Monday, February 25, 2013

Economics as ecology

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This post is the third part of longer lecture, "Is God on our side? Economics at the borders of nature." Click for the first and second parts.

Economics as ecology

So much for ecosystems. What about people and economies?

Let’s begin in a situation where it’s obvious that people are components of the surrounding ecosystem: a society of hunter-gatherers.

Just like any other organism, they influence the environment in wich they live, but they’re only a small component of the whole. They hunt and gather what the ecosystem itself provides almost or entirely without much intervention by people.

But coevolution is at work here as well. Through the use of fire, the original domestication of animals and plants, humans gradually broaden their influence on the surrounding environment—unintentionally! These first steps on humanity’s technological road are in no way different from countless earlier evolutionary changes, whether those concern changes in the structure of the body or the behavior or individuals or the appearance of superorganisms and ecosystems.

The implication is that they are subject to the same decision mechanism as the more well-known evolution “out there” in nature.

And so we can ask, What distinguishes a human economy from “mere” ecosystems? Does it have to do with influencing the landscape? But every species influences the surrounding landscape, and in the case of, say, beavers, they do so quite meaningfully and visibly. So is it a matter of cultivating your food, something that beavers don’t engage in? That can’t be it either, because on the one hand we can speak of the economic behavior of hunter-gatherers, who don’t cultivate their own food, and on the other hand there are, for example, ants that gather leaves and use them to cultivate aphids, from which they harvest nectar.

We must acknowledge that there is no clear dividing line between an ecosystem inhabited by humans and a human economy. Yet we can recognize an important boundary with primitive agriculture, and that’s the situation in which agricultural humanity transforms the landscape to such an extent that not only must humans cultivate their own food, but that the landscape in aggregate becomes less productive.

We can see the regularity of this phenomenon in the book Human impact on ancient environments, by Charles Redman. In various parts of the world, early agricultural populations exhaust the fertility of the soil, not only for those plants which interest us as agriculturalists, but overall. We never get entirely free from our dependence on the functioning and health of other species, but from the dawn of agricultural society, the development of the human ecosystem, of the human economy, depends more on the actions of people themselves than on arbitrary evolutionary changes of other species.

And why do such societies spread when they reduce the capability of local ecosystems to supply gradients? Because for enough generations, even this early, undeveloped form of agriculture makes available to farmers a sufficiently greater share of that reduced fertility, that even primitive farmers have access to significantly larger gradients than do neighboring hunter-gatherers. And so the pressure of the 2nd Laaw favors farming over earlier human arrangements.

The birth of agriculture, whether or not it happened intentionally, is an example of technological progress—more specifically, it’s an example of progress in material technology, in physical technology. And just like all subsequent technological steps it is marked by a change in humanity’s relationship with surrounding thermodynamic gradients. In this case it was an increase in the capture of the solar gradient for human purposes, but other technological innovations can be of a different nature.

Consider the following short, not entirely arbitrary list of several important steps in the development of human technology.
  • Domestication of animals and plants
  • Agriculture
  • Metallurgy
  • The wheel
  • Ship-building
  • The water wheel
  • The windmill
  • Navigation
  • Coal and the steam engine
  • Oil and the internal combustion engine
  • The Green Revolution of the 20th century
  • Nuclear energy
With a moment’s thought you can see in each one an improvement in at least one of those three aspects of our relationship to gradients: finding, capturing, or utilizing.

Let’s take the steam engine as a representative example for all human material technologies, illustrating that their development is a deeply evolutionary process, with a strong resemblance to genetic evolution. At the beginning of the 18th century the steam engine was heavy and extremely wasteful in terms of fuel—its efficiency was less than 1%.

There was no point in putting it in a factory, not to mention putting it on a boat, and nobody even dreamed of a railroad with steam power. So we face the question, how did this pointless beast survive?

