The Second Law

Imagine the Earth as it would be if it were in the outer fringes of the solar system – say in the region of Pluto 5,000,000,000 miles from the sun, rather than just 93,000,000 miles away as it is. It would be frigid, silent and still. Far colder than the Antarctic all over. No wind, no waves, no clouds, no sound, no movement, apart perhaps from occasional earthquake tremors and volcanic eruptions. The sky pitch black and the sun a twinkling star barely brighter than the appearance of Venus in our evening sky.

All movement, all change, all life, everything that living things accomplish – the nests of the birds, the dams of the beavers, our skyscrapers, airliners and communication satellites – is made possible by the stream of radiation from the sun.

Every day 2,880,000 MWh of energy arrive on Earth, and the same amount is radiated away into interstellar space from the night-time side of the planet. If the earth were not losing energy at the same rate as receiving it, it would get hotter and hotter – and the oceans would have boiled long ago. That energy arriving from the sun every day is ten thousand times as much as the entire human race uses up. All of our factories, cars, steamships, airliners, appliances, heating and air-conditioning could be run from just 0.01% of that solar radiation.

So – if there is no net change in the amount of energy on the Earth, what is it that is so important about this constant stream? It is that the quality of the energy received from the Sun is higher than the quality of that which is lost into the night sky.  The difference between the two allows the local reversal of the universal tendency towards decay and disintegration, and for interesting things to happen on this planet.

The Second Law of Heat and Movement didn’t feature in any science classes when I was at school, and I expect the same is true today. So for many people it has an air of mystery about it – especially as it is expressed in a number of different ways. But actually, we all have an intuitive grasp of it – as this video will illustrate:

What is the most obvious thing that you noticed when you watched it? – Of course it is the fact that the film is being run backwards! We simply never see a sequence of events such as this in real life. But why should such a sequence be impossible, bearing in mind that – as asserted by the First Law – the total energy of the system is exactly the same at the end as it was at the beginning? The gravitational potential energy is progressively transformed into energy of movement as it falls. When it reaches the ground the directed movement of all the atoms in the object are abruptly shaken into increased agitation in random directions slightly raising its temperature. In other words, transforming the energy of motion into heat. Since this object was fragile, a portion of the energy was used in overcoming the binding energy which held the atoms in place to form a rigid structure. As the dispersing fragments slide across the floor, frictional forces bring them to a standstill – again transforming movement into heat. Finally the slight excess temperature of the pieces dissipates into the surrounding air.

Newton’s Laws of Motion are symmetrical in time.  The slowing down of a ball thrown into the air exactly mirrors its acceleration as it falls back to earth. So why could that sequence above never happen the other way round? Couldn’t random agitation of atoms in the fragments align to create bulk motions of the object so that they rush inwards to meet and fuse together in the form of a flowerpot, and then re-orientate the directions of their motions to propel the jar upwards and back onto the table, as shown in the video? The suggestion is clearly absurd and preposterous – but why?

To illuminate the reason, let’s consider a simpler example, as shown in this video:

Once again, that reel is obviously running backwards – we don’t see things like this happening. On the other hand, it doesn’t have quite the same aura of absolute impossibility as the previous example. It’s a matter of probabilities. Maybe if we shook the jar for long enough the beans could just drop into a pattern like that by chance? After all it is it highly unlikely to get say 28 reds in a row in roulette but clearly it could happen. And perhaps it has – maybe once in about 250 million spins the wheel.

So what are the odds of shaking the beans into the brown and white layers? In that video there are about 100 beans of each colour. How do we calculate the odds? I ran the numbers for a simpler case of 50 of each colour. The probability is given by the ratio between the number of micro-states corresponding to ‘colours in layers’ compared with the number of micro-states representing ‘colours jumbled up’. It turns out that there are about 10¹²⁹ micro-states for beans in layers (that means 1 followed by 129 zeros – a truly huge number; for comparison there are estimated to be about 10⁸⁰ atoms in the entire observable universe). This sounds quite encouraging! Surely we could stumble across one of those before too long? Unfortunately, it turns out that there are about 10¹⁵⁸ micro-states for beans jumbled up – so the odds against shaking them into a pattern are about 10²⁹. If you shook the jar once per second, how long would it take to get a passing chance of shaking the contents into an ordered pattern? The universe is estimated to be 13 .6 billion years old – that is about 10¹⁸ seconds. So you would have to shake it up for a period 100 billion times longer than the entire age of the universe!

