The System of the World (Part II)

By Daniel Wilkinson, on January 12th, 2009

In part two of this series, I examine global demographic trends and take an initial look at the implications for global GDP growth, and by extension, the outlook for the current world-system of debt-money, as defined in part 1.

The general demographic trend over the last 500 years, and particularly so since the mid 1700s has been one of inexorable, exponential population growth. During this time the world-system of debt-money has evolved to it’s current level from very weak and inauspicious beginnings in the early 1500s. My contention is that population growth has been the trend which has sustained this world system, and that this driving trend is now abating with significant consequences for the world-system.

Many people make the mistake of reviewing total world population growth graphs, and see an ever upward trend, when in fact what really matters to the current world-system is not absolute population numbers, but the growth in population. It is growth in population year on year that provides more grist for the debt mill, and ensures that productivity increases year on year sufficient to replay the interest outstanding on the current money supply.

Another important fact most people miss when looking at demographic trends, is that the only population growth that directly sustains the world-system is growth of population within the monetary economy, or more specifically, those individuals earning a wage and eligible for bank loans. New money is created by the banks when they make new loans. It is imperative that the system always has more outstanding in new loans than loans currently due, since otherwise there will not be enough new money to pay off the original money supply plus the interest owing on it. So economic growth is required to sustain the system – and population growth is the most crucial element of economic growth, followed by productivity improvements via technology and better social organisation.

Therefore, the vast majority of recent world population growth which has been in the least developed nations on earth – mostly in sub-Saharan Africa and in the less developed Asian regions cannot immediately contribute to sustaining the debt-money pyramid since it takes considerable time to integrate the teeming masses in the third world into the monetary economy. Indeed recent progress in this regard has been very slow – certainly far slower than the third world population growth rate, due to a whole host of developmental problems, many of which have been caused indirectly or directly by the actions of developed nations. For this reason the west has found it necessary to appropriate the resources of third world nations to sustain western consumers of debt, rather than focussing on lettnig the third world nations develop in their own time – it would simply take too long to be of any utility in keeping the debt flowing.

So to summarise, the population demographic we are most interested in is the demographics of the world monetary economy, which are shown in the figure below (I had trouble adding the image so please follow the link).

http://www.flickr.com/photos/25490645@N06/3183768236/

The blue and light red lines represent the Total Fertility Rate (TFR) of the ‘developed’ and ‘less developed’ world respectively. Developed in this context can be taken to mean the western nations including the US, Japan and some parts of east Asia. Less Developed includes India, China, Brazil and so forth. The yellow and green lines are the TFR of the two regions respectively, but moved forward in time by 30 years. The dark red line is a weighted average of the developed and less developed TFR advanced by 30 years, with the developed TFR contributing at 400% the rate of the less developed TFR to the monetary economy.

Note the sharp and relatively simultaneous fall in fertility for both the developed and less developed worlds in the 1960-1975 time frame[1]. This is the origin of the ‘baby bust’ generation that followed the boom generation. A TFR below 2.1 (births per woman) will result in a falling population, and a TFR above 2.1 in a rising population. 2.1 births per woman is termed the ‘replacement rate’. The period around 1950-1960 represents the origin of the baby boomers. It should be obvious from the graph firstly that the growth of the population of the monetary economy has crashed since the 1970s, during which time the birth rate in the less developed world (mostly Asia) has also fallen sharply partly but by no means entirely as a result of China’s one-child policy.

Now, from birth it takes on average 30 years for an individual to enter the most productive phase of their working life, during which time they either contribute to labour input, borrowing, savings or both. If we recall that the world system requires an expansion of debt to continue functioning and that the market for new debt is significantly determined by new workers entering the market for housing, personal loans, business loans and so forth (and specifically, a larger number of new workers and debt-victims than existed previously is required, in order to take up the burden of interest on the money supply) , then we can see that a low in the groweth the productive population of the monetary economy represented by a low point the the monetary economy TFR curve shown in dark red, represents a point of maximum danger for the economy. The figure shows two periods of significant decline within the overall downward trend – one from 1995 to 2010, and another from 2015 to 2025. Note also that it takes a period of time equal to the average loan life-span for changes in the input of labour and new loan creation to manifest themselves in their effects on the economy. The recent low point in the monetary economy TFR corresponds roughly with the 2001 downturn and also with the recent credit bust of 2008.The developed economy productive worker TFR actually falls below the replacement rate just about the year 2000.

Looking slightly further back, it is also possible to observe a major down trend bottoming in the late 1970s, the might be partly correlated with the severe recessions of this period.

