Monday, April 7, 2014

1375. Did Natural Limits to Growth Cause the Great Recession?

By Kamran Nayeri, April 7, 2014
Great Recession: For Whom?

1. Introduction

Dear Saral:

Thank you for your letter of March 2 written in response to my critical discussion of your essay “Understanding the Present-Day World Economic Crisis—An Eco-Socialist Approach.”  

Your letter concludes by a declaration that you “shall not write any more on this topic.”  However, the topic under discussion is of great importance to the ecological socialist and other emancipatory movements. Our discussion has been a public one with some readers offering their own views.  Further, I find your response to my criticism unsatisfactory.  You did not address my detailed and specific criticism of your original claim that a permanent secular rise in prices of a host of primary commodities has caused the Great Recession. Instead, you raised a new claim, that peak oil reached in 2005 or 2006 has caused it.  Again with no proper data, analysis or evidence whatsoever.  You have also introduced a number of philosophical, theoretical and methodological issues on which we differ and I feel are important for the entire emancipatory movement to consider.  So, I am obligated to write a rejoinder.  If the ecological socialist movement cannot benefit from a respectful and honest discussion of differences among its proponents how would it ever grow to become a mass movement of self-thinking and self-acting individuals and groups?  Also, I believe a personal letter format is not appropriate for this public discussion. So, with due respect for our fellowship that I treasure I will address you in the third person in what follows.  

Because of different topics that need detailed discussion, which will make this rejoinder long, I have decided to break it up into different discussion pieces.  The rest of this rejoinder will address your natural limits to growth claims. I will first recapitulate your original claim and my criticism of it and then summarize and evaluate your new claim that peak oil was reached in 2005 or 2006 and has caused the Great Recession. In the subsequent discussion pieces, I will examine a tendency in your writing to naturalize the capitalist economy and society.   This approach is a regression to the pre-Classical Political Economy doctrines.  As no emancipatory movement can overcome the capitalist world economy without challenging it, and to challenge it one has to know at least its very basic laws of motion, then such regression in theory represents a major step backwards.  There is also an increasing hostility to Karl Marx in your writing and a unexplained affinity to propertied classes thinkers like Thomas Malthus.  I will take this up as well.  Finally, your statement that “life-style” choices, including diet, are matters best set aside in favor of “systemic” questions require a response.  In particular, I will write why veganism is an important part of the fight to overcome the anthropogenic planetary crisis.

I certainly hope that you will read my rejoinder in the spirit intended. It is intended to discuss what appears to me to be a sliding back in thinking of a fellow ecological socialist that I have admired for thinking outside of the box.  

Warm regards,


*     *     *

2. Did natural limits to growth cause the Great Recession?

In my discussion of Saral’s essay, I demonstrated that he did not support his assertion that the Great Recession was caused by natural limits to growth. To do so at a minimum he had to review the literature to make the case for his hypothesis, assemble relevant data, and scrutinize them using statistical analysis to show causation.  Saral did not do any of these.  

Saral simply made three sets of claims.  He asserted a secular and permanent rise in prices for a number of primary commodities “oil…energy resources coal, gas, uranium as well as industrial metals like copper, zinc, iron and steel, tantalum etc.” in the years leading to the onset of the Great Recession. These he claims were due to increases in production costs (claim 1).  Secular, permanent rise in prices of these primary commodities could only accrue if production costs rises permanently.   Saral writes: “If due to diminishing availability of affordable resources a growing number of workers lose their jobs or are forced to work only part-time, then they are producing no goods and services or less of them than before. Now, since most goods and services are, in the ultimate analysis, paid for by (exchanged with) goods and services, it is unavoidable that these workers can get less goods and services from other people.” (emphasis in the original).  This alleged secular, permanent price increases for a host of primary commodities undermined family finances leading to mortgage default, housing crisis, financial crisis, etc. (claims 2 and 3).  

