Monday, September 14, 2009

The Diagonal Economy 2: The Impact of Energy Descent

I’ve wondered how to best explain the advantages of the Diagonal Economy in confronting energy descent.  I think that reference to an old post addressing “anti-economies ” is perhaps the best framework.   There, I discussed the classical sources of economic efficiency:  economy of scale and economy of place.
Both economies of place and scale will be impacted by the phenomenon of energy descent—the idea that there will be increasingly less surplus energy available to society going forward.  While I am very confident that this will be the case, it’s necessary to recognize that there are those who don’t think this will be true—or at least that this won’t be a significant force going forward because we’ll have plenty of energy available from renewable or other sources.  Some even think that technologies like thin-film-solar will make energy “too cheap to meter.”  While I think this is highly unlikely, it’s also important to accept that this is a possibility—to think otherwise (or to think that it’s an inevitability of technological innovation) is an inherently faith-based position. 
I’ve critiqued this “viridian vision” previously here and here .  This post operates on the assumption that society does undergo energy descent, and to the extent that assumption is mistaken then the conclusions reached in this post will be incorrect.  However, even if this assumption is faulty, the general concept of the Diagonal Economy is not necessarily flawed because there are several other forces supporting its adoption that I will address in coming posts.  Now, on to a discussion of the impact of energy descent:
Economy of place, the first of the two classical “economies,” is the concept that some things are more efficiently done in certain places--to use the classic example, it would be just plain silly for to try to grow grapes for Port in dreary England when they grow so nicely in Portugal. Lumber is more ripe for the logging in Oregon than it is in Kansas, etc. 
Of course, when it comes to physical products, economy of place is facilitated by affordability of transportation.  It still made sense to grow grapes in Portugal when the only way to get them to England was via sail.  This effect was less powerful, however, because of the comparatively higher cost of transport via sail (though wind is free, the overall cost of transport by sail was more than modern transport by containerized freighter).  Many items that are transported between continents on a routine basis today were produced locally in the past because of the then higher cost, or slower speed, of transport.  But the oil age, with its cheap and rapid transport options, has fundamentally re-shaped our economy around extreme economies of place.  This will change as oil and other sources of energy for transport (potentially even for the energy for transport of information over the internet) become increasingly expensive.  As economy of scale is less decisive a grantor of fitness in our ongoing economic evolution, we’ll see more localized industry gain on its centralized predecessors.  This won’t necessarily mean a return to the same look and feel of past localization—too much as changed to think we’ll simply revert to the 18th century.  As the saying goes, history doesn’t repeat itself, but it rhymes.
Economy of scale is the concept that it is more efficient to do lots of one thing rather than trying to do a little of everything. You can specialize and stratify and apply all kinds of economic terminology, but the bottom line is that if all you do all day is draw out wire into pins (to take Smith’s classic example), you're going to get pretty good at it. But if you only had to draw out wire into a pin when you need one (can't remember the last time that happened to me), you will probably be very slow and inefficient in their manufacture. This is economy of scale--and it applies, for obvious reasons, even better to things like microprocessors and flu vaccines than push pins.
As with economy of place, the leverage available through pursuit of economies of scale will change under energy descent.  To some extent, economy of scale is facilitated by cheap transportation fueled by cheap energy.  Of course, economy of scale also facilitates specialization, which can lead to economies of production under certain circumstances.  While not strictly a prerequisite to reaping economies of scale, centralization is a common symptom of such efforts.  It’s possible to leverage distributed networks of highly specialized functions to achieve economies of scale (something especially compatible with the Diagonal Economy, and that I will cover later), but this is not yet commonplace.  As a result, economies of scale tend to require cheap energy for transportation to meet three needs:  1) to get workers to a physically centralized location where they can perform specialized tasks, 2) to transport physical goods to this specialized location, and 3) to redistribute the resulting physical product to its end user.   It’s also worth addressing one more symptom of economies of scale:  the information-processing burden of hierarchy, or what Robert Anton Wilson called the SNAFU principle.  