Guest Post: The Grand Failure Of Conventional Economics

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Grand Failure of Conventional Economics

The "fixes" of conventional economics such as Keynesian stimulus will all fail catastrophically within the next 10 years.

The next decade will see the complete failure of conventional economics. Why is this so?

If we take the very long view, we find that all of conventional economics developed in the era of ever-cheaper, ever-more abundant energy and the miraculous "low hanging fruit" productivity gains made possible by cheap energy and the tools of mass production and industrialization. Like a creature that was born in the morning and has only seen daylight, conventional economics has never experienced night and so it has no conception of darkness.

This is true of classical, neo-classical, Marxist, Socialist, Keynesian, Neoliberal, "Capitalism with Chinese characteristics," etc.

Not one of these ideological strands of conventional economics recognizes the limits on conventional "growth" as measured by GDP, increased production, etc. When the planet's population stood at 500 million, there were sufficient resources to enable a doubling to 1 billion. Then 1 billion tripled to 3 billion, which doubled to 6 billion. Now, the 600 million high-energy-consumption "middle class" of post-industrial economies is expanding four-fold to 2.4 billion.

There simply isn't enough oil on the planet, in any remotely plausible scenario, for 600 million of China's 1.3 billion people to live on an American scale of oil consumption, not to mention 600 million of India's 1.2 billion, and so on for every developing economy.

As population and energy use per capita have expanded, the curve of consumption approaches an exponential function. Frequent contributor Harun I. has often commented on the impossibility of this curve continuing in the physical world we inhabit. Exponential Growth and Depletion: Chart of the Century? (May 3, 2010)

Here are his recent comments on the impossibility of limitless growth as defined and measured by conventional economics:

Think about what pension funds expect, 8 percent per annum. Let's think about this in terms of inputs and output. For simplicity's sake let's round to 7%. This means that every ten years inputs have to double in order for outputs to double. On the finite sphere that we call earth this reaches its limit at a pace that accelerates. Imagine that today if we were to make two iPads per household. In ten years we would need to make four, then eight, then sixteen, etc. We already have gone from one car per household to two. Since four cars per household is unlikely all eyes are upon China (brace for disappointment).

This goes back to my discussion on thermodynamics. The net energy required for every chemical reaction is constant. In a finite realm, more of something cannot be made. If stranded at sea with few rations of food and water, you can consume it all in one day or portion it out. Regardless of what is decided there will come a point where nothing is left. This nullifies the notion that each successive generation can have a better quality of life. Within the finite sphere of earth, this is simply not possible.

Many smart people have placed their hopes on technological innovations such as nuclear power, fusion, biofuels, and so on. As I have noted here many times, under close examination, each of these promises of limitless cheap energy either violate the laws of thermodynamics or they have severe limits in scalability, cost, waste, etc., or they end up being dependent on cheap, abundant oil for their functioning in the real world.

Others look to innovations such as iPhone apps to provide "growth," conveniently forgetting that an iPhone app is just as dependent on electricity, security, a power-hungry Internet, etc., as a sewage system, highway network or any of the other infrastructures of modern life.

Nothing in conventional economics of any flavor suggests how to create "growth" when oil is scarce/rationed and it costs $300 per barrel. Having been conceived in daylight, conventional economics has never experienced darkness, and has no way to conceptualize a world without "limitless growth."

Behind today's carefully contrived façade of normalcy, the only limitless resources are paper money and propaganda. Everything else is limited by real world constraints. An economy which consumes ever-greater quantities of real-world resources such as oil, and harvests renewable resources such as timber and fish at rates far in excess of their renew rates, will soon encounter shortages and higher prices as those with paper or electronic money bid for the remaining reserves.

The Keynesian experiment is being extended to its ultimate point of failure. Interestingly, China, Europe, Japan and the U.S. are all pursuing the same Keynesian credit-expansion Grand Strategy. It is the single tool available to States and Central Banks imprisoned by conventional economic theories, and they are hitting that single policy switch like cocaine-crazed lab rats clamoring for another hit.

Their lab cage is our world.

