Thursday, September 23, 2010

How do we really know collapse is immanent?

Aeldric has done a great post over at the Australia/New Zealand Oil Drum entitled The Networking of Resource Production: Do the Networks Give us Warnings when They are About to Fail? which goes straight to the heart of the problem I have: how can you tell in an unambiguous way that the system we are living in is approaching collapse? After all our human culture is full of legends of The End, replete with prophetic dreams, visions and revelations. If they line up with reality they get incorporated in legend and religious tradition. If they fail, which is vastly more frequent, they make page four in the newspaper under the "Quaint-goings-on-in-some-nutcase-cult" section: something a sharp student doing their Masters in psychology could use as a good subject for a thesis.

As an ordinary member of Industrial Society, what information do I have leading me to say a crash is immanent? What does an ordinary person "see" in their day-to-day existence which allows them to make these kinds of judgments? All of us have networks flowing through our lives but no-one can easily "see" these networks from start to finish or how they may relate to one another. We may understand our little bit very well and have a clear idea what is right and wrong with it. Our appreciation of other people's part is necessarily vaguer and tends to be tinged with the natural human suspicion that "others" are not as competent or hard-working as we and our colleagues. To quote from a comment Aeldric added to the discussion of the above post:
This is not helped by the fact that the problem is hidden by complexity. The people who say "We have plenty of resource X" are not just saying this to inflate the share price - they truly believe it. From their perspective, it is true.

The reason that low-quality reserves of resource X will never be extracted is only obvious when you look at the overall system.

Unfortunately, each entity only looks at their own area, the overall matrix in which we operate is treated as a "black box" that supplies our needs just as long as we continue to play our part. This faith in the system has worked thus far, but it is misplaced - we need to look at the overall system.
Add to that the seemingly exponential increase in complexity when doing anything (My wife and I are building a house and the planning requirements have two extra levels to surmount from the time I built my first: bushfire rating and energy rating which is part of a large engineering bill I didn't have before) and you have a world where everything seems micro-managed for efficiency and effectiveness, yet is all too complex for the ordinary person to control or understand more than a tiny part of their own life.

This situation is also governed by a time factor and a certain perception of "rightness". By "rightness" I mean that in Australia (at least for now!) there is a quite strong sense that we live in the best of all possible worlds, that everything is getting better and better incrementally, year on year, and the time factor means that even big changes often happen imperceptibly. So we have much better cars and sound systems, better roads, cheap international travel and the Internet which we can feel good about, while not noticing how much more difficult it is to buy a house and support a family than it was thirty years ago. We can be lulled by shiny novelties trickling into our lives while seeing our problems making our way in the world a lot of the time as "personal": that is, governed by our individual failings in a complex world where we are constantly struggling to find a role for ourselves. And strangely enough, this perception of struggle to be or at least appear competent increases amongst the more highly educated! As Jim Kunstler remarked in some context I now forget, if you go into any room full of educated people you can bet 90% feel that they are frauds.

Those of us who do want to understand the bigger picture must necessarily depend on abstract knowledge, of which we as a culture have a lot, but which in its sheer voluminousness and the difficulty in assessing its relevance poses yet another challenge. You can hardly blame the uneducated or moderately stupid for plunging headlong into dogma and cultishness which promise a shortcut to true knowledge, usually in the hands of a dubious leadership. Add to this the fact that certain professions such as economics suffer from alarming delusions and are just plain wrong in their very basis and it is little wonder that true knowledge of our real situation is limited to a very few. And even the knowledge of these few is very incomplete!

This is another reason why a political solution is simply not possible. Without the goodwill of a large proportion of the population no political party can push through a program which can address what is coming down the line towards us. And if only the tiniest minority of the population understands what is happening, how can that support appear?

Nevertheless there are people working on the problem in a rigorous and as far as possible, scientific way, so you can get reasonable quality information on what's happening. The problem is here that the phenomenon we are looking at is part of complex systems theory and therefore very difficult to quantify. So we depend on clever simplifications such as that posed by Aeldric in the article on The Oil Drum. But we still have to rely partly on less rigorous methods: "gut feelings" and intuitions which are very difficult to prove or even demonstrate to someone else. One of my favorite commenters on The Oil Drum is memmel but he drives some of the other regulars crazy, because his writing style is dyslexic and his ideas while having the ring of truth sound like a shorthand grab from a much more rigorous theorem which he never gives footnotes for. Here's an excerpt from his first comment:
I'd like to add what I came up with as the warning signal of collapse of a complex system in particular ours.
You have outline the overt signals but whats missing is what the system itself does to counteract the situation.
Indeed to the point that it obfuscates its real state.

