Monday, April 3, 2017

The world economy from a military perspective: complexity and collapse?

Back in 2010, the Australian Defence Force Journal published an article titled 'Lasers or Longbows? A Paradox of Military Technology'.  You'll find it on page 44ff of this issue (link is to an Adobe Acrobat file in .PDF format).  It examined the increasing complexity of military weapons, and argued that if the world economy were to enter a downward spiral, such complexity would have to be balanced against the need for affordable and sustainable simplicity.

Within the article was a remarkably cogent and concise analysis of the threats confronting the world economy, as identified by the author.  They're still accurate today, and in some cases have intensified (remember, he was writing seven years ago).  I found them compelling enough that I'm going to reproduce that section of his article here.

Complexity and collapse

Maintaining complexity comes at a significant cost. Anthropologist and historian, Joseph Tainter, in his ground-breaking work, The Collapse of Complex Societies, argues that human societies are problem-solving organisations that increase in complexity in order to solve problems. This complexity places a cost on society in terms of energy, resources and capital. Over time, investment in complexity as a problem-solving response often reaches a point of declining returns.

Tainter concludes that once a society reaches a certain point of complexity, the costs required just to maintain the status quo are very high. Solving additional problems incurs further costs without yielding a net positive return. A current example is the oil industry, which some argue could require as much as US $100 trillion over coming decades just to replace ageing and rust-affected infrastructure. There are a number of trends that suggest the global economy is currently approaching a point where the costs to maintain the current level of complexity cannot be sustained.

These trends will be analysed through Nathan Freier’s ‘strategic shock’ model. Freier argues that although most future shocks will be unconventional and mostly non-military in origin, defence strategy development has been overly reactive and lacking in imagination, resulting in nations being vulnerable to surprise. According to Freier, strategic shocks can be characterised as having an important impact, stretching conventional wisdom, such that it can be difficult to convince others of their likelihood, and so complex that it can be difficult to imagine what could be done in response. Nevertheless, strategic shocks are generally predictable, being based on long-term trends. Three interrelated and interdependent threats that fit this model are peak oil, peak minerals and debt deflation.

Oil is the world’s primary energy source. There are a number of trends that suggest global oil production will commence a terminal decline sooner rather than later. These trends include that global oil discoveries have been in long-term decline since the 1960s, despite significant technological advances, that the majority of the world’s oil producing nations have passed their domestic oil production peak, that oil exports from many oil exporting nations are in decline, that depletion rates from existing fields are increasing over time and that the energy return on investment is declining over time. The massive growth in useful energy provided by fossil fuels—or more correctly—‘exergy’, has been responsible for much of the economic growth in the 20th century. With no viable near-term alternatives, the level of economic activity seems likely to parallel declines in the production of oil, followed by natural gas and coal.

Peak oil is not the only peak of concern. Mineral ore grades are gradually declining and are unlikely to increase in the future, as humans tend to use first the easiest to access and highest quality resources. Reputable analysis suggests the production of 11 key minerals is declining. The future availability of some minerals vital for many modern technologies, including platinum, indium and tantalum, are also of concern.  The continuing availability of rare earths, crucial to modern military technologies, such as precision-guided munitions, lasers, satellite communications and optical lenses, are also problematic. China currently accounts for 93 per cent of the production of most rare earths but has reduced its exports over the last three years and is considering further reducing exports for environmental and strategic reasons. These factors suggest the availability of some mineral resources required for modern industrial societies will decline in the future.

The final threat is debt deflation. Prime Minister Rudd has attributed the global financial crisis to a ‘decade of excess,’ with the boom ‘created on a pile of debt held by consumers, corporations and some governments’. Debt-to-GDP ratios in Australia, the US and many other countries are now more than twice what they were during the Great Depression. Post World War 2 recessions have all resulted in a declining debt-to-GDP ratio, while subsequent recoveries have involved debt rising faster than income. It is becoming increasingly apparent that ‘this is simply a formula for avoiding a crisis now by having a bigger one in the future’.

The global financial crisis (GFC) can be viewed essentially as a balance sheet crisis. That is, businesses and individuals are over-leveraged. This can be addressed in a number of ways. However, all have significant detrimental side effects. According to the World Bank, saving rates have increased significantly since the onset of the GFC, as individuals and businesses have attempted to reduce their debt ratios. This has resulted in reduced demand for consumer goods and reduced investment. Another option involves defaulting on loans, which results in falling asset prices and toxic loans for financial institutions.

A third option, attempted by many governments, is ‘quantitative easing’ or inflating the money supply to reduce the value of debt. However, this will be difficult to achieve because of the sheer size of the debt-to-GDP ratio and the impact of devaluing currencies. As an example, despite unprecedented stimulus packages, US bank loans contracted at a 14 per cent annualised rate in the three months to August 2009. These factors imply that the global economy will face a prolonged period of debt deflation or stagflation until the debt-to-GDP ratio is reduced to more manageable levels. This will have significant impact on consumer spending, investment, economic growth and, of course, defence budgets.