If we now mentally zoom out such that our time-scale incorporates the full period from 1500 onwards, we see a picture of exponential growth of the population of the world population up until the period some 3 years after the end of WWII. This trend has seen world TFR being strongly positive and quite stable in the 3-5 births per woman range and hence population growth has been exponential due to the compounding effect of growth, until the last 50 odd years during which growth has levelled out drastically. The UN population division predicts that the world population as a whole (this figure now includes the whole world including the least developed regions) will peak in 2050 and afterwards decline, only to level out around 2300. Note that this means that the peak population of the world monetary economy is peaking about now (or may have already peaked), since only a fraction of the population of less developed nations participate in the monetary economy. According to the UN, after the peak we might expect a period of population decline that lasts two centuries.

It is my thesis that it is mainly (but not entirely) the increase in population rather than productivity growth that has sustained the debt-money, never-ending growth world system to date since the green revolution and population explosion of the 18th century, and that the recent significant moderation of the population of the monetary economy is partly responsible for the current problems in the global economy, and that the continuing moderation and eventual decline of this monetary population is going to result in a series of rolling recessions, and possibly destroy this world system altogether over a period of some 50 years from now. Further exacerbating factors can be seen in the form of:

  1. global wage arbitrage, which is accelerating the rate of convergence between the most developed and developing economies[2]. Most people think of convergence as a process of the third world cathing up. The reality is that we shall meet them in the middle – which is what markets are all about!

  2. Ageing societies such as Germany and Japan exhibit huge decreases in domestic consumption due to the increasing need to save for old age. An ageing nation is a global market that is retrenching for good, hurting the exports of other younger nations. Many Asian nations such as Korea, Singapore, China will join the Germans and Japanese in being ageing societies within 25 years.

  3. Relentlessly increasing lifespans, resulting in higher social costs for the elderly.

  4. The contraction in growth rates is superimposed on an increase in actual population of about 3 billion between now and 2050, putting extra pressure on already strained natural resources.

  5. After 2050, a declining world population and therefore a sustained period of economic contraction, or at least stagnant growth – not seen for over half a century – is going to turn many of the accepted economic rules on their head. Remember that the whole of the dismal science has been constructed in the last 300 years of the ‘population bull market’. Few see the coming crash during a bull run.

The next article will look in more detail at the economics of ageing societies and depopulation, along with some further ruminations on other interacting factors such as the information economy. Contrary to what the reader may take from this article my overall conclusion will be one of opportunity for humanity rather than damnation, however I shall attempt to show that a rather different world-system and cultural attitudes will be required to gain a positive outcome from population growth moderation.

Before that I shall leave one more idea for you to ponder. Recall how our developed world TFR curves started downward in the late 1960’s? Looking at the 30-year adjusted developed TFR, we see that boomers born in the 50s are entering their productive phase in the 80’s. Prior to this there is a new-worker bust as the generation born durnig WWII moves into their thirties. Afterwards the generation following the boomers – the baby bust generation born in the 70’s results in another worker-bust around 2000.

Perhaps the incontrovertible fact of the shrinking populatio of the monetary economy is correlated with the birth of fiat money after 1971. Perhaps the chronic inflation that has caused middle class incomes to stagnate for the last 30 years partly a deliberate or accidental response to the suddenly impaired population growth fundamentals of the debt-money system? In fact the debt-money world system can be sustained simply by constantly inflating the money supply sufficiently to account for falling GDP growth.

No-one can deny the huge leaps in technological productivity that have been developed over the last 30 years. So what else is it that is sucking the real growth away?

Footnotes:

[1] The reasons for fertility decline are well covered in the literature so I don’t intend to address the reasons why in this article, instead I shall focus on consequences.

[2] I shall take a further look at the effect of labour arbitrage in the next article.



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The System of the World (Part I)

By Daniel Wilkinson, on December 30th, 2008

What is the System of the World? One social scientist defines it as follows:

“…a social system, one that has boundaries, structures, member groups, rules of legitimation, and coherence. Its life is made up of the conflicting forces which hold it together by tension and tear it apart as each group seeks eternally to remold it to its advantage. It has the characteristics of an organism, in that it has a life-span over which its characteristics change in some respects and remain stable in others. One can define its structures as being at different times strong or weak in terms of the internal logic of its functioning.”

This definition comes from the world-systems school of global social science. It is not the purpose of this article to advocate this or any other approach to the social sciences (including economics), but rather to examine the ‘System of the World’ such as it currently exists and according to the definition above, and to place the current system in the context of other long term trends in human existence.

