"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, February 21, 2011

The Collapse of Complex Civilizations

For those not familiar with Dr. Joseph Tainter, he is an Anthropologist and US Historian that wrote in 1988 the book: "The Collapse of Complex Societies."

The best way I can describe this approach to viewing the history of empires and complex societies is one of systems dynamics.  A complex society has multiple systems functioning within it.  Such systems include financial, agricultural, energy reliance, military, social welfare, infrastructure, etc...

These systems, in the beginning, as they are being created give society a rather high rate of return.  As they are developed, their use is optimized and society benefits from this.  But over time, a hyper-complexity develops.  Manageability of these systems through regulations, protection, growth, and overall maintenance becomes complex as well.  And after a point, the costs of maintaining these systems become extractive.  The costs exceed the benefits.  A diminishing rate of return is reached.


We have seen this with America's military costs in maintaining world order.  We have seen this with our financial system that to grow, needs to become more speculative, and thus, more extractive of the productive economy.  We have also seen this with the amount of debt the US economy needs in order to grow GDP.  Our bang for each buck borrowed, so to speak, is diminishing... yet the costs of debt, the interest, grows.

We have also seen this in energy.  To extract oil, or to develop "green energy" we need to expend more and more existing energy.  The rate of energy return too, diminishes.

So what does this mean when a hypercomplex society, or industrial civilization, reaches a point of diminishing growth and growing costs?  Tainter calls the result of such a process "collapse."  In another presentation, Joseph Tainter defines this collapse:

"Collapse is the rapid simplification of society."

Think about that.  What is simplification?  It's the system telling us that it can't grow at the current rate... that it wants to regress to a more stable, simpler phase.  The Wall Street meltdown of 2008 is such an example.  The system was telling us that it can no longer handle the creation of ever-increasingly risky loans, despite credit default swap (insurance) protection.  The system was telling us that leverage, debt in other words, was no longer productive for the economy.  It became unbearable.  The system wanted to shake this debt off.

One could also argue that the US may have reached a point where it no longer benefits as much from influencing the Middle East... that is, the benefits it derives are no longer greater than the costs.  Just look at Iraq, Afghanistan, at Egypt...   What was spent, and what was gained.  When the US first entered the Middle East after WWII, it benefited tremendously.  Now that it has to share the gains with other countries such as China, the benefit is not as great.

Economics aside, maybe we should also view the world as a complex system that requires various types of inputs to produce a certain amount of outputs.  And then maybe, the solutions we arrive at are more realistic.

Below is a brief video of Joseph Tainter describing the process of collapse.  Now keep in mind, I'm not saying we're entering a stone age.  It's a process of simplification, which means to me that it takes place over certain period of time.  Things change slowly, sometimes quickly.  One generation doesn't live as well as the previous generation.  Growth slows.  New monetary systems develop to handle this new emerging paradigm.  There will be destabilizing periods as well, maybe even wars.  There will likely be political and societal upheaval.

Actually, one could say that all of the above is taking place right now.  That it has been taking place the past ten years.

But keep in mind, eventually, things do stabilize.

7 comments:

OKL said...

not sure where my previous comment on the post about china went... but I'll try to reproduce it from memory.

there's an interesting thing going on here; as long as the global monetary system remains more or less the way it is, i think that regardless of who takes over or what happens, the solution to improve the quality of human life will definitely be more govt spending, so as to increase the amount of money available to everyone.

the question is whether the populace trusts the govt to do so. take the US for example; Washington had all the time in the world to spend wisely during the good times, but did they? nope; most of US' infrastructures are still rated in the "C" to "D" range.

when the tide went out, we saw who was swimming naked and what did the govt do? the govt bailed them out. no crime, no lawsuits, no political deals... not even a slap on the wrist. heck, even the govt joined in the party.

is it a correct economic decision? maybe. but it is definitely not the correct political decision at all.

if more spending is the way out of the problem regardless of who is in charge, then why not spend now? do it fast, do it right!

that might work in computer games, but this is reality. the right solution applied at the wrong time can have disastrous consequences; the economic tool does not serve the political purpose.

i don't claim to have an idea of what the political purpose/s are, but at this point, it seems like the same old same; maintain the status quo...

OKL said...

one more thing about Libya now; Italy's energy needs depends a fair bit on Libya... i think it's just a stone's throw away from creating further political division in Italy, leading to another fiscal crisis and subsequently the Eurozone as a whole...

hmmm....

Misthos said...

OKL,

There is no one steering the ship. It's too complex, and there are too many vested interests that get taken care of first - at the expense of the greater economy.

Too many people see some sort of conspiracy plot. I don't think so. I think the world has gotten too big, too fast, too complex, and no one or no institution can possibly implement real solutions. The only thing that can be done is piecemeal - save this group, save that group - as the ship slowly sinks.

Government already proved how it is going to handle this. It will take care of banks first. I see no change in course.

As for the Libya crisis - this is the type of thing that can destroy a weak, fragile system. It is not just Libya, of course. There are a flock of black swans ready to make their entrance.

Not to get too "out there," but the best way I can describe it is I fear there's a lot of bad karma pent up over the past 60 years, and it is finally blowing up.

But you bring up a great point. Libya can indeed be Europe's black swan.

I believe that ultimately, an oil crisis will contribute to the downfall of the fiat paper system. You can manipulate money all you want, but energy is the real deal. Energy builds roads, towers, airports, it transports goods around the world.. etc... Without a steady, affordable supply of energy, a paper debt based system, in my view... vaporizes.

Extremely high energy costs affect the price of everything. So whereas central banks can manipulate interest rates... if energy goes thru the roof - Central Banks action's are pointless.

boatman said...

i stopped believing in conspiracies after sleeping with my girlfriend's sister in high school....it was our secret....that secret beat me to the bus stop.

it wasn't pretty.

Misthos said...

boatman,

Now that's funny. The bigger the secret, the faster the news travels...

Julia Riber Pitt said...

Question:

How would gold or silver currency prevent collapse?

Misthos said...

Julia,

First off I want to say that collapse can be many things, and it can be an event or a long term process.

International trade is currently conducted with the use of fiat money, whose basis is the debt of the issuing country. That means that every country trusts its trading partners to manage their currency and debts.

Economically speaking, on a global level, if the system ground to a halt due to war, or due to a financial collapse similar to 2008 - but one that is not so easily papered over... then gold could play an important role.

It has been my opinion that gold is held by treasuries and central banks around the world as a form of insurance. In the event of a serious global economic dislocation, gold would function as a backup. It's the one monetary asset that outlasts empires, countries, and debts. Unfortunately for most governments, gold can't be created by borrowing, or out of "thin air." But that's the reason it has value...

Thus, gold may not prevent a collapse, but may replace, maybe temporarily, the system we currently use.

Nothing is permanent. Every system eventually gets replaced by a new one. The question is, will it be a smooth transition, or a violent one? Will there be a temporary transitional system in use until things stabilize?