Most post-World War 2 recessions have been preceded by oil price spikes, including the GFC. As oil production declines, the price of oil will continue to be volatile, resulting in further oil price spikes and recessionary pressures. This in turn will both reduce the availability of credit for future investment and the availability of mineral resources. Other threats, such as climate change, water shortages and salinity, will also have significant impact on the global economy. In combintion, they are, or will be, ‘game changing’ events.

Yet despite the warnings—particularly with regards to peak oil and the GFC—conventional wisdom has been dismissive and little in the way of mitigation has been achieved. Canadian political scientist Thomas Homer-Dixon argues that at a global level ‘we face an ever-greater risk of a synchronous failure … arising from simultaneous, interacting stresses acting powerfully at multiple levels’. John Michael Greer argues that the global economy is transitioning from ‘abundance industrialism’, defined by the abundance of energy and resources, to ‘scarcity industrialism’.  The implication is that it is unlikely that current levels of complexity can be maintained. The only real question, according to Richard Heinberg, is ‘whether societies will contract and simplify intelligently or in an uncontrolled chaotic fashion’.

So how could a collapse to a lower level of complexity unfold? David Korowicz argues there are two forms; ‘hub collapse’ and ‘creeping collapse’. Hub collapse is where a key element of the global system fails, which has immediate and far reaching consequences throughout the entire system. The collapse of Lehman Brothers in September 2008 provides a recent example which almost precipitated a global collapse in international trade and finance, only averted by unprecedented government stimulus.

Creeping collapse is based on the failure of individual companies or elements within the system, which in turn results in other failures. While not having the same immediate impact as the failure of a hub, creeping collapse can over time have significant negative impacts. For example, declining economic activity will likely result in falling disposable income. In turn, this will have a negative impact on the tourism industry, with a flow-on impact on the aviation industry, which will be forced to downsize. This will have further negative impacts on other industries, such as aircraft manufacturers, travel agents, hotels and hire car companies.

Economies of scale have been one of the advantages of the globalised economy, allowing goods to be produced cheaper and enabling more to be purchased, while also freeing up disposable income to purchase other goods. However, as creeping collapse progresses, businesses will face the prospect of ‘dis-economies’ of scale, where declining sales will result in price rises to cover costs, which will further reduce the number of customers who can afford the goods or services. Creeping collapse, while initially only affecting parts of the global economy, has the potential to spread and significantly impact the whole. Arguably, it is the most likely method by which the globalised economy could collapse to a lower level of complexity.

There's much more at the link, although the excerpt above is more specifically economic in nature than the military thrust of the rest of the article.

Obviously, the economic circumstances prevailing today are not identical to those of 2009/2010, when this article was written.  Nevertheless, enough of them are similar (or worse) that its perspective offers compelling food for thought.  Consider:
  • Debt-to-GDP ratios are even worse today than they were then.  Here, for example, is the USA's performance over recent decades. (Click the image for a larger view.)

  • Quantitative easing has followed a similar path, as this Heritage Foundation analysis of QE by the US Federal Reserve from 2007 to 2014 illustrates.

  • Several other factors have also deteriorated over the period 2010-2017. Others, admittedly (such as, for example, oil prices in recent years) have improved, but not enough of them, IMHO, and not sufficiently to offset those that have gotten worse.

It's an interesting study, and one that repays thoughtful reading.  Recommended.



bruce said...

too bad oil finds keep getting in the way of peak oil. Afraid that no matter how valid the rest of his thinking may be I dropped the chain of thought at that concept.

CDH said...

Yep...been hearing about a falling sky called peak oil for over 30 years, and I suspect longer but I didn't care when I was a teenager. There are technologies just waiting for the right price to make current reserves look positively mundane.

SiGraybeard said...

The guy raises a lot of good and interesting points, but seems to suffer from too linear thinking. The first two commenters raise a good point about peak oil; I know I've been hearing of that since the 1973 OPEC embargo. In a normal, functioning market, peaks don't matter because something else becomes available. Will it be more expensive? In the places where oil flows out of the ground under pressure, it's hard to get cheaper than that. When those are all gone, of course it will be more expensive.

It has long been a theory of mine that if we were really in dire need of resources, people would be mining in landfills and garbage dumps because of the density of mineral reserves there. Normal people see a rusting refrigerator or car body; I see iron ore. If there was a serious copper shortage, (#1) it wouldn't be $2.60/pound, and (#2) people would recycle old wires. Remember hearing of people stealing copper wire (and getting killed) a few years ago, when copper was over $3/lb? It's still cheaper to mine in other places for aluminum, steel and copper.

Rare Earth minerals didn't always come from China. They came from California. The insane local politics made it cheaper to pay someone else to mine. When that dynamic reverses, or if we suddenly don't do business with China anymore, I suspect that changes.

I can direct you to a spot in Michigan where the purest iron ore available lies in tons on the ground but is too expensive to transport to a smelter.

Jonathan H said...