That was just for a system with a mere 100 items in it. The odds become far more extreme still when we consider entities made up of trillions of atoms.

It is clear in these two examples that the later state is more disordered or disorganised than the earlier one. It is an everyday observation that (unless otherwise manipulated) that is the way events unfold: iron rusts; wood decays; machines wear out; bodies age and weaken; toys scatter all over the floor. In two areas we see an apparent violation of this principle. One is the growth and development of living organisms – the chick grows from the formless yolk and white of the egg. The other is in the purposeful activity of birds, beasts and humans.

There is a technical name for this disorder which tends to increase over time it’s called entropy. We have just seen a couple of examples of changes in entropy; let’s deepen our feeling for it with a few more illustrations:

• Low entropy                /                    High entropy
• beans ordered in layers / beans jumbled up
• glass whole / glass broken
• water at top of hill / water at bottom
• objects hotter or colder than surroundings / objects same temperature
• items filed neatly / items scattered randomly
• parts assembled into a machine / collection of loose components
• computer disk with data files / corrupted or erased computer disk

There are a couple of other important instances of entropy comparison which may not be so intuitive.

• One is that an object or substance is in a higher entropy state the hotter it is; at absolute zero the atoms are still and their position is defined exactly. As the temperature rises they move faster and faster so their positions are less clearly defined.
• The other instance is that a given amount energy in the form of electromagnetic radiation has more entropy if it is at long wavelengths than at short ones.

As I said earlier there are several different formulations of The Second Law. The original one was:

• Heat cannot of itself flow from a colder body to a hotter.

This form is a reflection of the focus of interest at the time the law was formulated – the drive to understand how to make steam engines more efficient. Hence also the name “thermodynamics”, although we now know that the principle applies not not just to the energy movement but to all forms – including electrical chemical and biological.

The most common formulation is

• Any change within a closed system results in a net increase of the total entropy of the system.

Thus, we have a physical statement of the directionality of time: the flow is from lower entropy to higher. There is of course also a psychological arrow of time: it flows from the past – which we remember – towards the future which is unknown. The correlation between the psychological arrow and the thermodynamic one was the source of the cognitive dissonance we experienced in watching the video clips

Is this correlation essential or merely contingent? Would a universe be possible in which these arrows were reversed – when we remembered the higher entropy state and awaited the lower one? No, this would not be possible. The two arrows have to align this way as we shall see later.

Note that both examples we gave for statements of The Second Law contained a qualifying phrase: “of itself” and “within a closed system“. Heat does flow from a cold body to a warm room in the case of a refrigerator, but only because you provide electricity to drive the pump. And more heat is put out into the room than is extracted from the inside of the fridge.

And the Earth is not a “closed system”: it is continually receiving energy from the sun in the form of light, ultraviolet and heat radiation. The difference in entropy between this radiation and the far infra-red radiating from the Earth into the night sky enables all the natural processes on this planet, and all purposeful activity of the human race. The incoming radiation is at frequencies around 100 times higher than that from the Earth into the cold vastness of interstellar space.

There are four main effects of the energy that arrives from the sun that have the potential to be harnessed to do useful work and thereby create wealth:

1. Direct heating of locations in strong sunlight
2. Rising air currents in regions warmed by the sun, causing winds to blow towards the lower-pressure regions that this creates.
3. Evaporation of water from the oceans, forming clouds which condense to fall as rain on higher ground, then collect into rivers which flow back to the sea.
4. The formation of glucose molecules from carbon dioxide and water within the cells of blue-green algae and in the leaves of plants.

