Simple Liberty  

 

     
   
     

Monetary Reform

Chapter 8

That Dismal Science

Written by Darrell Anderson.

Epigraph

Epigraph source

More than 150 years ago, in 1850, Scottish essayist and historian Thomas Carlyle called economics “the Dismal Science” (Latter Day Pamphlets, No. 1). In 1898, Thorstein Veblen wrote “Why is Economics Not an Evolutionary Science?” (The Quarterly Journal of Economics, 1898, Volume 12). In that essay Veblen questioned why economics had remained basically a taxonomic study rather than matured into a scientific study as had other branches of science. Little has changed in all those years. In 1977, in his book The Age of Uncertainty, Kenneth Galbraith used Carlyle’s words to describe the early 19th century economic theories of Thomas Malthus and David Ricardo. However, Galbraith should not be left off the hook, being a professor in that same field.

Traditional economic theory often is little more than a narrow worldview. All worldviews are based upon presumptions. Unlike many worldviews where the underlying presumptions are neither provable nor deniable, in the case of economics many presumptions are provably false. Current economic theory is indeed a dismal science, perhaps a pseudo science, although sometimes myth and illusion seem more appropriate descriptions.

In his 1921 book Wealth, Virtual Wealth and Debt, The Solution to the Economic Paradox, Frederick Soddy noted that a study of the mechanics of human exchange systems is more correctly called chrematistics. In “Economics As A Moral Science,” (American Economic Review, March 1969, Vol. 59, No. 1), Kenneth E. Boulding wrote, “The field of study traditionally called economics specializes in the study of that part of the total social system which is organized through exchange and which deals with exchangeables.”

Modern economics theory is myopically inconsistent with the observable laws of nature that are described by science. Although many concepts in the study of “economics” are reasonable and applicable in understanding human exchange markets, the basic “economics” model is built on a foundation of sand. Fundamentally, the word economic means efficient, and therefore is a study of human energy flows. Economy refers to utility — the efficient provision of needs and wants, not the study of mercantile or commercial exchange of goods and services. Efficiency is a process of controlling energy flows as close as possible to the source of the energy.

Some people might respond that such statements are mere semantics. However, current economics theory ignores the fundamental principle that life is primarily about sustaining energy flows, that humans and natural resources are subject to the principles of energy, and ignores foundational principles such as the Conservation of Energy and the Second Law of Thermodynamics. Such observable principles necessarily impose natural limits to any system model that might be discussed and current theory ignores those natural limits.

The starting point for studying human social systems is energy, not human action or exchange. Thus, many if not all so-called economic models are flawed and contain fundamental blunders. Consider the following observations.

Nature, resources, and the environment are not subsystems of the “market.” Humans and human markets are subsystems of nature. Humans are only another component of nature, not the master of nature.

Economic theories are based upon concepts such as subjective value, utility, consumer choice, price, profits, etc. However, those concepts are secondary elements with respect to how humans survive and relate primarily to their manufactured exchange models. The primary foundation of human social systems is sustaining energy flows, not mediums of exchange. All wealth distribution and exchange processes are exchanges of various forms of energy.

The “dismal science” of economics is based primarily upon the misleading tenets of price, value, profit, and income, not with respect to wealth but with respect to a common circulating medium of exchange. Fundamentally, humans do not exchange currencies, they exchange wealth. They use currencies only as a temporary placeholder in exchanges.

Although humans produce and exchange, standard economic theory ignores the other widely observed method of sustaining energy flows — raw acquisition. All of nature, including humans, uses raw acquisition to sustain energy flows. Raw acquisition is biologically instinctive and cannot be ignored. Biologically, raw acquisition is a normal and natural mode for sustaining energy flows — even when raw acquisition is adversarial.

Understanding human social systems does not begin with human action, but begins with plant life. Plants are the only earthly living entity that can directly convert the sun’s low entropy energy (usable energy) into usable form (photosynthesis). Without plant life humans cannot begin to sustain their own lives or hope to convert natural resources into usable forms of energy. Economic models, therefore, should begin with sustainability, not human action.

Economists consistently talk about human production, but humans do not produce anything. The Law of Conservation of Energy (The First Law of Thermodynamics) teaches that energy can neither be created nor destroyed but only converted from one form into another. Einstein showed that matter is merely another form of energy. Thus, humans do not produce anything, but merely convert energy from one form into another. And for all intents and purposes, humans only convert matter into energy, not vice-versa. Humans have yet to develop a practical process to convert pure energy into usable matter.

Although human diligence and discovery can provide more efficient energy conversion processes, the Second Law of Thermodynamics teaches that no energy conversion process is 100% efficient. There always are energy losses, called entropy. Humans cannot bypass or defeat those energy losses.

The human concept of property arises from the principle of scarcity, but the principle of scarcity is partially a result of the Second Law of Thermodynamics because there is no such thing as a perfect energy conversion process. Resources decay and must be replaced.

By definition, wealth is anything tangible derived from labor that satisfies individual happiness. Yet, wealth is only a form of usable stored energy. Wealth is merely another stage of humans converting energy from one form into another. Wealth long ago stopped serving as a common medium of exchange (currency).

Economists tend to discuss the aggregate flow of wealth as a circular and continuing growth process. The Second Law of Thermodynamics denies such thinking. Not only is all wealth a form of stored energy, all wealth is subject to decay. Therefore, the flow of wealth is not circular or continuous but unidirectional, a process focused toward final consumption, and the total amount of entropy continually increasing. A circular or renewable model implies self-sustaining or perpetual motion. Perpetual motion is impossible.

