seeing the problems in such phenomena as the melting of sea ice, loss of species, depletion of oil reserves and other natural resources, intercultural conflict, and increasing social and economic inequality

Humanity is now literally evolving its presence on Earth, and the evolution process is being driven by the ideas or “memes” that we carry around in our brains.  If a meme works against our ability to adapt, we are in serious trouble, unless we change that meme.  The authors of the Club of Rome report assert that one of our most problematic and defective memes working against our survival is the belief that a monoculture of money in the form of individual national currencies is the only way to operate a money system.  The reason that this meme is a serious problem for humanity is that it constitutes a structural flaw in the money system causing repeated financial crises as well as aberrant speculative behaviour that distorts the operation of the whole money system.

Equally serious is the fact that because money is created and put into circulation mostly as debt on which interest is charged by banks, people are forced to work to pay off debt and therefore continuously expand the economy.  This puts a priority on the need for on-going economic growth, which, collectively as a global phenomenon, is consuming the resource base of the planet. There is clear evidence that worldwide industrial activity has put global civilization into overshoot (we are drawing down natural capital faster than it can be replenished) such that in the lifetimes of our grandchildren they can expect serious environmental, economic, social and cultural breakdown—unless we change the defective memes that are getting us into trouble.

In this post we will continue to explore systemic problems with the money system with a view to identifying the best alternatives that might be put in place.  In order to do so, it is important to recognize that there is yet another issue to understand about how the current operation of the money system guarantees that society will move further and further into unstable territory unless reforms are introduced.  It requires us to develop a new understanding about what is meant by sustainability.

A New Definition of Sustainability

The Club of Rome report presents a synthesis of new research on “complex flow networks,” which looks at how nature is able to maintain ecological sustainability while human systems, in particular the economic system, are manifestly unsustainable.

The reason is that sustainability is a balance between a pull towards efficiency, on the one hand, and a pull towards resilience, on the other hand.  What does this mean?  Let me explain.

Efficiency is the process of streamlining operations so that you try to get the best outcome for a given amount of input.  However, it can get you into trouble if, in the process of increasing efficiency you weaken your resilience, that is, your ability to bounce back or recover from adversity.  Resilience in a system is increased by having greater diversity, that is, more ways of doing things, “numerous channels of interaction to fall back on in times of trouble or change.”  Efficiency, on the other hand, is increased by following a single path.

The point is that efficiency and resilience are both necessary, but they pull in opposite directions.  Nature selects those systems that have the optimal balance of the two.  That is why you don’t see monocultures in nature.  Natural systems operate on having a lot of diversity so that if things go wrong for a plant species or animal species through something like a fire or prolonged drought, the natural system as a whole has a way of recovering.

Now let’s apply this insight to human-created monetary systems.  First, it helps to have a visual perspective of what we are talking about.  The Club of Rome report provides this useful picture.

 The figure shows the sustainability curve mapped between efficiency pulling in one direction and resiliency pulling in the opposite direction. In nature, resilience is given more importance than efficiency so the curve is steeper on the resilience side of the graph. Sustainability reaches an optimum point (near 100%) when there is a balance between high resilience and moderate efficiency.  When you go beyond that optimum point, sustainability drops off as efficiency increases.

This phenomenon is summed up by Paul Hawken in Blessed Unrest (2007):  “Life tends to optimize, rather than maximize.  Maximization is another word for addiction.”  Unfortunately, as I remember one of my economics professors telling me in university, human beings tend to be maximizers.  That is why we are continually getting into trouble with nature.  In relation to the graph, what this means is that too much resilience means low sustainability because nature needs a certain amount of efficiency in its operations to be sustainable.  On the other hand, too much efficiency lowers sustainability because the system breaks down from shocks from which it can’t easily recover.  This is where the human economic system continually finds itself.

The Club of Rome authors point out that there is a “window of viability” around the optimum point on the graph in which viable systems operate.  This is shown in the chart below.

 So what do we learn from all of this?  “The main point is that nature does not select for maximum efficiency, but for an optimal balance between the two opposing poles of throughput efficiency and resilience. In other words, sustainability requires just enough, and not too much, of both efficiency and resilience.  In most human designed systems, and certainly in the monetary domain, we have been concerned only with efficiency, and have therefore tended to unduly sacrifice resilience.” (Emphasis added).

From this understanding we can derive a definition of sustainability as “the optimal balance between efficiency and resilience.”  Now, let’s look at how human systems repeatedly violate the principle of sustainability.