Until the last 300 years almost all human activity and creation of wealth was empowered by energy made available through that fourth process. The building of cities, temples, roads and canals; the tilling of fields and the harvesting of crops; the working of wood, metal, glass and pottery: all of this was accomplished by the muscle-power of humans or of animals. And the energy to provide that muscular activity came from plant food consumed, which embodied the energy captured from sunlight in the leaves of the plants. A small proportion of the energy came from the second and third processes: via the use of windmills and water-wheels. And the heat to warm houses, to cook food, and to fire forges came from the burning of wood or charcoal, which again was released from sunlight captured by the leaves of the trees.

And the coal, oil and gas that have fuelled our industrial age have likewise originated in that same photosynthetic process, but in this case the sunlight was captured millions of years ago in ancient forests and oceans.

All wealth creation involves a reduction in entropy. Steel represents a lower entropic state than the iron ore that it was made from. The ability to play a critical role in the wealth-creation process is what gives value to concentrated forms of high-quality energy such as coal and gas. That is why wars are fought over oilfields, and it is why the global elites are ambivalent in their attitude towards solar and other forms of renewable energy, which would reduce our dependency on their monopolies.

BP and Shell both dallied with initiatives to diversify into renewable energy projects, and both abandoned the activity when they realised that they can make a higher return (at least in the short run) by focusing on selling oil products, rather than promoting alternatives to them.

Harnessing the abundant, free, non-polluting energy from the sun is the key to the transition to the forthcoming era of universal peace and prosperity – as long as we don’t destroy civilisation first. Later in this thread we will look in more detail at what it would take to provide a decent, fulfilling standard of living for every human being on this planet – and one that is sustainable for millions of years. The poverty-stricken  of this world will be able to make the transition to the solar age without having to struggle through the smokestack era.

This is an extract from my forthcoming book The World in 2100: What might be Possible for Humanity?

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Where Malthus was Wrong – and What he got Right

Thomas Malthus was the 18th-19th century economist who is most widely known for making a bold prediction which turned out to be spectacularly wrong. He  suggested that an exponentially rising population could not be sustained because agricultural production would not be able to keep up with it. he predicted that periodic crashes in population level and increased poverty would be the inevitable result. But on the contrary, over the next hundred years the population of Britain increased from about seven million to more than 41 million. And in the following century it increased further to over 60 million – and the average prosperity of even the poorest of English workers had advanced to a level that would have been unimaginable in 1800. Because reality diverged so greatly from his forecast, his name has become a term of ridicule, applied to any commentator who suggests that unlimited global financial growth may not be possible.

Malthus studied at Jesus College Cambridge, where he distinguished himself in English, Latin and Greek. He was awarded a high first class honours degree in mathematics, and elected as a fellow of the college. In common with many academics at that time he took holy orders, and served for a while as a parish priest. While performing that role, he noticed that he was carrying out significantly more baptisms than funerals – and from his mathematical understanding he realised that this would lead to an exponential growth in the population of the country. Suggesting that agricultural production could not possibly grow at more than a modest linear rate, he concluded that the level of the population would shortly rise to a point where it could no longer be supported by the available food, and that poverty and misery would surely result. He published these findings in An Essay on the Principle of Population in 1798, with several updated editions over the next thirty years.

Malthus’ ideas became more widely known and debated because both Charles Darwin and Alfred Russell referred to his work as an inspiration for their theories of evolution by natural selection. However, the rising levels of population of the country coupled with growing average prosperity undermined the acceptance of his theory. The mainstream economic view persisting from the mid 19th century to the present day argues that indefinite unlimited growth can be supported by a combination of novel technology and the operation of free market pricing. Consequently, anyone who suggests otherwise risks being ridiculed, and accused of falling into “the Malthusian Fallacy”.

But perhaps his critics have been both unfair and premature? The core point that an exponential rise in population would cause it to overtake the capacity of the country to produce enough to feed it was not disproved by the events of the next century. On the contrary it was vindicated. Britain did not – and could not – produce enough food for the 41 million inhabitants it had in 1900. The development that allowed it to feed everyone, and for large sections of the population to become much more prosperous, was the dramatic success of the Industrial Revolution. British manufactured goods were exported on a vast scale, and food grown in other countries imported in exchange. Although the Industrial Revolution was getting under way at the time Malthus was writing, nobody could have predicted the impact of the next few decades’ developments. Similarly, we have been living through the early years of the Cybernetic Revolution, and cannot know how social, cultural and industrial arrangements are going to develop over the next fifty years.