The Federal government is now borrowing in excess of $1.6 trillion every year to prop up the Status Quo, fully 11% of America’s GDP and 40% of all Federal expenditures. This stands in stark contrast to the traditional economic view that deficits in excess of 3% of GDP a year are inherently destablizing. Now we borrow roughly four times that much (once we include the off-budget “supplemental appropriations” that run into the hundreds of billions of dollars every year) and the political and financial class evince a complacent confidence that these extremes are sustainable indefinitely.

The globalization of financialization is another conventionally approved system that is unraveling. The world’s central banks and governments are waging an unprecedented “war” on global financial instability using the “battle plans” perfected in the wake of the Great Depression in the 1930s. Unfortunately, they’re fighting the last war, and today’s global financial system is fundamentally different from the one which imploded in the 1930s.

Theirs is not a failure of individuals, but of the whole of conventional economics.

These articles dismantle a key part of conventional economics, the benefits of "free trade":

Economists Are Hopelessly Naive About International Trade

The theory of "comparative advantage" and why it's wrong.

Behind all the elaborate theoretical facades, the foundations of the current system, globalization and cheap, abundant energy, are eroding, and as they devolve then so too will all the promises of "permanent growth" made by conventional economics, along with all the policies and theories that were hatched in the bright light of a long-ago morning.

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Note to self's picture

"Well whud we sposed ta do, ya mo-ron?"  

covert's picture

we have already seen evidence of this before in china and europe & it will get worse. we must either leave this planet or decend into slavery again.


sgt_doom's picture

Kudos and props to that remark, spiral_eyes!

"The next decade will see the complete failure of conventional economics. "

No offense to the blog poster, but this is kind of a nonsensical blog to begin with, I mean, by conventional econ you evidently are referring to the dismantling of the American economy, as so many others have been dismantled in the past by the global banking cartel.

I assume the blogger doesn't realize there is NO economy in the USA?  That when the Fantasy Finance Sector makes up 75% or more of the GDP, only "commerce" continues to exist (as it has since the first people roamed the Serengeti), but as there is NO media in the USA, so too there is NO economy anymore.

So how exactly can "conventional economics" exist when there's no economic system in place?

Many of the people who routinely view this site are aware that the USA is simply a gargantuan Ponzi scheme.

sgt_doom's revised reading list:

The Rich and Super-Rich, by Ferdinand Lundberg

The Predator State, by James K. Galbraith

Treasure Islands, by Nicholas Shaxson

Trade, Development and Foreign Debt, by Michael Hudson

Wall Street Capitalism: A Theory of the Bondholding Class, by E. Ray Canterbery

The Road Through 2012: Revolution or World War III, by David DeGraw

Brothers: The Hidden History of the Kennedy Years, by David Talbot

Death of the Liberal Class, by Chris Hedges

The Age of Unreason, by Susan Jacoby

The Handmaid's Tale, by Margaret Atwood (fiction, but extremely pertinent to our times) 


Highrev's picture

The writing's on the wall and it doesn't get any clearer.

MisterAmbassador's picture

You could give me credit for making most, if not all, of these same points in my previous posts, but nah.  My posts about population and oil increasing the carrying capacity of the planet were 'flagged as junk'.  Oh well.

TraderMark's picture

Good news folks.  The new paradigm service economy is going to add 50,000 McDonalds jobs on April 19th to replace those boring old manufacturing jobs that once existed.  $8.30 an hour, expect a good 500,000 applications for these highly sought after quality jobs, and let's get ready for the "better than expected" April payroll report in a month from now.

Matte_Black's picture

Sir. Your conclusion is grossly incorrect.

I predict that a mere 300,000 will apply for the 50,000 jobs.


crzyhun's picture

Let's see- Malthus, Paul E, McNamera, Club of Rome, and Gore...all in the same boat. When do we recognize this for what it is? It's falsehood. The economic growth issues are population issues, see in Japan are due to Zero family growth, same in China, same in Euro social land. This is mere eugenics in drag! And it is not cured by run away open boarders either. 


TDoS's picture

You tried to smear the post as "Eugenics," though it never once suggested anything remotely close to that.  You failed to acknowledge any of the clear and well stated points in the post, or to refute them.  Then you yelled "Junk."