In the absence of any literature review, presentation of relevant data and statistical analysis to show causation in Saral’s essay, the undue burden was placed on his reader to look into these questions.  When I conducted a preliminary search in the literature for prices of primary commodities I found no evidence for a secular, permanent rise in their prices taken as a group (see my critical discussion of Saral’s essay).  While Credit Suisse Commodity Benchmark Index showed a 220% rise between 2000 and 2011, the report (not me as a reader, Johnny Rutherford mistakenly states in his comment) attributes this to rising demand from China and other “emerging economies,” not to a secular, permanent price increases due to permanent rise in production costs.  Taking prices of primary commodities as a group, Credit Suisse report adopts the conservative approach that contrary to “many economists and commentators” who believe “despite short-run volatility, over time commodity prices tend to fall” most primary commodity prices “do not have a clear long-run trend (up or down) with most effectively moving around a relatively consistent average over the past 110 years.”  I cited a couple of other studies of primary commodity prices that show similar trends.  
Any objective reader would have to conclude that studies I cited show no evidence for a secular, permanent price rise for primary commodities preceding the Great Recession and Saral himself offers none. So, the first claim does not get off ground. 

But if secular, permanent rise in primary commodity prices did not occur, the Saral’s entire augment for a natural limits to growth fails because even if a cyclical (as opposed to secular and permanent) rise in primary commodity prices caused mortgage failures and the housing crisis it would simply be an economic cause for the Great Recession, not a natural limits to growth explanation.   

This point seems to be lost to some readers, including Johnny Rutherford who offered a long commentary that can be found at the bottom of my critical discussion of Saral’s essay.  He quotes a long paragraph from Saral’s essay: 

“…[T]he contraction of the resource base of industrial societies is most clearly manifested in the fact that oil extraction has, according to most experts, peaked or even crossed the peak. That is why the price of crude oil, by far the most important resource of modern industrial societies, had been rising continuously in the few years before the present crisis broke out. In July 2008, it reached over $140 per barrel. Also the price of other important resources – the energy resources coal, gas and uranium as well as industrial metals like copper, zinc, iron and steel, tantalum etc. – rose sharply. Even the prices of foodstuffs, for hundreds of millions of people all over the world the main source of energy for recreating their labor power, rose exorbitantly. After the recession began and deepened, the prices of these resources fell again, but they never reached the low level in which they were, say, in 2000. Today, in July 2010, despite the fact that the recovery from the recession is very slow, crude oil price is fluctuating around $80.” (my emphasis).
There are a number of problems here.  Saral is either not aware of or does not address here whether these price movements are cyclical or secular and permanent.  These are all market prices not cost of production prices.  Are these retail or wholesale prices? Are they adjusted for inflation? They are point-in-time prices—not time series to see price movement.  Oil prices in particular are very volatile. In short, there is nothing to hang a hat on! And how is this meager “information” in this paragraph suppose to convince the reader that these in fact caused the Great Recession.  Thus when Johnny adds: “As far as I can tell these facts are basically correct. There was a sharp rise in resource prices prior to the global recession and, even today, they have not returned to pre-2000 levels,” it is not clear whether he missed my entire critique of Saral’s argument and the references I marshaled that explicitly argue for a cyclical rise in primary commodity prices or prefers not to address them because he too likes to believe that the Great Recession is caused by natural limits to growth? 

In his letter, Saral himself does not attempt to support this claim in his essay. Instead, he restates his case by asserting that peak oil was reached in 2005 or 2006 and it was the cause of the Great Recession.  Again, without a literature review, offering any data or attempting any statistical analysis.  Let me explore this new claim.

3. Did rising oil prices cause mortgage defaults and the housing crisis?

For a moment, let’s set aside Saral’s claim that peak oil was reached in 2005 or 2006. Instead, let’s examine the causal mechanism that that the alleged peak oil could have caused mortgage defaults by constraining the American household budgets through retail price inflation.

The Consumer Price Index (CPI) rose from 168.8 in January 2000 to 207.3 in December 2007 when the Great Recession formally began (base year 1982-84=100), a 38.5 increase in eight years.  By historical standards, this was not a particularly inflationary period.  The annual inflation rate registered a minimum of 1.6% in 2002 (coinciding with the recession) and a maximum of 3.4% in 2005 (Consumer Price Index Data from 1913 to 2014—US Inflation Calculator; accessed March 4, 2014).  However, it is well known that food and energy prices are more volatile, and, in fact, in the immediate years before the onset of the Great Recession retail gasoline prices and food prices rose. How much impact did they have on the purchasing power of working people?  Headline inflation (that includes gasoline and food prices) was lowest in 2002 at about 1.2% and highest in last quarter of 2006 at 4.75%.   Core inflation (that does not include gasoline and food prices) was lowest at just above 1% in 2004 and highest in fall of 2005 at 4.75%. (Consumer Price Index: Headline and Core Inflation: Perspective Advisors; accessed March 4, 2014).  Do these data suggest that high oil or food prices undermined household budgets leading to mortgage default and housing crisis?  They clearly do not.  