However the issues we face now are global in scale, not national. There is no other planet that we can turn to when we reach the limit of our food supplies. Even with the current population of over 7.5 billion, there is enough food being produced for everyone; the reasons that millions are starving are political, institutional and financial. But it is also true that there is a finite area of cultivated, or potentially productive land. Some changes in farming methods have delivered considerable increases in crop yields, but there will still be an upper limit at some point. And unfortunately some of the modern farming techniques are turning out to be short-term solutions. We may be producing more food today – but at the cost of damaging the soil in ways that will ensure falling productions within a generation or so. Modern techniques are also heavily dependent on energy inputs from fossil fuels – not just in the obvious reliance on fuel for all that agricultural machinery, but also in the manufacture of all the fertilisers, weedkillers and insecticides. As these fuels become scarcer and more expensive, many of these recent gains may be reversed.

The population of the world as a whole has actually been growing at more than exponential rates. It took 123 years to double from 1 billion to 2 billion; 61 years to double from 1.5 to 3 billion; and 39 years to double from 3 to 6 billion. Even if it maintained “merely” exponential growth at the latest rate, we would reach 15 billion by 2055, 30 billion by 2094, and 60 billion by 2133. Even the greatest optimists must surely agree that sometime along that path we will exceed the capacity to grow enough food to nourish them all. If we haven’t brought the growth under control by reducing the birth rate, it will come down by an increase of the death rate – through starvation, disease or warfare.

And if we want to provide the world’s poorest with more than a meagre poverty-stricken existence – what would it take to provide this expanded population with the comforts and luxuries that we take for granted?

The next section in this thread will describe a computer model that maps the interactions between population, food production, industrialisation, energy consumption and pollution. This can be used to explore the likely consequences of various policy choices over the course of the next century. The best way you can prepare yourself for the disruptions that are coming over the next decade or to is to have a realistic grasp of what is actually possible within the resources of this finite planet.

This essay is part of my forthcoming book The World in 2100: What might be Possible for Humanity? It is within the thread on The System of the World, which – in conjunction with the other six themes of the book – provides a comprehensive survey of the position we find ourselves in at this critical time in human history.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this year. Registering will also take you straight to Chapter 1 – The Foundations which will give you an overall idea of what the book will cover.

Enterprise or Ponzi

The difference between an enterprise and a Ponzi scheme

We have already observed how modest regular savings enhanced by ‘the miracle of compound interest’ can result in the accumulation of substantial wealth –  but where does this abundance come from? Can such a thing possibly be legitimate? – The answer is… sometimes it is, and sometimes it isn’t. If it arises ultimately from a stake in an enterprise which is authentically creating wealth then this is legitimate. If not, then it is a scam of some sort – a form of theft, eventually at the expense of others who have produced genuine value.

Let’s look at some simple examples of the creation of value:

• a farmer creates value by sowing, tending and harvesting to produce wealth (recall that we defined wealth as ‘things people want’) in the form of food
• the carpenter creates value by shaping and assembling wood to produce wealth in the form of furniture
• a blacksmith creates value by working hunks of iron to form them into tools and fittings
• an author creates value by composing stories to produce wealth in the form of entertainment, education or inspiration; as do performing artists and athletes
• even an ‘honest broker’ can provide genuine value by connecting suppliers and purchasers, if they are saving either of them trouble, uncertainty or expense in seeking each other out.

All of these activities require two things: one is capital, and the other is a supply of energy.