What I believe starts to happen is the system plays whats basically a grand game of musical chairs. Its no longer capable of any real growth yet its forced to fake it.

A simple example is every job in Mexico or China results in the loss of a job in the US with a dramatic reduction in costs. No new job is created yet profit margins go up. For this to work obviously demand has to remain robust for the product of the job. Rising debt loads allow this to take place. In a real expanding economy wages would have risen rapidly in Mexico and China as they demanded they purchased the goods they where making. The wage arbitrage would have dissipated rapidly.

The same of course works for resources as well as labor the economy shifts to increase profit margins as constraints arise. Its a complex system thus a tremendous amount of shifting around is possible.

It becomes difficult to discern that its really just running around in circles and nothing is happening indeed only the explosion of debt really shows the underlying system has peaked.

As you note eventually everything becomes correlated with money and thus the final signal is in the financial arena. And its pretty simple its debt.

Next its worse than that really by the time the debt load grows to horrendous levels the system is well past its peak. This is because a lot of the debt was issued based on equity valuations supported by the previous debt expansion. Ever cheaper debt aka credit serves to support previous valuation rounds making new debt safe to issue.

So given that eventually everything gets correlated with money the signal that the system is now unstable is easy to see its debt. To understand how the system can pull off such a situation you need to look into this game of musical chairs or circular economics which eventually results in trading partners allowing debt to balloon.
Everyone has to reap real benefits even as the debt bubble expands. If now it won't expand.
This is done by allowing gains to be made on each individual transaction. Eventually of course it ends with central banks forced to carry tremendous amounts of debt in one form or another. The profits are of course skimmed off and the debt load is socialized.

On can actually construct a small variant of this. Consider a village where everyone works to build houses for each other. As each villager gets his house built by the village he owes the village for the house. Assume that resources are constrained and each house costs more than the last all paid for via credit back to the village which acts as the bank. Eventually the last house is built and its ten times the cost of the first house and the village owes itself immense sums of money as notational credit. Indeed many of the villagers that had their house built first are notational multimillionaires. Then what?
Do you see what I mean? Personally I love his comments because his intuitions have for me a ring of truth but I can understand people finding them repellent. But if we try to be more rigorous, dotting the "i"s and crossing the "t"s we end up with this, quoted from an article available here (warning, it's a pdf):
The theoretical basis of the work on early-warning signals in simple models is quite strong, and the first results from more elaborate models suggest that similar signals may arise in highly complex systems (23). Nonetheless, more work is needed to find out how robust these signals are in situations in which spatial complexity, chaos and stochastic perturbations govern the dynamics. Also, detection of the patterns in real data is challenging and may lead to false positive results as well as false negatives. False negatives are situations in which a sudden transition occurred but no early-warning signals could be detected in the behaviour before the shift. This can happen for different reasons. One possibility is that the sudden shift in the system was not preceded by a gradual approach to a threshold. For instance, it may have remained at the same distance from the bifurcation point, but been driven to another stable state by a rare extreme event. Also, a shift that is simply due to a fast and permanent change of external conditions (Box 1 Figure a) cannot be detected from early-warning signals.
And so on for many more qualifying paragraphs. I think memmel is easier!

In the end we have to make decisions about our lives based on hunches and intuitions as much as anything. It doesn't hurt to have some solid theoretical backup but that can be wrong too! I guess my gut feeling is that a collapse of the US economy is not far off: maybe one or two years. How that will play out in Australia is much more difficult to say as we are tied very closely to the Chinese and Japanese economies and how they will fair is open to question, seeing both are very export oriented at a time when the importing economies, namely the USA and the Eurozone are wobbling badly. And as at my public lecture in October 2008, I stated Australia was importing 1/3 of its oil needs and that proportion has remained the same (choose Australia from the drop-down menu to display).

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