Economies of scale are usually (though, importantly, not necessarily) the result of hierarchal structures—corporations, governments, religions, etc.  Because control (both of process and output) is often a requirement of those who design such institutions,  hierarchal structure is a necessity.  However, with such hierarchal structure comes an increased information-processing burden as the top must communicate through several relays to the bottom, and vice versa.  This tendency, while individually important, is relevant here because it can exacerbate the importance of cheap energy/cheap transportation to economies of scale because hierarchies tend to require more people—and hence greater centralization and more transportation to and from—as a result of this information-processing burden.  The truism that hierarchy tends to result from a need or desire for control—of inputs, outputs, process, etc.—also suggest that hierarchies can be avoided by forfeiting control over these parts of an economic process.
Like economies of place, the result of energy descent will be that economies of scale provide less comparative advantage than it did in the past.  This will be particularly true where economies of scale require physical centralization and where it depends on hierarchal control structures.  Therefore, as a result of energy descent, we’ll see two trends:  away from physical centralization, and away from hierarchal control structures.  Here in particular, because of both available communications technology and the conscious understanding of modern communication possibilities like P2P and open-source, the future will not be a simple reversion to the past.  Instead, there will be great comparative opportunity to structures that develop a way to leverage economies of scale without depending on physical centralization or hierarchy.  The Diagonal Economy is specifically conceived with this possibility in mind—open-source information processing, the development of platform-based manufacturing, and other concepts that I will discuss in more detail later.
I think it might be useful to envision the spectrum of economic possibilities along two axes:  degree of hierarchy and degree of physical centralization.  The result of the declining importance of economy of place and economy of scale presents a potential bifurcation point on the resulting graph of our future economic path(s).  If you accept that, on one axis, the scale and centralization of our economy will recede due to energy descent, then I argue that the variable axis is the degree of hierarchy within our economy. 
Less centralization and scale but more hierarchy than present looks like a form of neo-feudalism to me.  I certainly don’t mean that this will be a regression to jousting and castles, but rather that we’ll see an increasing disparity in standard of living among an increasingly stratified local political and economic structure.  For matters of ontogeny and optimizing the median standard of living, this is the less desirable option.  However, as this option may prove the best option (both in absolutes and comparatively) for current elites, I would not be surprised if there is a significant push in this general direction.  I think that, absent active pursuit of the alternative outlined below, the natural tendency under energy descent will be for our current structure to “erode” into some kind of a neo-feudalism with less centralization but more hierarchal stratification.
The alternative—less centralization, less scale, and less hierarchy—is what I envision as the Diagonal Economy.  This is my preferred vision of the future, but not one in which I am especially confident.  While I think this option will be the most effective in maximizing the absolute median standard of living in an environment of energy descent, it will be a challenge to implement because, as I just pointed out, there will be little incentive for existing elites to choose this path.
Finally, the third option of less centralization and scale but about the same amount of hierarchy seems unlikely.  This option is the analog to the viridian vision of the future as a land of renewable plenty!  Considering that this framework accepts declining surplus energy due to energy descent, the existing economic structure will simply be untenable.  As pointed out above in the discussions of economies of place and scale, if energy for transportation is less available then we must reduce centralization.  Existing levels of hierarchy that made sense under existing levels of centralization will no longer be tenable—the overall economic product per person available will decline along side energy, requiring either more hierarchy to enforce a greater stratification or no providing enough economic incentive to those at the top of the hierarchy to justify its costs.  While I have argued that a flatter structure with much less information processing burden may also provide high quality of life to its constituents, it does so specifically because of the avoided cost of hierarchy.  Instead of the status quo, then, It is my guess that we will either see an intensified but localized hierarchy (neo-feudalism) or a dissipation of hierarchy itself (the Diagonal Economy).  Finally, for those who do not actively pursue the Diagonal Economy option, the existing political and economic terrain will all but mandate a neo-feudal future.