By capital, I mean a specific form of wealth that has the capacity to create further wealth. For example, the farmer needs capital in the form of land, buildings, tools and so on. The carpenter needs capital in the form of a workshop, tools, equipment etc. In addition to this fixed capital, an enterprise also needs working capital – stocks of raw materials, partially completed work, and finished goods awaiting sale. An entrepreneur starting out in business will have to purchase the capital which they need to operate. If they haven’t got the resources to fund that themselves, then they have two options: they can either borrow the money to purchase this capital, or they can sell part ownership of the enterprise to investors. When the business makes a profit on its activities, this profit can benefit the investors – either by paying interest on the loan or by distributing dividends to the shareholders.If the investor wishes to reap the benefits of compound interest, then they would use the dividends or interest payments to purchase more shares or bonds. If a business has scope for expansion, then it may reinvest at least part of its profits in more equipment, larger premises etc rather than distributing dividends to its shareholders. In this case the shareholders benefit by owning a portion of the larger business, which is generally reflected in a higher price of the shares. For example, the shares in the Ford Motor Company were held by Henry Ford and his family and associates from the time of its foundation in 1903 until 1956 when 22% of the shares in the company were sold to the public on the stock exchange. The profits over that period had not been distributed, but had been reinvested in larger factories and distribution networks, so that the value of the company as a whole had grown from the initial investment of a few thousand dollars to a company valued at $2,920 million.

In January 1978, a group of investors paid $517,500 for a 17.5% share in the year-old Apple Computer Inc, which enabled the company to ramp up the production and marketing of the Apple II desktop computer. Sales of these grew exponentially and the profits were ploughed back to increase the capacity of the operation. By the time the shares were offered to the public two years later, the holdings of those original investors were worth over $195,800,000. Had they retained their shares in full to this day, they would now be worth around $140 billion. This is all accomplished by assembling components into products that people want, and selling them at a healthy profit margin which is constantly re-invested into the expansion of the operation.

On the other hand, we can find many examples of activities which pretend to be a real business but are generating no real wealth.As J K Galbraith commented, “From time to time, a new seer will arise claiming to have uncovered the secret to money and to its indefinite multiplication, but invariably it turns out to be some variant of an ancient fraud, possibly dressed up in a novel guise.”

One common example is the type of operation known as a Ponzi scheme – named after Charles Ponzi who who operated a notorious scheme in the 1920s, although it wasn’t a novel concept at that time: similar fraudulent operations had been common in the 19th century, and some are described in the novels of Charles Dickens.  The basic principle is that investments are solicited with the promise of abnormally high returns. Initially these returns are paid out, thereby substantiating the credibility of the operation and encouraging investors to tell others about this apparently wonderful opportunity. However  there is no real business activity taking place and these dividends are simply made from the money which the investors themselves had provided. As long as new  participants are being attracted to the scheme these payments can continue, as well as the scheme operators extracting funds for themselves. But when the supply of new participants dries up – as sooner or later it must – the money available for payouts is rapidly exhausted and the investors wake up to the reality that they have lost  everything. There is usually some plausible, but vaguely stated, suggestion of the methods that are being employed to generate these exceptional returns. For example Charles Ponzi claimed that he could buy postal return coupons in Italy which could be redeemed for a higher value of postage stamps in the US, and promised that he could provide a 50% profit within 45 days. A moment’s reflection would uncover several flaws in this proposal, but that did not prevent thousands of people being taken in by him, and losing over $20 million.

The most recent large-scale example of a similar process was Bernie Madoff’s investment company, which collapsed in 2008 with losses to investors of $50 billion. Madoff had started out as a stock trader and manager of an investment fund. However he falsified the returns that he was making on the operations to attract more clients, paying dividends out of the capital in classic Ponzi fashion, and the scheme unravelled when customers tried to withdraw their holdings following the 2008 banking crisis. Madoff was given jail sentences totalling 150 years. The Enron and World.com scandals were Ponzi schemes in effect, as the ever-escalating share prices were predicated on expanding profits that turned out to be non-existent.