Junk is right.  


kridkrid's picture

People love their strawman... it excuses them from having to think.  That's a good 90% of American politics... how quickly can I label someone or something a Socialist or Nazi... make it political, make it emotional so I can intellectually "check out".  Same here... "eugenics"... provides cover to someone who doesn't want to consider the mathematics working against us in so many areas of our lives.

Rodent Freikorps's picture

Fuck you.

Forced abortions. Mass sterilization. A "Planetary Regime" with the power of life and death over American citizens.

The tyrannical fantasies of a madman? Or merely the opinions of the person now in control of science policy in the United States? Or both?

These ideas (among many other equally horrifying recommendations) were put forth by John Holdren, whom Barack Obama has recently appointed Director of the White House Office of Science and Technology Policy, Assistant to the President for Science and Technology, and Co-Chair of the President's Council of Advisors on Science and Technology -- informally known as the United States' Science Czar. In a book Holdren co-authored in 1977, the man now firmly in control of science policy in this country wrote that:


kridkrid's picture

bravo... an excellent example.

Rodent Freikorps's picture

I never thought the US would die with a whimper.

I still don't.

I just no longer will bet money on which side wins.

TDoS's picture

Even if what you're saying isn't complete hyperbole, it has ABSOLUTELY NOTHING to do with the article. The planet has a finite carrying capacity, this is not a matter of opinion. It's fucking math, plain and simple. The original post is describing how traditional economists do not consider this math in their analysis. Clearly, the people who found their way to Zerohedge via an Alex Jones link don't grasp this concept either.

ibjamming's picture

Bullshit...  Purge the country of blacks and mexicans and this place could be great again.  We've become mediocre because we MUST include brown people in everything.  It's like fielding a sports team and having to have a percentage of women on it.  Let's go back to using the best people have to interference.

Matte_Black's picture

*rimshot* <canned laughter>

When a rich man uses the word 'nigger' you don't actually think he is referring to the color of a man's skin, do you?


Live_Free's picture

 It's like fielding a sports team and having to have a percentage of women on it. 

-Or like fielding a sports team and having to have a percentage of

crakcer a$$ white people on it.

Diogenes's picture

Hahahahahahahahaha he's got you there :)

TDoS's picture

When exactly was this country "great?"  When it was exploiting the post World War 2 lack of European competition, when it was exploiting the free labor of the brown people you hate, or when it was stealing land from a whole host of other people you probably feel are beneath you?

disabledvet's picture

actually i agree with comment.  key problem in analysis in article is "population as problem."  actually ever increasing populations solves so called "growth" problem.  it's when population declines....

r101958's picture

Not!...the population could stay at 0 growth and finite resources would still deplete. The population explosion was caused, in large part, by that wonderful, inexpensive resource called oil.

LawsofPhysics's picture

and the Habor Bosch process.

BobPaulson's picture

Haber. But yeah. The "green revolution" just made the population problem worse.

cossack55's picture

SSSSSHHHHHH. Some of those little yellow folks might hear ya, and there is bunch of em'.

beastie's picture

Are economists retarded?

Article explores why economists will never be right.

TheMerryPrankster's picture

economists are a trailing indicator.

Diogenes's picture

Saw an article recently where some psychologists tested people to find out if they made rational decisions as predicted by economic theory. The only people who behaved "rationally" were mathematicians and sociopaths.

dexter_morgan's picture

Reminds me of that scene in "Back to School" where Dangerfield is discussing things with the stuffy economics 'professor'. Hilarious. What the hell is a widget? OK, then go back to fantasyland.

Amish Hacker's picture

Another way to look at the End Game: start with the traditional family. Dad works as a carpenter, Mom stays home and raises Buddie and Sis. They can afford to own a home, and public schools actually teach. But the financial screws tighten, and now Mom has to work, too. What to do with the kids? No problemo. Turn the schools into places to warehouse the kids during the work day. The word "daycare" enters the language.