12 comments:

TH in SoC said...

Fascinating read. I too have thought that neo-feudalism is a likely outcome. I have a question: In one of your recent posts on hierarchy and information processing burden, you proposed an open-source, non-classified information processing model for U.S. Defense intelligence users in Afghanistan. Since the information would not be classified, I assume that it would be possible for other combatants to see it. How would the open-source nature of such information sharing compensate for laying all one's cards on the table?

This leads to my second question, which is even more important from a personal standpoint: There have been collapse/Peak Oil writers discussing various options for ordinary people to build resilient adaptive strategies. Yet as these writers have laid their cards on the table, our present elites have hindered these avenues of adaptation. I think of the Federal Government's sudden recent interest in taxing barter income, the sudden recent interest by many speculators in buying up depressed properties in places like Detroit (properties that could have been used by people of small means, but which are instead being turned into expensive rental properties), proposed new Federal restrictions on small organic farms, and so forth.

Is the open-source, peer-to-peer discussion of personal adaptation by people of small means valuable under these conditions? Will such an open discussion help us to avoid a neo-feudal future? Or would we be better off keeping any good ideas we have to ourselves?

complexfatwa said...

TH- Do you have any sources documenting land speculation in Detroit? I know certain formerly-depressed areas of the Bay Area have been experiencing speculative development and gentrification, but that's because of proximity to the uber-expensive San Francisco market. I don't really see any market incentives to speculate on Detroit currently, but I'd be interested in being shown otherwise; it would portend a disturbing trend if even the depressed areas are getting bought simply to keep the poor tied to the cash economy, essentially implying the elite's class consciousness have reached the point where they're staking out fiefs in anticipation of serfs.

Geoff said...

Economy of scale would also have an additional downside, being that if you do only one thing well, then you are required to do that one thing continuously in order to survive.

Hence we have the "upgrade your TV" marathons and designed-in-disfunctionality of modern goods. This way is not compatible with a world of resource scarcity. If you only need one pin a year then local production, however inefficient, is going to be sufficient. It's the economy of scale, pushing the purchasers to buy a new pin weekly to ensure that the business remains economic, that is a source of so much trouble.

Kevin Carson said...

Excellent post. To the extent that energy and transportation are artificially cheap as a result of the state externalizing the cost of such inputs, the economies of scale have always been artificial. Peak Oil, and the fiscal crisis resulting from escalating demand for subsidized inputs, just show we're reaching the limits of a system based on subsidized (and concealed) inefficiency.

One mitigating factor against the push toward fedualism is the imploding cost of capital outlays for physical production. We're seeing those outlays impode by one or two orders of magnitude, with the open-source CNC multimachine that can be built for $1500 in parts, a RepRap 3-D printer for $500, etc. I saw a story somewhere recently about a guy who'd built a numeric controlled XYZ cutting table for just a few hundred bucks. As Marcin Jakubowski of Factor e Farm put it, when you can work a few weeks to produce for a few hundred dollars what would take years of salary to purchase for $100,000, how you gonna keep 'em down in the factory?

Same goes, even in the case of more conventional and older technology, for the household microenterprise. Most of the capital outlays required, even for such traditional technology, are artificial. The wave of the future IMO is the household microenterprise using spare capacity of ordinary capital goods most people already own: microbakeries using ordinary kitchen ovens, etc.

If feudalism occurs at the local level, it won't be because of the capitalization requirements or any other imperatives of production. It will be because the parasitic interests dependent on artificial scarcity make a concerted effort to enforce it at the local level, though licensing, zoning, "safety" codes, etc. And I'm extremely skeptical of their ability to prevent people "buying out at the bottom" (that's Vinay Gupta's phrase from "The Unplugged") and seceding from the system, given the fact that cash-strapped local hollow states will lack the resources to enforce anything beyond a bare minimum of public order.

TH in SoC said...

complexfatwa,
Here are some links for you re. Detroit and speculators: http://michiganmessenger.com/14775/amid-distressed-homes-communities-struggle-to-keep-up, and http://www.nuwireinvestor.com/articles/rediscovering-detroit-real-estate-51708.aspx, and http://money.cnn.com/2009/06/11/real_estate/investing_in_Detroit/index.htm. It's all true, unfortunately, and it seems to have been going on for at least several months.

The Energy Standard team said...

Good essay and nice continuation of the diagonal economy.

However, as we all accept none of us has a working crystal ball - and the only really scientific way to go about in situation like this is to work with multiple hypotheses, instead of just one (even if most likely).

So, what other alternatives could work?

Let's say we roll back 30 years in energy consumption and world wide trade energy consumption.

