Back in January, physicist Brian Stewart asked me to give a talk to his “Radical Sustainability” class at Wesleyan University. The talk was to be in early April, and Brian offered to fly me to Connecticut for the occasion. Luckily I decided at the time to give the lecture virtually. So when the coronavirus forced us all to stay home, nothing much changed.
On that note, here’s a video of the talk. I decided to make it relevant to our current situation, so I discussed how biophysical economics relates to the coronavirus pandemic.
[Embarrassing technical note: pop-up windows on my screen (which I’ve edited out) cut off a few of the slides. You can download the original slides here.]
Referenced links:
Wikipedia article on modern monetary theory
Interview with L. Randall Wray
Vox article on modern monetary theory
Summary
As I see it, there are two constraints on our ability to deal with the coronavirus pandemic. The first constraint is money. This gets all the press right now — and rightly so. To slow the spread of the coronavirus, millions of people are staying home from work. Since we don’t want these people to starve, we need to somehow give them money. But where should this money come from?
While this appears like a monetary constraint, it’s actually a social constraint. Money is a social fiction that we can create and destroy at will. So at the societal level, ‘not having enough money’ isn’t a real constraint. No, the real constraint is about who has the power to create and distribute money. We usually give most of this power to the private sector. (Banks create the majority of money when they issue credit.) We forget that the government can also create money. Fortunately, many governments of the world are rediscovering this power, and are paying their citizens to stay at home.
While this (apparent) monetary constraint is on the top of our minds, there are also biophysical constraints on how we can deal with the coronavirus pandemic. These biophysical constraints are little discussed, but they’re more fundamental than the lack of money.
These biophysical constraints have to do with industrialization, which has greatly changed the structure of society. Some of this social change makes coping with pandemics easier. Some makes it harder.
Let’s start with the bad. Two hundred years ago, most people lived in rural areas. This made it easy to keep your distance from other people (if you had to). Now the vast majority of us live in cities, making it hard to stay away from other people. So urbanization has made it more difficult to fight pandemics.
Fortunately, another demographic change offsets the affects of urbanization. To slow the spread of the virus, many of us are being paid to sit at home and do nothing. Two hundred years ago this would have been impossible. Why? Because at the time, most people were farmers. If they didn’t go to work, the population would starve. So a sweeping ‘stay-at-home’ order would have been impossible.
Now things are different. As Figure 1 shows, the US has undergone an astonishing
demographic inversion. The vast majority of people now work in the service sector. This means that many of us can simply not work. Sure, without a large service sector we can’t get our lattes or our manicures. But we won’t starve.
So the coronavirus pandemic is forcing us to run a vast social experiment. The research question is this: in the short run, how many jobs can society do without? The answer, it would appear, is an awful lot.
Further Reading
Fix, B. (2015). Rethinking economic growth theory from a biophysical perspective. Springer.
Graeber, D. (2018). Bullshit jobs–a theory. Penguin.
Support this blog
Economics from the Top Down is where I share my ideas for how to create a better economics. If you liked this post, consider becoming a patron. You’ll help me continue my research, and continue to share it with readers like you.
Stay updated
Sign up to get email updates from this blog.
This work is licensed under a Creative Commons Attribution 4.0 License. You can use/share it anyway you want, provided you attribute it to me (Blair Fix) and link to Economics from the Top Down.
Dear Blair, congratulations for your work.
I’m a physicist doing some research on materials science, and I’m quite interested in these topics you have been working on. In my field of research oftenly I’m facing physical constraints, mostly related to the availability of minerals which are consumed to build high tech devices. To give one objective example, we have about 1.5 billion vehicles in the world; to make electric cars at such scale I’m afraid we do not have Cobalt, Silver, Neodymium (and so on) available in this planet. Of course some technologies may improve, but for me it seems unrealistic to expect something “better” than fossil fuels. In this context I’ve been thinking in terms of complexity (as discussed by Joseph Tainter https://www.youtube.com/watch?v=ddmQhIiVM48, or Geoffrey West https://www.youtube.com/watch?v=ncDE_V5RAQc, for example). So, this growing importance of the services sector in the last two centuries is also related to our ability to extract energy from the planet with a “high return on investment”, in the form of fossil fuels. If we invest in renewables, which provide less liquid energy to run our complex systems, it could mean more people working in the energy sector in the future? I mean, for example, a significant share of labour dedicated to services in the energy sector, to install, clean, maintain, replace, recycle devices as solar panels?
Hi Marcos,
Yes, I think ramping up renewable energy production will mean having more people work in the energy sector. That’s probably not a bad thing. There are many silly services that we could do without. Put those people in the renewable sector and we’ll be better off. Capitalism, however, isn’t always ‘rational’ when it allocates labor and resources.
“No, the real constraint is about who has the power to create and distribute money. We usually give most of this power to the private sector. (Banks create the majority of money when they issue credit.)”
This statement implies that banks can create as much money as they wish, that they can essentially counterfeit it, which is not the case. The are middle-men, lending funds from one source at current market interest rates and lending to others at a net higher interest rate.
As I understand, the banks ability to create credit (debit book entries?) is just intra-day, they have to balance their books at the end of each day by loaning funds (credit book entries?) from other banks or sources.
Hi Steve,
Your write:
This is a concise summary of the neoclassical model of banking. In this model, bankers are just middlemen, loaning out other people’s deposits and taking a cut as interest. In this model, no money is created.
Unfortunately, this model is simply wrong. There’s a voluminous literature on how banking actually works. Here’s a tiny sample:
The Grip of Death: A Study of Modern Money, Debt Slavery, and Destructive Economics
The coming revolution in political economy: money
creation, Mankiw and misguided macroeconomics
The history of banking contradicts the neoclassical fable. Modern banks arose as gold deposit holders that issued paper IOUs as proof of deposit. These IOUs then circulated as currency. Right off the bat, banks realized that they could create more IOUs than they had gold. This worked fine as long as enough people kept their gold in the bank. But if everybody tried to convert their IOU into gold, the bank would go belly up — it didn’t have enough gold to do honor everyone’s IOU. Historically, this happened quite frequently — we call it a run on the bank.
Eventually governments placed limits on this private credit creation. Banks technically now must maintain a ‘fractional reserve’, meaning they have enough cash to backup a certain fraction of their credit. Still, this gives banks the right to create money. And there are many ways to get around the fractional reserve.
Interesting that you use the word ‘counterfeit’ to describe money creation by banks. That’s essentially a value judgment about what type of money is legitimate and what is not. Still, the fact remains that banks create most of our money via debt. And governments, at least, view this money as legitimate. That’s why banks are allowed to do it.
So here’s how banks create money. You take out a mortgage — say $100,000. What the bank does not do is take someone else’s deposit and give it to you. Instead, they give you credit out of nothing, and they do it via the magic of double-entry accounting. On one ledger they register a debt. You owe the bank $100,000. On the other side they register a credit. They gave you a $100,000. Since the signs on the two ledgers are opposite, they cancel out. Presto, a balanced budget. All the while money has been created.
Now, this money will eventually be destroyed when you pay back the mortgage. Both sides of the double-entry ledger will return to 0. But more money must exist afterwards, because you paid back additional interest. Where did this money come from, you ask? From other loans. So this system requires a constantly expanding debt load.
Governments can do the same thing (create money via debt) by selling government bonds. Or they can just create money without the premise of double-entry bookkeeping. No debt required.
Many people are appalled to learn that banks create money out of nothing. But if you read the deep history of debt (which is the same thing as a history of money), it’s not surprising. Check out David Graeber’s book Debt: The First 5000 Years for an instructive history.