This is analogous to the question about birds’ wings. We understand from Darwin that genetic changes such as the development of a new body part take at least several generations, more likely very many generations. But Darwin also explains that the evolving organism must have some advantage over alternatives in every generation, or else it has a low probability of survival. From this perspective the ability to fly seems to be a mystery. A half-wing doesn’t serve that ability, but we can’t say that “pre-birds” with half-wings survived so that their descendants could fly. That not-yet-a-wing must have been adaptive in some way, even when it’s owners could not yet fly.

So what advantage of this sort did the steam engine have? What advantage in its own time, not merely with regard to the future? First, coal mines were reaching the water table and needed draining to an extent that in practical terms exceeded what was possible with groups of people or animals. But what about the low energy efficiency?

David Landes explains it in The unbound prometheus. These were coal mines, the transport of coal to other places wasn’t cheap, and so at the mouth of the mine, fuel for the steam engine was almost free. The ability to perform useful work, with the help of inexpensive fuel meant that even the primitive steam engine, in that environment, was economically efficient, it was economically viable. It survived in that environment long enough for James Watt and others to think up various improvements, and then the steam engine could be brought into the factory, and eventually onto boats and railroads.

In other words, material technological progress for humans isn’t merely an analogue of material genetic evolution in other species. It’s more like a continuation, a further manifestation of the same process that drives biological evolution.

It’s worth commenting on intentionality in human technological progress. I presented the rise of agriculture as an entirely “natural” phenomenon, something that happened all by itself. In modern society we’re used to thinking more in terms of research and about effort aimed quite purposefully at a particular outcome. And there’s certainly a difference, yet there remains an unavoidable element of chance in even the most scientific research. What’s more, just as with biological evolution, every new step changes the cultural and technical environment in which other technical beginnings either grow or fail. We will never reach a condition where we can dream up whatever we want and create it. Our ability to realize a particular intention is conditioned by our technical capabilities, and the general state of knowledge will always set a boundary on what it is that we can think up.

The result of all those intended and unintentional technological discoveries was an enormous increase in the use of gradients, which also has an analogue in the biological past. We know that life existed before the appearance of photosynthesis—after all, chlorophyl is itself a product of biological evolution. But pre-photosynthetic life could only draw on the limited energy available in the gradient of some chemical compounds, so there was only limited life, and limited diversity.

Then came the "technological breakthrough" of chlorophyl, a structure capable of capturing sunlight and turning it into sugar.

And once chlorophyl was around, ecosystems experienced a tremendous inflow of energy, a result of which was an unprecedented blossoming of all forms of life.

The aggregate effect of our technological progress, especially innovation in the area of the use (and capture) of fossil fuels, has analogously increased economic output, but also the quantity of various economic activities.
The economy before fossil fuels

The economy after fossil fuels

But we can’t limit this to material technological evolution. Termites function not only due to their individual physical abilities but to a crucial extent thanks to their mutual behavior. And even though in their case the behavior is relatively strictly governed by their genetic code, nonetheless we can speak of social technology or of social evolution. And the same goes for human groupings which pass through states of norms, hierarchy, and markets.


Economists like to tell fairy tales about a mythological village where there’s no money and so the inhabitants are left with nothing but barter and burdened with the attendant necessity of finding a double coincidence of wants for services and goods. And then it occurs to someone that these bits of metal or something else might serve as a universal means of payment—that is, as money—and thus simplify daily life and increase the efficiency of trade and of the economy in general. Later people realized that they could use the records of ownership of those coins in place of the coins themselves and then these paper records also began to function as money. And finally we thought up loans and the ability conjure money out of the clear blue with a few strokes of a computer keyboard.

But the sociologist David Graber argues that this legend lacks a basis in reality, since the actual development was more or less the reverse. Pre-money societies didn’t use barter, but instead operated by useful, adaptive norms. If you had extra of something, you shared with your neighbor. It wasn’t barter, first of all because the one who was sharing didn’t expect immediate repayment from the other side with something that had a value corresponding to what he had given, and second, he didn’t keep accounts in order to record the eventual repayment and to what extent the loan had been repaid. He simply shared, because that’s what his society’s norms told him to do. He was able to distinguish members of his own group from “foreigners” and could also recall which members of his group operated by norms of sharing and which ones didn’t, and he could share only with the former.