Energy becomes more subsidized as it is seen as the lifeline of local economies and the global trade.

Where did we mass produce goods in the 70s: US, Asia, Latin America, some in Europe.

(mass produce means food, clothes, bikes and all the other extra stuff incl. cars and mp3 players).

Now, how do economies of scale and place work in a situation of growing subsidies, energy starvation and rising manufacturing/transportation costs.

It all depends on the price curves, but if transportation costs double or triple, that also hits local (national) production - unless it's really hyper-local.

Also, if Asia were to roll back 30 yrs alongside with OECD countries, their energy consumption advantage would still be about 10:1 - 50:1.

Hence, it might still be advantageous to produce in Asia (whether that's cereals, clothes or other consumables).

It all depends *at the very least* on

1) how much we let subsidies distort the markets

2) do we go back towards trade protectionism and national mercantilism

3) how steep the energy descent is

4) how rapidly can we economize on transport (there are plenty of opportunities WITHOUT replacing the whole flee - just by doing different type of logistics planning/execution)

For example, I see a possibility that in a scenario like above that local warehouses will come back. JIT will be a forgotten memory.

Also, local might mean local extraction/production/manufacturing/packaging and THEN shipping to the other side of the world to warehouses.

Now we have one place producing raw materials, second refining them, third putting parts together, fourth assembling, fifth making actual end products and sixth delivering selling. Sometimes several thousand kilometers and borders between each phase.

That might stop, but not revert to hyper-local, but HUB-based structures (cf. changes in the airline industry).

The problem we as humans have is that we have hard time thinking new systems -- unless there is a huge incentive AND we are forced to abandon the old one.

Hence, we come up with half-baked models that are more or less copies of how we did things before.

But things rarely roll back to the same situations as they were before.

Granted, we've never faced a global forced powerdown before, but there's the catch, isn't it.

Nobody knows.

Let's keep entertaining multiple hypotheses.

That's the only way to stay vigilant, not to fall in love with one's ideas and be ready for whatever scenario eventually unfolds.

Bilbo said...

This is very interesting. I am thinking that it is not a choice only for the two possibilities you suggest, the whole world neo-feudalism or whole world diagonal economy. Couldn't each locality develop one or the other based its particular history, culture, geography and many other factors? For example, I think the Old South in the US is more inclined historically toward hierarchy than other parts of the US. On the other hand, perhaps there are certain types of activities that would be only possible with diagonal economy, hopefully some of these would produce trade goods that may be needed in the neofeudal areas but goods the neofeudal areas would be unable to produce internally.

Geoff said...

Bilbo, wouldn't neo-feudalists want to expand their dominion to neighbouring areas and take over regions where goods are produced that they don't produce at home?

Multiple approaches to the problem is a great idea, but certain approaches are going to be mutually exclusive by their very nature I'd imagine.

Chase Saunders said...

The anti-economies link is broken - needs an "l" at the end.

Peter Hodge said...

Jeff - I'd think that another response to energy descent, more likely than a neo-feudal set-up, at least initially, would be an effort to increase centralization and hierarchy. In other words a command or war-time economy where scarce resources are tightly controlled and rationed by central and / or state governments.

In this kind of economy, there would still be a oil supply, for instance, but it would be diverted to essential services, rather than being freely available to all for personal motoring.

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Rice Farmer said...

I'm coming to the discussion late, but just want to say that for the past five or six years I have thought that there is a high likelihood of neo-feudalism. One reason is that nearly everyone wants the current socioeconomic system to continue, and no cost will be spared to prop it up. This is quite obvious from the "stimulus" efforts being made around the world as governments incur massive debt to prop up systems that are already sagging under crushing debt. As this proceeds, a small cadre of elites continues to accumulate colossal wealth, while the Little People sink deeper into debt peonage. Unless something is done to stop this trend, the elites will become the new aristocracy, and the Little People will become the new serfs.

A second reason is that it appears to me this is actually the plan. Faced with energy descent, it's obvious to elites that there is not enough wealth and energy to go around, so the answer is to concentrate them into a few hands (theirs).

Although I like the idea of the diagonal economy as you've presented it, I think there will be fierce resistance from those with the most to lose.