Again the screws tighten. Dad and/or Mom has to take a second job. Still, nearly impossible to maintain living standards, as wages stagnate and prices climb. What now? Credit cards for everyone! Borrow today's prosperity from tomorrow. But what comes after unpayable quantities of debt (which is where we are now)? 

Massive fail. Finis.

kaiserhoff's picture

So, we are at the end of history.  There will never again be any new technologies, no innovation, no substitution.  We've heard this shit many times before.

We will, at some point, be at the end of ever-expanding bureaucracy and banking cartels, but that's a good thing.  As to why anyone, anywhere, hires an economist..., excellent question;) 

Milestones's picture

Someone has finally zero'ed in on the absurdity of our world situation. A finite world cannot sustain infinite growth. Popullution IS the overwhelming world problem and the longer we ignore it the more desperate will the problems become for mans future. We either come to grips with it or it will resolve itself in a most brutal fashion in the next few decades.     Milestones

sgt_doom's picture

Ya know, Milestones, the other day I read that the storms and climate in general, is getting windier and supposedly the scientists don't know why! (One wonders who all these scientists are the newsy stenographers are speak of?)

Obviously, since the study by NASA back in 2008, indicating the Earth is losing it's magnetosphere, the winds and storms will continue to worsen.

What I have just done is correlate the obvious.

Wish more American Zombie Consumertards could do likewise.

LawsofPhysics's picture

Damn that finite planet.  Hedge according.  I mean what else can you really do? Every decision you make is, essentially, a hedge.

sgt_doom's picture

Short the planet Earth, but go long on porn.....

BobPaulson's picture

We need to shrink, but since every single metric we use for success measures it in terms of our exponential growth, we will do everything we can to secure our destruction. Easter Island. Sustainability is anathema to all current economic theories. My prediction is we will choose suicide over sustainability.

The required collapse will hurt. It won't be fun, even if you have a basement full of gold and firearms, IMO.

kridkrid's picture

The newer zeitgeist movie talks about the very word "economy".... I had never really given it much thought... "economics" has become about growth, is measured on growth, but the word itself: a. Careful, thrifty management of resources, such as money, materials, or labor.  It was a piercing thought... our system contradicts the very word.

airedalesrule's picture

Moore's Law anybody?

Flakmeister's picture

Examine the corresponding growth in energy to produce and power those cute little chips....Thermodynamics and Entropy (information) is a bitch....

sangell's picture

Spot on but, when the notion that bacteria caused infections was realized, it didn't mean every doctor ran to sterilize his instruments and wash his hands. They were 'old school' and still believed in the methods they had been taught.

So it is with our current economists and government officials. They are 'old school' too and know no other way than what their education and experience have taught them. I guess that means we are as doomed as  the patient with cholera was at the hands of an 18th century doctor.

falak pema's picture

Planned obsolescence is now planned deflation and re-positionning in new economic areas. The fight to win on productivity will hotten-up further as the real economy shrinks as more money looks for fewer goods. All you have to do is look at two potentially high labour intensive, relatively high tech sectors : financial/banking services and editing/publishing services. Both use the english language as global medium. Both now massively move further and further down the outsourced/automated route; cutting back labour by standardizing automated, computerized, reporting-data processing systems, using third world countries to service global systems and save on home based 'entitlement' costs in developed countries. This is another global tsunami in the making via Internet and cloud computing. No getting away from it. Watch out brave new developed world; now having its juicy butt chewed to the bone! BY THE INTERNATIONAL ENTREPRENUEUR WHO RESPECTS NO NATIONAL FLAG. He is part of the oligarchy now!

TruthInSunshine's picture

Ex-Goldman Sachs executive and now head of the NY Federal Reserve, William Dudley, said "an iPad in every pot."

btdt's picture





Come on Tyler.

                        Sure it's Monday AM,

                                     but don't post slow and sleepy posts like this.


bbq on whitehouse lawn's picture

This is what other planets are for. This is what happened in the 14th century and why Europe had to explore new worlds.

Without new lands this tired old game ends. The US could break up into lots of states and default on its federal debt. Civil war 2.0 anyone?

So civil war 2, planet express, or default.

Of course kick the can is still working, so no need to be hasty.