Of course, one could argue that Consumer Price Index underestimates inflation and there is some truth to this view. So, let’s take a look at an alternative measure of inflation that “corrects” upward the Consumer Price Index.  John Williams, a consulting economist who has made a business out of creating alternative estimates of major government indices, has a shadow Consumer Price Index (“shadow” because it is tracking CPI).  For the same eight years before the onset of the Great Recession, Williams’ index was at its low point at 4% in mid-2002 and at its highest at 7% in early and again late 2006. (John Williams, Alternative Inflation Charts; accessed March 5).  However, as the reader can verify this alternative inflation index closely follows the ups and downs of the government estimates. Thus, although the inflation level is higher in Williams’ estimate the rate of change is the same as in the government data and oil prices have a similar modest effect. 

How can anyone conclude that at most a slightly elevated inflation level and moderate rates of change in commodity prices, including for oil and food, have caused the massive mortgage and housing crisis that caused the deepest capitalist crisis since the Great Depression of the 1930s? 

Add to this that Saral’s chronology of events is not accurate: mortgage failures did not precede all that went wrong.  They actually followed bursting of the housing bubble in 2006 and the decline in housing prices that ensued. A red-hot sellers market turned into an ice-cold buyers market.  Still, mortgage failure really became widespread with massive layoffs that followed the onset of the Great Recession in December 2007 and the financial crisis that was marked by Lehman Brothers’ bankruptcy in September 2008.  Clearly, if the goal is understanding the causes of the Great Recession, we need to look at economic and social aspects.  

Thus, in my discussion of Saral’s essay I pointed to the exponential rise since 1980 of the household, private (corporate and financial) and public debt, with household debt standing at 100% of the GDP before the Great Recession.  Also, I noted the well-know fact that real wages remained stagnant or declined for most workers during the four decades before the Great Recession.  Given these facts, it was not a question of whether a systemic capitalist crisis will happen, it was only a question of when and how. 

It began when the housing bubble burst in 2006 and home prices began to decline.  By December 2007, a “recession” had begun (recognized as such a year later because data would have to be collected to confirm it).  Waves of layoff followed resulting in mortgage default and home prices dropped even further. By August 2008 Lehman Brothers failed signaling, a deep banking and financial crisis that ensued.  The huge insurer AIG and the Big Three automakers in Detroit and banks considered “too big to fail” had to be rescued with trillions of dollars of public money.  Unemployment skyrocketed to levels not seen since the Great Depression.  All of these can and have been explained using economic and social theories. None requires natural limits to growth or a peak oil as aid in understanding.   

To illustrate this point, I cited a number of studies by noted Marxist economists about the causes of the Great Recession. I cited these because they have predicated the crisis long before it happened using well understood theories of crises and empirical validation of them.  Despite their differences, all agree that the crisis was driven by a long cycle problems of accumulation fueled by the tendency of the average rate of profit to fall.  

I added a reference to Laurence Summers’s recent paper because as a prominent mainstream economist he now supports what Marxist economists had argued for some time—long-term stagnation of the U.S. economy. Of course, I could have cited Keynesian and post-Keynesians such as Paul Krugman, Secular Stagnation, Coalmines, Bubbles, November 16, 2013 and Thomas Palley, Explaining Stagnation: Why It Matters. February 24, 2014 that offer other explanations for the same phenomenon.  

In his letter, strangely Saral interprets my discussion of these as verification of his own unproven claim about natural limits to growth.  This must be a misunderstanding given that all these writers reach their conclusion using economic or/and social theories of the capitalist system.  Moreover, Saral misses the key issue in our discussion: there has been no proof that the Great Recession and capitalist stagnation is due to natural limits to growth. On the other hand, there is ample evidence these could be explained in terms of economic and social factors using data and statistical analysis.  If Saral wants to counter these arguments effectively, it is not sufficient to point a finger at the indisputable fact that given enough time there will be natural limits to growth. He would have to use data and statistical analysis to show that limits to growth or peak oil have caused it.  So far, he has done nothing of the kind.

4. Did peak oil cause the Great Recession?

Now, let us consider Saral’s claims that (1) peak oil was reached in 2005 or 2006 and (2) that is the cause of the Great Recession.  