Overshooting the Optimal Balance

A classic and common example of disregard for the principle of sustainability is the way in which we favour organizations becoming excessively large and efficient such that they out- compete smaller organizations for resources, causing the smaller ones to die off, which “reduces resilience, increases instability and steadily moves the whole system towards collapse (i.e. sustainability = 0).”  This trend towards bigness and efficiency is rampant all over industrialized society.  In the economic system it leads, as we have repeatedly seen, to “bubbles” which appear as “a shimmering bubble of wealth over a feeble, eviscerated real economy.”  When the bubble bursts (as all bubbles do) we realize how unstable the whole economic structure is.  Can we do better? Yes, but only if we understand what the problem is and correct it, rather than react to the symptoms.

Turning now to the global monetary system, we see that it is “a network of monopolistic national currencies, one for each country.” (In the European Union several countries have opted for the one currency, the euro, but it is still a monopoly within those countries).  The technical justification for such a system is “to optimize the efficiency of price formation and exchanges in national markets.”  However, the hundreds of systemic crashes that have occurred over the past forty years demonstrate that what we really have is an unstable network of “monopolistic national currencies [which have] evolved into an overly efficient and brittle system.”  Another chart illustrates this point.

 What this chart shows is that “today’s monetary ecosystem significantly overshoots the optimal balance between efficiency and resilience. . . The general belief that all improvements must go further in that same direction [as shown by the arrow] will drive us yet further away from sustainability” (Emphasis added).

The problem for people shows up acutely when we have a financial collapse.  This happened in Germany in the 1920s and in Argentina in the 1990s.  We are on the edge of it happening in Europe today in the form of a potential euro breakup and in America as a possible dollar collapse.  What do financial and political leaders do to deal with the problem?  “Until now, the same old remedy has been applied: the banking system and the monopoly of bank-debt money are forcibly re-established as quickly as possible.  Typically, the largest banks that are ‘too big to fail’ are bailed out and helped to absorb the smaller ones, fueling further concentration in a few financial institutions.”  Another chart shows the process.

 “As soon as possible after a financial crash, the monopoly of bank-debt money is re-established, creating a loop where system crashes or crises are predictably repeated over and over again.”  Of course, it’s not only the economic system that perpetually wobbles on this knife edge of unsustainability; the whole structure of society twists and turns in agony, and each new “recovery” forces more of the aggressive economic growth that is ravaging the planet.  What a sorry system!  Can we not do better than this?

Yes, say the authors of the Club of Rome report, as well as a lot of other well-informed people writing and speaking about what is going on.  But it requires a structural solution—a break with a dominant economic paradigm—and that is notoriously hard to do.  As far back as 1976 Freidrich Hayek , one of the leaders of the influential Austrian School of Economics, said about the issue: “There is an immense education task ahead before we can hope to free ourselves from the gravest threat to social peace and continued prosperity inherent in existing monetary institutions.  It will be necessary that the problem and the urgent need of reform come to be widely understood.” 

Almost forty years later in 2012, the Club of Rome report and this blog are continuing with this educational task, while the whole social and economic future of global civilization continues to wobble precariously as it remains firmly in the grip of the traditional economic paradigm.

The Solution: An Ecosystem of Complementary Currencies

The authors of the Club of Rome report argue for an ecosystem of complementary currencies to replace the monoculture of national currencies.  They use a biological metaphor to illustrate their point.

“Conventional money plays the role of the red blood cells in your blood stream: they carry vital oxygen to all parts of the body.  While red blood cells are necessary, they are not sufficient to keep your body healthy.  Such a focus on only one type of cell would ignore the role of white cells, platelets, and dozens of other specialized hormones playing complementary functions to sustain your health.”

Likewise for the monetary domain.  “The key lesson from natural systems is to allow and even encourage the development of specialized media of exchange to circulate in parallel with the conventional national currency.  While this approach may seem unorthodox, please remember that it is orthodoxy that has led us into our current troubles.  Complex flow systems theory demonstrates that continued orthodoxy would compound the trouble.”

Is it time to think outside the box of the conventional approach to the money system?  Yes, but first we need to appreciate other ways the money system works against sustainability.

Other Ways the Money System Works Against Sustainability

Before describing alternatives to a national currency, the Club of Rome report delivers several more knocks against today’s monetary system.  While the modern money system gave birth to the industrial age—no small accomplishment in the evolution of human society—it also has delivered a heritage of negative consequences.  Significantly, it acts as a large scale “unconscious programming tool” that encourages aggressive, competitive human behaviour where little or no thought is given to sustainability.  Self-interest today is at the top of the agenda and the future can go hang!