The current world system is Money. Money, and more specifically debt, or credit. In the 21st century some 97% of the supply of circulating money is in the form of electronically created bank loans. This is interest-bearing money created from thin air backed by little or nothing of any intrinsic value. So today, nearly all money is also debt.

Crazy as it seems, this system has by and large served humanity well for the past 500 years [1] from it’s origins with Italian and German proto-bankers of the 14th and 15th centuries. It has taken many forms and names, such as monarchism,imperialism, mercantilism and capitalism, all of which represent incremental improvements in the social efficiency of production, but which are all based on the same fundamental world-system.

The world-system of debt-money is stable only when the money supply (essentially the value of goods and services available at any time, as represented by the volume of the accepted medium of exchange) grows such that it becomes possible to pay back both the principal – the original loan-money issued by the banks – and the interest on it. With a fixed money supply and no (or low), money supply growth the only possible outcome for the debt-money system viewed as a whole would be be a default on the interest owed, or default on a number of loans roughly equal in value to the value of the total interest borne by the money supply, and thus for the systems collapse

How then has the system remained stable? The answer lies in the astonishing productivity growth of the human race over the last half century. This productivity growth has in general been sufficient to sustain this world system for an impressive period of time. In fact productivity growth has been symbiotic with the debt-money system in the sense that the debt borne by society impels it to develop the productivity gains required to fund interest payments on the principal, thereby repaying the original loan and thus facilitating further expansion of credit to fund yet more development.

The key components of productivity growth required to sustain the current world system are technology growth and population growth. Technology growth improves the productivity of each human in general. When the increase in productivity of one man or woman due to technology is multiplied by the increase in population we arrive at the total productivity growth for the economy. As long as this combined increase can generate new economic value sufficient to cover the interest owing on the money supply, the system is both stable and self perpetuating. This has remained the case for a good half century during which technology growth and population growth have both been explosive when compared with earlier epochs of human history. As long as people continue to innovate and procreate, it is reasonable to assume this system will continue to deliver. Unfortunately however, the fundamentals are not encouraging at the start of the 21st century.

Population growth, contrary to popular understanding is actually now declining. This is not to say that the population per-se is shrinking, merely that the rate of positive change is slowing. Recent reports from the UN population division predict that the global population will peak around 2050, after which it will begin a gradual decline, reaching a steady state of around 9 billion in 2300.

As the crucial population element of the productivity growth equation approaches zero, productivity growth can come only from two sources – direct technological innovation, and improvements in how humans organize themselves to produce. If the UN forecasts are in the right ballpark, then in fact a declining population will require that productivity growth from these two sources must not only make up for a lack of positive population growth, but must increase to compensate for a declining population. In all liklihood this heralds a decline in global GDP growth with respect to the last five centuries.

This series of articles will investigate the details behind the population dynamics, and what that means for technology and social organization improvements and ultimately overall growth, followed by a discussion of some likely outcomes of this scenario in terms of a world-system that might be able to adequately serve a prolonged period of low, zero or negative growth. Some of these discussions will touch upon environmental and ecological issues, however these will be tangential to the main argument, since it is possible based on current demographic data to show that population growth is likely to slow and ultimately to decline without significant recourse to ‘environmental limit’ arguments.

In summary, we can return to the definition of the world systems approach as follows:

“Apart of these, Wallerstein defines four temporal features of that. Cyclical rhythms represent the short-term fluctuation of economy, while secular trends mean deeper long run tendencies, such as general economic growth or decline. In the theory the term contradiction means a general controversy in the system, usually concerning some short-run vs. long run trade-offs. For example the problem of underconsumption, wherein the drive-down of wages increases the profit for the capitalists on the short-run, but considering the long run, the decreasing of wages may have a crucially harmful effect by reducing the demand for the product. The last temporal feature is the crisis: a crisis occurs, if a constellation of circumstances brings about the losing of the system’s structure, which also means the end of the system.”

Cyclical rythms we are already familiar with in terms of business cycles or even kondratiev waves. Secular trends we can see in the form of 500 years of population growth. Contradictions we can see in the form of both business cycles and in the debate over the environmental commons, and crisis we can see as the coming end of the debt-money, growth based paradigm primarily as a result of population growth fall-off and secondly as a result of human population approaching and exceeding the social carrying capacity of the environment.

In the next article, we begin with the crisis – the likely demographic trends over the next few centuries.

[1: Footnote] 500 years is only moderately impressive in historical terms – the Roman, Imperial Chinese and Byzantine empires lasted considerably longer.



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