Life is best understood not as an economics model but as an energy flow model. The fundamental unit of life is the BTU, not dollars. Humans are continually in the process of converting low entropy (natural) resources into high entropy resources (houses, cars, computers, etc.). Humans do this to improve their perception of happiness.

Economic models tend to be static snapshots of a dynamic process. Static snapshots are limited in usefulness to understand any system. Analyzing only one component of a complex system also is limited in usefulness and sometimes leads to incorrect generalizations about the entire system. These generalizations are called fallacies of composition. A static analysis cannot fully explain dynamic processes.

Modern economic models are built upon limited mechanical models of physics, models developed long before humans understood concepts such as thermodynamics and energy conversion processes. Those economic models are built upon flawed concepts of monetary theory and those flawed concepts provide false foundations for understanding human social processes. Human social systems are complex sociological-ecological-biological systems. Thus, those flawed economic models impede rather than help human progress.

Although the energy conversion processes of the sun and the earth provide naturally existing energy sources in the form of geological fuels, human consumption of those energy sources cannot last forever if those fuels are non-renewable. Although not a closed system because of the sun, the earth itself is a finite spherical unit. Often there are natural limits to energy conversion processes and general economic theory does not account for those natural limits. Growth will not continue forever in a finite system.

Labor is not something humans own or sell but something humans do. Labor is the process of humans converting energy into work. By definition energy is the capacity to perform work and work is the process of applying physical force to move objects.

Some economic models ignore land as one of the three factors of wealth production and clump land into the category of capital. Yet, capital, by definition, is previously produced wealth that is reinvested in the production process to further produce wealth. Land represents all natural resources, from which all wealth is derived. Capital is a feedback mechanism in the aggregate flow of wealth, and must be considered separately from land.

Many economists claim that currency — the token symbol representing the concept of money, is a store of value, or is wealth. Currency is not a store of value, or a form of wealth. Currency is a token symbol of an unfinished exchange of wealth. Subjective value is derived from individual desires, not the currency used to exchange that wealth.

The entire modern economic model is based upon currency rather than wealth. People today do indeed exchange currency for wealth, but currency is only a token symbol representing an unfinished exchange of wealth. Terms such as “profit” become meaningless inside a true wealth-for-wealth exchange system and possess meaning only within the boundaries of a currency exchange system.

Because current economic theory is based upon a currency exchange model, social reform theory often is flawed too.

Many economists tend to provide praise when market production and distribution “efficiencies” reduce prices because all humans are consumers. However, the “efficiencies” they describe are not in terms of energy flows but monetary units. Prices have meaning only in relation to other prices and have no ability to provide information about resource consumption or energy flows. By definition, efficiency is a process of controlling energy flows as close as possible to the source of the energy, and is not a process of reducing prices. Prices are only an external indicator that efficiency might be improving.

Modern economic theory recognizes conflict as part of human action, but tends to treat conflict only as an intrusion or inconvenience to human production. In reality and throughout the rest of nature, conflict is a bona fide choice in sustaining energy flows. Conflict is not the exception to human action, but merely another choice to sustain energy flows.

Many economists and financial experts discuss capital in terms of monetary units. Capital is wealth devoted to further producing wealth. Capital is a feedback mechanism from the distribution of wealth back into the production of wealth. Common mediums of exchange, otherwise known as currency, are future claims on wealth, represent debt not wealth, and are token symbols representing future wealth. Currency represents virtual wealth, not actual wealth. Wealth is a form of stored energy, currency is a claim on future stored energy. Confusing currency with capital creates tremendous social problems. Conflict is the result.

Because currency is a token symbol of debt representing an unfinished exchange of wealth, the concept of currency necessarily implies power and leverage over the labor of other people. Conflict is the result.

With respect to human life spans, currency does not decay where as all wealth is subject to decay. Thus, accumulating currency possesses tremendous social and political leverage with respect to future exchange power. Conflict is the result.

Social processes such as currency inflation and compound interest tempt people to create virtual perpetual motion through the captured labor of other people. Both processes attempt to bypass the natural flow of energy to create future claims on wealth/energy that do not currently exist and might never exist. Conflict is the result.

Biologists are familiar with the term carrying capacity, but economists ignore that important term. The earth is a finite spherical planet. Economists tend to believe that human ingenuity can allow human population to grow forever. A safer presumption is the earth is a finite sphere implying limited carrying capacity. Conflict is the result.

Modern economic theory is built upon a theory of pure individualism and self-interest. In that theory the goal of each individual is to continually increase wealth. Profit, profit, profit. Growth, growth, growth. In most cases (war being a noticeable exception) this continual aggregate feedback of capital to further increase wealth is a positive feedback system. Yet, systems theory teaches that such a process is a negative system, by definition is inherently unstable, is subject to oscillations that likely are to reach system limits — both high and low, and often collapse. Such a system is unsustainable as population increases and insists upon increasing material wealth. Such a system is dog-eat-dog. Conflict is the result.

I do not want to discredit or mock the many intelligent people working within the field of economics. I merely want people to recognize that the current models are limited and flawed. Economists can change their models, but will they? Or will they succumb to the age-old problem of egoism?

Finis.

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Next: Chapter 9 — Common Misconceptions

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