The core of the problem—the most egregious feature of the traditional money system—is that it authorizes private banks to create money out of thin air in the form of debt to be repaid by the borrower with interest.  “Since bank-debt money in our current system is created with interest, it is subject to compounded interest or ‘interest on interest,’ which automatically implies exponential growth.”  Unfortunately for humanity, our brains have great difficulty in comprehending the implications of exponential growth.  It begins with small increments, but the amounts increase at an increasing rate over time.  Our brains tend to think in linear increments and can’t readily comprehend exponential growth, possibly because nature never allows it to continue and our brains have not evolved to comprehend it.  If feedback mechanisms are not put in place, the system is faced with runaway growth.  The inevitable result is system collapse as the other components of the system are overwhelmed by the feature that is growing out of control.  Our closest experience of this in ordinary life is the disease of cancer, where renegade cells multiply at an exponential rate and will kill the body if not removed or checked into remission. 

But the same thing is happening in the economic domain as national monetary systems all over the world grow exponentially.  The Club of Rome gives two examples of exponential growth in the money supply, one from a developed country, the USA, and another from a developing country, India.  The fact that it is happening in both kinds of economies shows the systemic nature of the process.  Here are the two charts showing what has happened to the money supply in the USA and India over recent decades.


 The same process is crippling poor developing countries who have large external debt (relative to their economies) which is compounding annually.  For example, Nigeria borrowed $5 billion in 1985, paid back $16 billion, but in 2000 still owed $28 billion.  In the developing world “governments are forced to neglect their domestic economies since there is no alternative but to export an ever larger proportion of their resources to service their debts.”

 But the problem is endemic in populations in countries all over the world as individuals, businesses and governments struggle to out compete each other in order to pay down debt.  Natural resources are used up, pollution is allowed to run rampant, and human-induced climate change continues unchecked.

 These environmental problems are bad enough, but add to that the evidence that the money system’s use of interest paid on debt as one of its central operating mechanisms results in a transfer from those who do not have enough to those who have surplus money.  General awareness of this as a social issue erupted in the “occupy movement” that spread from Wall Street in the USA to many countries around the world in 2011-12.  The mantra of that movement was that the 1% of the world’s super rich are dispossessing the 99% of the rest of us.  No one fully understands how serious this problem is, but we can be sure it will get worse over time.  Many of the 99% are still doing well enough financially to keep them off the streets, but when the effects of overshoot kick in and the rapid impact of exponential growth on the steep part of the curve takes hold, then all bets will be off on what people might do.  Unless, of course, changes are made now while there is still room to manoeuvre. 

 How might necessary change be made?  The institution we have invested with the authority to do it in democratic countries is government.  As the Club of Rome report says: “Governments have the right to exert power over their citizens and over the businesses active on their territory.”  If we had a perfect system, with governments acting in the best interests of all, there would be reason to hope for the right kind of changes to be introduced.  However, the report identifies the problem in its next sentence: “Therefore, whoever can control governments can project power all over the world.”

 The report then goes on to describe the complex arrangements entered into historically by which the creation of money became predominantly privatised so that private banks under the loose control of a central bank (not fully controlled by government) are authorized to create money and put it into circulation as debt.

 Various plans for reforming the money system by having government take back the authority to control the creation of money are circulating in countries around the world.  However, the Club of Rome report does not recommend this approach as the solution for the following reasons:

 1.       The problem is lack of resilience or diversity in the money system; replacing one monopoly (private banks) with another monopoly (government) would not generate the needed diversity.

2.      If governments were the only ones in charge of creating money, there might be a risk of inflation rising to a greater extent than it has in the past.

3.      Political realism: The banking system would fight to the death to avoid government takeover.  An army of lobbyists would exploit to the full the potential for “legalized bribery” of politicians.

4.      The risk of unintended consequences from an all-or-nothing venture that would be required in the nationalization of the banking system.

 For these reasons the authors of the Club of Rome report favour a focus on “innovative, non-financial incentive systems that can function in parallel and complement current financial incentives based on bank-debt money.”  Further, their hope is that the burgeoning NGO movement around the world will become a key actor in finding a solution to the impending challenges coming our way.


 This post has made it clear why reform of the money system is a key requirement for the global civilization to come into a sustainable relationship with the natural world on which it depends.  That the problem is locked into the defective “memes” that decision makers are carrying around in their heads makes this a truly daunting task.  However, if the solution is the creation of new, sustainable memes based on clear understanding of the problem, then there surely is hope that a new generation of decision makers can do it.   If citizen energy can be channeled into implementing creative alternatives, we may still find a way to bring the system back into optimal balance and avoid the impending disasters that the current system is setting up for future generations to suffer through.

We shall continue this discussion in the next post.


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