Peter, Have you read any of the 1632 series by Eric Flint? You can find part of it in the Baen free library. When modern Americans get transported back to 1632 Germany, they "gear down" to the technology they can produce and maintain; while well below the level of modern technology, it is still well above technology of that day.
I think that if trade links were disrupted or countries were otherwise isolated (e.g. no sea travel, limited air transport, expensive vehicles), technology would regress unevenly but not as far as the stone or even iron ages, and more easily produced remnants of modern tech would remain. Life would be much tougher than today, but not as tough as some people think it will be (obviously, this depends on the type of incidents that happen)
I'm with you - we aren't in a shortage until the scrapyards are empty and every piece of metal is recyled. I've seen massive train/ ship piers in Superior Wisconsin that have been deemed not worth dismantling. There are huge known oil reserves in the Western US and offshore that are off limits for political and environmental reasons. I think the people who cry Wolf on oil and other resources are either 1. Trying to sell you something. or 2. Confusing CHEAP sources with ALL sources (some people are not as bright as they think they are!)

Jester said...

I'm curious as to how much of our Iron, copper and other metals are still being sent to China's smelters. I know that there was a time where everything seemed to be going overseas but that was when the cost of Iron was at the price point to send back across the Pacific. Still, I don't think that we are anywhere near running out of metals, particularly Iron and Aluminum. When you see junk yards that just strip, crush and stack newer car bodies because they are not worth sending to the smelters it tends to illustrate something other than a lack of available resources.

David Lang said...

I read through the linked article and I think the guy is all wet.

he continually goes back and forth between military needs and industrialization needs, conflating the two.

to paraphrase Heinlein from the rolling stones, there are three phases of technology, the first phase where it barely works, the second phase where additional complexity is layered on to try and increase reliability/functionality, and the third phase when the technology is greatly simplified.

The Military wants to be operating as much as possible in the third phase of technology, while still taking advantage of things in the other phases that make a significant improvement in their effectiveness.

Think about radio communications, in the earliest days you had barely functional morse-code equipment that couldn't be used by anything smaller than a HQ.

Then later on you were able to deploy radios to smaller units, but still had to have a specially trained operator dedicated to babying the equipment and coaxing it into performing.

Now, radio communication is something that has been simplified to the point that the question isn't "how many troops to a radio" but rather "how many radios a single trooper ends up carrying" (I'm sure it's a surprisingly high number when you consider all the wireless gadgets available, we are getting to the point where individual rounds have radios)

firearms went from such marginal things that the famous Musketeers were known as much for their swordplay as their gunnery, through the complex and unreliable days when you carried many pistols because you expected some of them to fail, to the current era where 100 year old designs (such as the 1911, with the ak47 nearing that age) are expected to "just work" and it's not unreasonable to see them in military service

Aerospace is one of the areas where we are still in the second phase (making things complicated to increase functionality), but part of that is the push to be on the bleeding edge. We could build aircraft of equivalent performance to the 1970's designs that would be FAR more reliable and easier to build and maintain, but we choose not to because the new designs are a little better (and politics has made it so incredibly expensive to get a new airframe 'blessed')

But the rockets that North Korea is building are FAR simpler, while still being more reliable, than the rockets that the US was building in the 1950's that had similar capabilities. We have purely civilian groups (SpaceX and company) that are on the leading edge, and there is even a purely volunteer group working their way up to building a manned suborbital rocket ( )

David Lang said...

continued due to 4096 character limit :-)

moving away from the military side to the infrastructure side. He is missing one of the biggest changes in manufacturing that's happening today, mass customization.

It used to be that you needed massive sales to support low prices because it was incredibly expensive to setup the manufacturing (produce molds, create circuit boards, program the equipment to populate circuit boards, test harnesses for all of the above, etc). But nowdays the production lines have become far more flexible, so where it used to take unit quantities in the hundreds of thousands to get to efficient production, it now takes unit quantities in the hundreds to get efficient production.

As an example, a recent kickstarter project needed motors with encoders to report how far they have turned. They found that with an order of even a hundred or so, they could order a custom-made motor/gearbox for the same price as an off-the-shelf motor and encoder separately that they would then have to deal with as separate components (with additional costs/reliability issues/etc)

There are still things where volume production helps, but they tend to be for components that can then sit in a warehouse until they get shipped to other companies for use (batteries, chips, etc) rather than finished consumer goods.

I eagerly look forward to the cell phone manufacturer who realizes this and stops chasing the latest and greatest in everything and starts to allow some minor customization (thicker case/larger battery/cheaper camera/etc) rather than producing only a couple of different models in a year.

Mike said...

He has some interesting points, but his thoughts on both the energy and mineral fronts are pretty misguided.

Proven oil reserves are increasing, and have been for quite some time. There's more known untapped oil out there now than ever before, and it's continuing to grow. That doesn't even take into account alternative technologies, such as creating liquid hydrocarbon fuels from atmospheric CO2 using energy from LFTRs or similar nuclear plants.

Minerals are also not nearly the problem being stated. There are lots of known mineral reserves that are not being exploited yet, and there are many exotic possibilities. For instance, platinum and iridium, two of the minerals specifically mentioned, are found in certain types of asteroids which are not particularly rare. With commercial space technology moving forward rapidly, there are already proposals to retrieve and mine some of these asteroids.

Human ingenuity will solve most material concerns.