The origin of such a norm perhaps resembled the origin of agriculture itself: people vary in their behavior and where there was sharing behavior people had a greater chance of survival than those wretches in communities where each individual was exposed to his fortune without the assistance of his temporarily more fortunate neighbors. And where people have a greater chance of survival, their community also has a higher probability of survival and thus the norms by which the community operates also survive.


Together with the arrival of irrigation in Mesopotamia we see the appearance of hierarchical societies of priestly bureaucrats.

Perhaps among themselves the peasants continued operating by the old norms, but above them there sat a layer of priests, who would take for themselves a significant part of the harvest—in principle, this was in exchange for maintaining security or keeping order, but in essence it was thanks to their social position.

These hierarchies triumph over societies possessing only norms, because such norms only operate in relatively small groups or societies, whwereas hierarchies are capable of coordinating human activity on a much greater scale. For instance, hierachies can build huge public works, which in turn support expanded capture of gradients, and then in the case of conflict between a hierarchical society and a group of hunter-gatherers the result is more or less predetermined. Hierarchies spread from Babylon through Persia as far as Rome. But like a hurricane that reduces the temperature of the water underneath itself and thus undercuts the basis of its own existence, these empire had a tendency to exhaust the ability of the soil beneath their feet to support such complex social structure, and so they died out.


North of the former Roman Empire, feudal societies arose.

I surrender to you a part of my labor and a part of my harvest simply because you’re my lord and I’m your serf. Money is hardly used in the local economy, and we have only occasional connections with more distant communities. Money exists, but it isn’t embedded in everyday economic life. The relationship between a lord and many serfs enabled broader coordination than was possible under primitive communism, and the higher feudal structure provided something broader still, though not on the scale of the earlier bureaucratic empires.

Markets and money

As local trade picked up, various forms of loans are seen again, sometimes as simple as marks on sticks indicated debts at the pub, and the innkeeper might in turn pay someone with those sticks—that is, a local currency had arisen from the record of a debt.
Debt sticks

And that’s how it always is with money, because the true essence of money is a promise, a credible promise. So long as I believe that in exchange for this worthless object I can get something truly useful—some good or service—it makes sense for me to accept that worthless object myself in exchange for something useful that I have.

In the late middle ages the innkeeper gave you a real thing—beer—in exchange for your promise to pay him back sometime, and by doing se he created money. In the modern world banks do essentially the same thing: from out of thin air they provide you with claims on real things, in exchange for your promise to pay them back sometime.

Together with banks and the expanded use of money, market economies also spread and their appeared further social innovations, such as central banking. And the more we used money, the more it became a claim on an abstraction, on economic value.

But value also has its material basis. As Eric Beinhocker explains in The origin of wealth, value arises by the transformation of some sort of matter—that is, by the reduction of some gradient. And here we can combine the diagram of the physical economy with a representation of the circulation of money. Material transformations and the creation of value flow clockwise.

Money flows counterclockwise, coordinating and directing all those transformation. And, nota bene, it does that in a decentralized manner, the same way that termites build themselves a nest.

(Note that conventional macroeconomics mostly concerns itself with the area inside the brown oval in the diagram below. Macroeconomics with ecological foundations acknowledges the whole diagram. And truly ecological macroeconomics understands the entire economy as an ecosystem, just one that has an unusual coordinating mechanism.)

This kind of social evolution—norms, hierarchy, markets—plays out just as unintentionally as does genetic evolution and at least the beginning of our technological evolution. And these new societal arrangements survive because, just as in the case of physical technologies, they offer society improvements in finding, capturing, and/or utilizing gradients.

We can even say that economies, just like ecosystems, serve the 2nd Law. That shouldn’t surprise us—after all, human economies are merely outgrowths of earlier ecosystems. Human economies are merely the latest thing in the three-and-a-half-billion-year history of life on Earth. Their growth and unceasing progress seem to be part of God’s plan. The process of globalization has God on its side.

But do we?

Next: Conclusion: Is God on our side?

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