Even if we have experienced peak oil in 2005 or 2006 as Saral claims, I have shown above that rising oil prices before the Great Recession were not of the magnitude that could have caused the Great Recession.  And, once again, Saral himself does not bother to make any attempt whatsoever to provide the necessary empirical work to prove his claim.   

Now the Great Recession aside, was oil peak reached in 2005 or 2006?  Saral does not cite any sources for this claim either.  This is particularly important as the oil experts do not agree if and when peak oil is reached.  This has been a debate since M. King Hubbert proposed the oil peak hypothesis in 1956.  For example, in the Guardian article that Johnny Rutherford cites in his comment and I have posted on the OPITW, Dr. Richard G. Miller, a former BP geologist, suggests 2008 as the year peak oil was supposedly reached.  But if we accept Dr. Miller’s account then peak oil was reached after the onset of Great Recession that began in December 2007. So, it could not have been its cause. One might want to argue that the alleged peak oil has added an extra drag on economic recovery, deepening the crisis. That would be a more reasonable hypothesis.  But still that has to be verified empirically using data and proper analysis.

Just as the Great Recession was about to start, R. W. Allmendinger (Peak Oil?, 2007) of Cornell University College of Engineering summarized various studies of peak oil and offerd the following summary:

“The bottom line is that conventional oil and natural gas will probably peak sometime between 2010 and 2040. Except for some extremely optimistic projections, most people inside and outside of industry predict that oil and natural gas production will be in decline before the middle of the 21st Century. It is important to understand that ‘peak oil’ is an economic concept: production will decline when there are other less expensive energy sources available. Thus peak oil will occur because we have exhausted easily accessible oil (something that is happening rapidly).” (my emphasis)

In the most recent critical survey of the literature on peak oil, Samuel Alexander (The New Economics of Oil, March 2014) offers a highly informative discussion of the dismissive claims of the peak oil theory in light of recent technological advances in exploration and extraction.  Let’s quote his conclusion in full.

“Peak oil turned out to be a more complex phenomenon than theorists originally anticipated.
“It has not been experienced as a precise ‘moment’ or ‘event’, but rather as a dynamic interplay between various forces that have provoked some adaptive adjustments (such as demand destruction or increased investments) in incremental and multidimensional ways. There may never be a ‘shock moment’ of peak oil’s arrival; instead, peak oil may continue to play out as a gradual, unplanned transition to a new set of energy and consumption patterns that are less oil dependent, giving rise to social, economic, and ecological impacts that no one can predict with any certainty. The evolving interrelationship of geological, geopolitical, economic, cultural, and technological variables has continued to surprise analysts – both the ‘cornucopians’, who claim there is nothing to worry about, and the ‘doomsayers’, who think collapse is imminent, as well as everyone in between. No doubt there will be more twists still to come in this energy tale. But what seems clear is that the consequences of peak oil are not going away.
“Whether the next twist arrives in the form of a new war or financial crisis, a new technology, a bursting shale bubble, or perhaps a radical cultural shift away from fossil fuels in response to climatic instability, intellectual integrity demands that analysts continue to revise viewpoints as further evidence continues to arrive. This issue is too important to be governed by ideology.”

In the case of the present discussion, what is important to take away is the emphasis by Allmendinger and Alexander that peak oil is not a natural phenomena.  It is eminently a social and historical phenomena. When peak oil arrives will have to do with the dynamics of alternatives to oil (and not simply as energy source) all mediated throughout the capitalist world market.  For that, it is necessary to have a theory of the capitalist world economy and a theory of price formation in the oil and other industries.  I have argued that for the former there is no substitute for Marx’s theory and for the latter I would recommend Cyrus Bina’s The Economics of the Oil Crisis (1985).

5. Do Saral’s claims constitute a new Kuhnian paradigm? 

In anticipation of the second part of my critical discussion of Saral’s essay and letter concerning the Great Recession, I like to end this contribution with an assessment of another of Saral’s claim, that his unsupported hypotheses of the natural limits of growth constitute a new and profound Kuhnian paradigm. 

