Stranger Than We Can Imagine (33 page)

Financial traders were able to create wealth out of thin air using wild and psychedelic financial instruments such as those traded on the derivatives market. This involved the trading not of actual things, but of changes to how the market would value things over time. It is no oversimplification to describe the derivatives market
as pretty much incomprehensible, which is a problem for those who wish to regulate it. It was recently estimated to have a notional value of $700 trillion, or about ten times that of the entire global economy. In the opinion of the billionaire philanthropist Warren Buffett, ‘derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.’

The fact that markets such as these created wealth on paper, while not actually doing anything of value or creating anything tangible, did not unduly trouble those who profited from them. But when Adam Smith defined wealth in his 1776 book
The Wealth of Nations
, he said it was ‘the annual produce of the land and labour of the society’. Economics was supposed to be a mathematical model of what happened in the real world.

Another factor in the emergence of the Great Divergence was the peak in US conventional oil production at the start of the 1970s, and the rise in the price of a barrel of oil from roughly $4 in 1970 to a price north of $100 in 2008. The price of oil has a proven impact upon national GDP, so even allowing for inflation, this was a significant extra cost which became a drag on economic growth.

This meant that corporations had to work harder to maintain the same rates of growth as before. As energy costs increased, so other costs needed to be reduced, and payroll and taxes were the most likely candidates. This in turn encouraged the move away from the virtuous circle that existed during the period of postwar economic growth. What was good for corporations, increasingly, was not what was good for countries.

The impact of the price of oil on the US economy became apparent in October 1973, when members of the Organisation of Petroleum Exporting Countries began a six-month embargo on sales to the US. This was a protest against the American rearmament of Israel in the aftermath of the Six-Day War. It caused an unprecedented peak in prices and shortages at the pumps for motorists. This did initially spur research into renewable energy, and resulted in the shift in car design towards more aerodynamic, but visually boring, vehicles. Yet the influence of oil corporations on American
politics meant that the country ultimately committed itself to a hydrocarbon-based energy policy, regardless of the future cost. This was apparent when Reagan became President in 1981, and immediately ordered the removal of the solar panels President Carter had installed on the White House roof.

The intellectual justifications for the policies that led to the Great Divergence are commonly referred to by the term
neoliberalism
. Neoliberalism was a school of economic thought that dated back to the 1930s, but it only became the orthodox belief system for politicians and corporations following the election of Margaret Thatcher as the British prime minister in 1979 and the arrival of the economist Paul Volcker as Chairman of the US Federal Reserve in 1979. Neoliberalism, at its heart, argued that the state was just too dumb to be left in charge of people’s wellbeing. It just didn’t understand the nature of people in the way that the markets understood them. It had only a fraction of the information needed to make good decisions, and it was too slow, inept and politically motivated to put even that knowledge to good use.

As the neoliberalists saw it, the role of the state was to put in place a legal system that protected property rights and allowed for free trade and free markets, and to protect this system by military and police forces. State-owned industries needed to be placed in private ownership and run for profit. At that point the state had to step away and not interfere. Private enterprise would take care of the rest.

Neoliberalism was always going to create inequality, but it claimed that this was for the greater good. If a small elite became immensely wealthy, then this wealth would ‘trickle down’ to the rest of society. Or in a phrase which came to symbolise the 1980s, ‘greed is good.’ Wealth did not trickle down, needless to say. It passed upwards from the middle class to the very top. Few economists now take the idea of the trickle-down effect seriously, but the thinking behind it still colours much of the discussion about global economics. It is still common to hear the very rich described as ‘wealth creators’,
rather than the more accurate ‘wealth accumulators.’

The belief that a combination of free markets and property rights would solve all problems meant that sometimes it was necessary to create markets where they had not previously existed. It was blind faith in this logic that led, in 1997, to the World Bank pressuring Bolivia to grant foreign corporations ownership of all Bolivian water. This included rainwater that people had traditionally collected from their own roofs. According to the theory of neoliberalism, privately owned property rights such as these were the best way to give Bolivians access to water. The Bolivian people did not see it this way, especially after the corporations exploited their monopoly and immediately raised water prices by 35 per cent. The protests that followed led to martial law being declared, and one death, before the Bolivian people got their water back.

Neoliberalism produced a significant retreat in the role of the state, in comparison to the postwar Golden Age. When the world of empires was replaced by a world of nation states after the First World War, those nation states justified their new position by taking over the duty of protection which emperors had traditionally offered their subjects. This new form of
noblesse oblige
took the form of social and welfare programmes, as well as standing defence and police forces. This resulted in an increase in the size of the state. Total government spending in the US was under 10 per cent of GDP before the First World War, and typically between 30 and 35 per cent of GDP during the second half of the century. This pattern was repeated in most of the Western world. The reason why the neoliberals thought that they could reduce the size of the state was because corporations, as they grew to become more powerful than nations, were not beholden to any concept of
noblesse oblige
. It was simply not their job to protect ordinary people from psychopaths. Which was lucky, given the clinical assessment of their own personalities.

By the end of the twentieth century neoliberalism had become orthodoxy. As corporate power grew, its influence over politicians and media companies increased, in no small part because of their
need for corporate money. Protests about corporate power occurred only outside of the political and cultural mainstream. The idea that a Western democratic politician from a mainstream political party could gain office with a platform that aimed to reduce corporate power, or increase corporate responsibility, became increasingly implausible. This is despite how popular a policy of, for example, making corporate executives legally responsible for their decisions would be with the electorate. There may have been widespread concern that a profit-led society was fundamentally inhuman, as well as depressing and unimaginative, but there was no way to express that opinion at the ballot box.

