The tight coupling between different infrastructures magnifies the risk of a cascading failure in our critical infrastructure and thus a complete systemic failure in the operational fabric upon which our welfare depends. At the very least, a failing infrastructure feeds back into reduced economic activity and energy use, further undermining the ability to keep the infrastructure maintained.
Financial System Dynamics
Our knowledge and response to expectations of the future, shape that future. One area that is most sensitive to this is financial markets.
Money only has value because it can be exchanged for a real asset such as food, clothing or a train journey. As long as we share the confidence in monetary stability, we can save, trade and invest. It is a virtual asset, as it represents only a claim on something physically useful.29 For most of us, bonds and equities are effectively virtual, as very few shareholders have any meaningful access to underlying physical assets; they are mediated by money. However, the current valuation of virtual assets towers over real productive assets on which their value is supposed to be based. A bond is valuable because we expect to be paid back with interest some years hence; paying 20 times earnings for shares in a company is a measure of confidence in the future growth of that company. Conversely, if a productive asset cannot be made to produce because of energy and resource constraints and the failing operational fabric, it loses its value. This implies that virtual wealth, including pension funds, insurance collateral and debt, will become worth much less than at present, or effectively evaporate.*
The widespread acknowledgment by market participants (and governments) that peak oil is upon us, coupled with an understanding of its consequences, is likely to crash the global financial system. Initially, just a few market participants will begin to question their faith in the overall stability and continued growth of the system and thus the likely value of their virtual assets. However, the transition can be very rapid from a few market participants accepting the idea that the system could break down permanently, to large-scale acceptance. A fear-driven, positive feedback conversion of a mountain of paper virtual assets into a mole-hill of resilient real assets could develop. This would help precipitate an irretrievable collapse of the financial and economic system.
The Rebooting Problem
The opportunity to reboot the globalized economy from a trough in the oscillating decline model, or from a collapsed state, so as to return it to the operation and functionality of its current state, is likely to be deeply problematic. We can consider this from four standpoints.
Entropic Decay
As Germany was hit by the global economic crisis, there was a big drop in the need for commercial transport. As a result trains and locomotives were taken out of use. A year later as the economy picked up, the trains were again required. But in the interim, cylinders and engines had rusted. The trains were of no use until repairs could be carried out, which required finance, time and open supply-chains. There was a costly shortage for a while but a fully functioning operational fabric and wider economy ensured there was no disaster.30
If we have a major economic collapse, the longer it continues the greater the entropic decay of our productive and critical infrastructure, and the more difficult it will be to reboot.
Loss of Coordination
The global economy we have now is the result of a self-organizing process that emerged over generations. If it collapsed, we would lose the infrastructure that allowed that complex self-organization to emerge. Post-collapse, we would have to begin with top-down conscious rebuilding; this would suffice for simple projects but not the hyper-complex products with globalized sourcing we rely upon today.
Loss of Resilience and Adaptive Capacity
In this paper, I have focused on some well-defined collapse mechanisms that are to varying degrees necessary, though they are by no means exclusive. Social stresses, health crises, and the effects of climate change may all add to our difficulties.
By way of illustration we can consider climate change. We are likely to see a major (forced) drop in emissions of anthropogenic greenhouse gases. However, temperature may continue to rise for many decades. Furthermore, we are left with uncertainty as to whether we have crossed tipping points in the climate system that could accelerate terrestrial emissions.
Few studies of the economic impact assume we will be very much poorer in future. The physical effects of climate change, in the form of flooding or reduced food productivity, will amplify the effects of the collapse processes. Being much poorer, and without our current operational fabric, will mean that the relative cost of adaption and recovery from climate induced shocks will escalate beyond our ability to pay much sooner than if our economies continued on their present courses. Furthermore, we will lose the buttressing provided by insurance, and the open supply-chains and strong globalized economies that could re-distribute surplus food from elsewhere.
Focus of the Moment
In the increasing stress of the moment, available resources are more likely to be invested in dealing with immediate needs over long-term investment. The stability of the globalizing economy has provided the context in which planning and investment could occur. The inherent uncertainty in the collapse process will also tend to favor shorter-term actions. This will reduce the resources for rebooting the system to its former state.
Conclusion
An amalgam of the oscillating decline and the collapse model has been offered as a guide rather than a prediction. The irony is that people may rarely notice they are living under energy constraints. Energy retraction from the global economy can be achieved by production declines or collapses in demand, though as we have seen, they are deeply inter-related. We may experience energy use collapse not as an energy constraint, but as a systemic banking collapse and vanished purchasing power. While energy is generally regarded as non-discretionary, energy use can drop considerably and welfare can, to some degree, be maintained. Food will represent a far more persistent challenge with the strongest real price support. For collapses in food supply and/or demand may well be associated with famine.
Tainter, drawing on historical precedent, defined some of the features of the collapsed state:
• a lower degree of stratification and social differentiation;
• less economic and occupational specialization;
• less behavioral control;
• less flow of information between individuals, between political and economic groups, between the center and its periphery;
• less sharing, trading, and redistribution of resources;
• less overall coordination and organization of individuals and groups;
• smaller territories integrated within a single political unit.
The integration and speed of processes (financial information, capital movement, supply-chains, component lifetimes, etc.) within the globalized economy suggest that a collapse will be much faster than those that have gone before. Furthermore, the level of delocalization and complexity upon which we depend, and our lack of localized fallback systems and knowledge, suggests that the impacts may be very severe for the most advanced economies. No country or aspect of human welfare will escape significant impact.
Our understanding and expectations of the world have been shaped by our experience of economic growth. The dynamic stability of that growth has habituated us to what is “normal’. That normal must soon shatter. Our species’ belle époque is passing and its future seems more uncertain than ever before.
Endnotes
1. Here we are referring to the 95% drop in the Baltic Dry Shipping Index. See globaleconomicanalysis.blogspot.com/2008/10/baltic-dry-shipping-collapses.html.