He writes addressing me: 
“If you haven’t yet seen any other study that makes the claim that I make, it is not at all surprising.  As Thomas Kuhn has said is his famous book, at times when a paradigm shift has just started, most scientists/authors still adhere to the old paradigm and carry on their work as before within the framework of the old paradigm. Only a few dare to propose a new explanation of a phenomena. But in course of time, more and more scientists shift their loyalty.” (my emphasis)
The use of the word “authors” in conjunction with “scientists” (which I have emphasized) is unfortuante. I will get to that in a moment.  The “famous book” of Thomas Kuhn’s that Saral refers to is The Structure of the Scientific Revolutions (1962).  It employs a philosophical, historical and sociological study of science to show that contrary to the then prevailing belief progress in science does no occur just as gradual accumulation of scientific knowledge.  In fact, there are periods of upheavals where hereto accepted paradigm in science is challenged in favor of a new one.  If successful, the new paradigm becomes the norm until it is overturned by yet another.  

However, Saral forgets that Kuhn’s proposition is strictly about science and scientists.  Scientists usually follow the scientific method.  Saral is neither “theorizing” about science or is employing anything that resembles the scientific method.  Claiming that Kuhn’s proposition includes “scientists/authors” is a mere slight of pen on Saral’s part, perhaps subconsciously. Huhn’s made no statements about “authors” such as Saral. He addresses science and scientists. 

Still appealing to the Kuhnian proposition confirms my concern that Saral is naturalizing the capitalist economy by reducing the capitalist crisis to a crisis of the “industrial society” and then to a natural limits to growth crisis.  He does this in his discussion of the housing crisis and the role of money.  I will turn to these in the next part of this rejoinder. 

Related posts:

— To be continued.


Johnny Rutherford said...

Hi Kamaran,

While you are right that the paper has a world focus, Clugston definitely does link the increased NRR prices with the 2008 GR. I know you will not be convinced because he does not provide specific U.S data or data relevant to mortgage holders….but it is relevant to our discussion, which has focussed centrally on pre-recession commodity price rises. Throughout your responses you asked for evidence of 'a secular, permanent price rise for primary commodities preceding the Great Recession.' Clugston's data, as well as the evidence I pointed to in my original response to you in the World Economic Forum paper (see p.13 here), does provide evidence of sustained, adjusted for inflation, increases in resource prices, particularly oil, prior to 2008. But, don't worry, I am very happy to admit uncertainty. The rising resource costs evident since 2000 could, as you claim, be simply a temporary/cyclical blip due to the explosion in demand in the 'emerging' economies. But, to my mind, you did not adequately address Saral's response to this line of argument…if it was just rising demand, why didn't resource suppliers respond to price signals, as they have always done in the past, and provide additional supply thereby bringing prices back down? Remember – and contrary to the Suisse study you cite – throughout the 20th century there was a general declining trend in resource prices (see Chart on p.5 in Clugston paper). Admittedly the general rise in resource costs since 2000 could be a blip. Perhaps, as you claim, there will be a cyclical reduction in prices in the next few years, in which case you will be proved right. But Clugston's evidence suggests this has not occurred yet. Therefore, I believe Clugston/Saral could well be right. That is, pre GR price rises could well have been due, not simply to rising demand, but ALSO due to the effects of increasing geological scarcity. What evidence do you have to dismiss that possibility?? I think a more rational position to take would be agnostic…I.E 'maybe you are right Saral, but I need more evidence to convince me'…if you took that line, I would completely accept it.

I think this is particularly clear with respect to oil – that most crucial commodity for industrial society – which as Clugston shows has continued to rise in price since 2000s, despite the move to unconventional oils. Also, with respect to the oil question, you should re-read the guardian article you cite with former BP geologist Dr Richard Miller. The article is actually unclear because while at one point Miller locates 2008 as the peak of oil, later on he is quoted as saying that 'the oil price has risen almost continuously since 2004 to date, starting at $30.' And yes, I know all this refers to world data, not U.S data! So yes Saral and I will need better evidence to convince you!! I have seen links to such evidence from Nafeez Ahmed focusing on the U.S situation specifically and links with mortgage holders but, unfortunately, I cannot track it down. Will do so if I can find.

Another quick thought; I don't think this discussion is as crucial as you may think. Even if the last GR had nothing to do with scarcity (and, as I/Ted said previously, Marxist explanations were indeed central to the explanation), I think it is very likely that the next GR will be! In otherwords, we are going to run into savage scarcities sooner or later and that is what the Left needs to understand…but has so far failed too!

In solidarity


Johnny Rutherford said...

Dear Kamran,

I posted the above, in the hope of generating discussion, and thinking that it was a direct response to your essay...and forgetting that I started out talking about Clugston, which readers will not understand!!

For readers interested, there is a report by Chris Clugston - link below - which provides evidence of non renewable resource price increases between 2000 - 2014....