The years that followed the Great Divergence also produced the environmental movement. To the environmentalists, the neoliberalist pursuit of perpetual growth was delusional and deeply troubling. They had had their perspective on the earth radically changed by the photos brought back by the Apollo programme. While the planet had previously been imagined as an endless horizon and a bountiful, unexplored frontier, ripe for plunder, environmentalists now knew that it was a finite, closed system. The earth was limited, and in these circumstances the pursuit of perpetual growth was dangerous.

An old Indian legend illustrates the problem. An Indian king named Sharim was presented with an exquisitely made chessboard, and he was so delighted with the gift that he asked the craftsman to name the reward he would like in return. The craftsman asked for one grain of rice on the first square of the chessboard, two grains on the second, four grains on the third and so on, with the amount of rice doubling for each square on the board. King Sharim was surprised that the craftsman asked for such a trivial gift, and readily agreed. But the amount of rice increased rapidly from square to square. By the time they reached the twenty-first square it had reached over a million grains. By the last square the king was required to supply more rice than existed in the entire world. The amount of rice had not increased in the containable, linear fashion
that the king had expected, but had instead increased geometrically. Geometric or exponential growth is like compound interest, in that the increases towards the end massively overshadow the increases at the start.

The doubling of rice is an extreme example, because those who believe in perpetual economic growth do not expect the economy to actually double each year. Yet even a seemingly manageable rate of growth, such as 2 per cent a year, requires the economy to double in size every thirty-five years. That means that twice as much real-world trade and economic activity have to occur in the space of roughly one human generation. But that is not the end of the problem because the amount of growth then continues to expand exponentially. It does not take long for the required size of the economy to become absurd.

All of this raises the question of when a global economic system based on perpetual growth will collide with the physical reality of a finite planet.

This was the question asked by the global think tank the Club of Rome, who in 1972 produced an influential book called
The Limits to Growth. The Limits to Growth
examined the implication of exponential growth in a number of categories, from human population to food production and resource depletion, and from that it generated a number of potential future scenarios. In one of those scenarios, the world stabilised in the mid- to late twenty-first century and fell into a sustainable system. In the other two scenarios, it didn’t. The result was societal and economic collapse.

The Limits to Growth
stressed that it was not attempting to make definitive predictions and was instead attempting to understand the behavioural tendencies of the global system. That said, a number of follow-up studies undertaken over thirty years after its publication have reported that the current data is roughly in line with its projections. Unfortunately those are the projections that point to overshoot and collapse, rather than the one that points to stabilisation. Increasing inequality of wealth seems to make the situation worse. It is the rich and powerful who are most able to change the
system, but they are the last to be affected by collapse and have a greater investment in maintaining the status quo.

The reaction to
The Limits to Growth
was telling. It was rejected out of hand not by those who engaged with its data or arguments, but by those who were ideologically invested in the neoliberal project. It threatened constraints on individual behaviour and was dismissed for those reasons. It was not necessary to study the research into deforestation, depletion of topsoil, over-fishing or increasing water salinisation. The environmental perspective had to be wrong, because it was incompatible with individualism. Less than a century after our understanding of ourselves had been dominated by the top-down, hierarchical framework of masters and subjects, deferment to the desires of the individual had firmly cemented itself as our unshakeable new omphalos.

Environmentalism, from this perspective, was anti-human scaremongering which failed to take into account mankind’s ingenuity. Imagination was a non-limited resource, and humans could adapt and solve problems as they developed.
The Limits to Growth
, it was argued, was no different to
An Essay on the Principle of Population
by the English clergyman Thomas Malthus. Writing at the end of the eighteenth century, Malthus had argued that population growth would lead to mass starvation. This scenario failed to materialise, in Western countries at least, thanks in part to the development of pesticides and fertilisers. But in a race against exponential growth it does not follow that, just because you keep up at the start, you will be able to keep up permanently. Exponential growth was like a video game which becomes increasingly difficult the more you play. The fact that you can complete level one doesn’t mean that you will make it through level twenty-three in one piece.

The most significant, if unspoken, question about the alarms raised by environmentalists was this: would the point where the system collapses occur
after my lifetime
? For many of the baby-boomer generation, then comfortably into middle age, environmentalism didn’t seem worth rejecting individualism for because the economic system looked like it should be able to keep going for at least
another three or four decades. That baby boomers would think this with no regard for their children and grandchildren is a particularly damning indictment of individualism.

The clash between individualism and environmentalists is perhaps best illustrated by the global reaction to climate change. By the late 1980s it had become clear that the release of greenhouse gases on an industrial scale was affecting the climate in a manner which, if it continued, would be catastrophic. Crucially, there was still time to prevent this. The issue quickly reached the global stage thanks in part to influential speeches by Margaret Thatcher, most notably her 1989 address to the United Nations General Assembly. Thatcher was a trained chemist with a good grasp of the underlying science. ‘The problem of global climate change is one that affects us all and action will only be effective if it is taken at the international level,’ she said. ‘It is no good squabbling over who is responsible or who should pay. Whole areas of our planet could be subject to drought and starvation if the pattern of rains and monsoons were to change as a result of the destruction of forests and the accumulation of greenhouse gases. We have to look forward not backward and we shall only succeed in dealing with the problems through a vast international, cooperative effort.’