I would say that the entire sub-prime mortgage fiasco had the essential characteristics of a Ponzi scheme. Naive investors, including pension funds and charitable foundations, were persuaded to buy complex financial instruments that had been categorised as high-quality secure bonds with superior yields. Yet these instruments rested ultimately on thousands of home loans sold  – at introductory teaser rates – to people who would not conceivably be able to repay or service them. Yet nobody has been held to account for this, and the perpetrators of the schemes have been protected from the consequences of their own folly by subsidies from the taxpayer.

Other examples of economic activity where no real wealth is being created are pyramid schemes and gambling. Essentially these are ‘zero-sum’ games where there is no more wealth at the end that there was to start with, but some have won and some have lost. In fact they are in reality ‘negative-sum’ games since there is always some cost involved in participating. When I speak of gambling, I am not just referring to traditional games of chance such as blackjack or roulette; financial speculation such as day-trading stocks or currency has exactly the same structure – nothing new is created and it’s a zero-sum activity.

There’s a good case to be made out that state pension schemes are a Ponzi scheme: there is no fund created to finance the obligations, and current payments are made from today’s contributions. Hence the stresses to the system when we have an ageing population supported by the taxes levelled on a shrinking workforce.

Finally it is worth reflecting on the shift in banking practice away from business expansion loans and into home mortgages. Whereas the former facilitated the creation of new wealth, the latter simply siphons money from the house purchaser into the profits of the bank. More detail on this, and the example in the previous paragraph in a later section.

This essay will form part of my forthcoming book The World in 2100: What might be Possible for Humanity?  When we return to the ‘Wealth’ thread, the next topic will be The Nature of Capitalism in its Various Incarnations.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Section 2.2 – The Dynamics of Exponential Growth

 This Nautilus shell is a fine example of exponential growth. As you recall from our discussion in Section 1.7 – The System of the World exponential growth is caused where we have a reinforcing feedback loop from the output of a process to its input. As the Nautilus grows larger it eats more; and the more it eats, the faster it grows.

‘Moore’s Law’, coined in 1965 by Gordon Moore the chairman of Intel, is a conjecture that the number of transistors in a single integrated circuit would double every two years. It has proved astonishingly accurate, and persisted over a far longer time-scale than most commentators have expected (including Moore himself). At the time he proposed it, digital chips contained a dozen or so transistors. By 1974 the Intel 8080 – the first successful 8-bit microprocessor – included about 8,000 transistors. Today’s latest Pentium processors contain well over a billion transistors.

This has been the driving force of the digital and communication revolution. In 1972 the computer that the Ford Motor Company used to run its entire European operation took up a large room. Its central processor was housed in a box the size of a filing cabinet. The 64 kilobytes of main memory were in another case the size of a wardrobe, and its two disc drives were each the size of a washing machine, with a capacity of 30 megabytes each. Modern smartphones fit in your pocket and have memory of 128 gigabytes – that’s two thousand times the size of Ford’s pair of disc drives; and two million times the size of their computer’s core memory!

It is the exponential growth caused by the process of compounding interest which makes it possible to acquire financial wealth within a reasonable time-scale. Suppose that when you were born, a generous grandparent invested £1000 for you. If it was in a fund that was receiving interest at the rate of 7%,  and the interest received was reinvested into the fund, how much do you think you would have at the age of 20, 40 and 60?…

The answer is that by the age of 20  you would have £4,000. At the age of 40 you would have £15,000. And at the age of 60 you would have £59,000.

Small differences in the rate of interest have a dramatic impact on the size of the fund that accumulates over time. For instance, suppose the interest had been 10% instead of 7% – what size do you think the fund would have grown to? In that case it would have reached £45,000 by the age of 40, and by the age of 60 it would be worth £304,000!

In the next section – The Difference between an Enterprise and a Ponzi Scheme – we will be examining how these kind of rates of growth of wealth can be accomplished legitimately and honestly.

It is compound interest that makes it possible – in principle at least – to build up enough over the course of a working lifetime to provide an income in retirement. Consider the example of a person earning £20,000 a year who would like to have the same income in retirement, and is prepared to save 10% of their income towards that goal. They would need £400,000 by the time they retire if the fund can return them an income of 5%. Saving £2,000 a year, it would take 200 years to amass that by simple accumulation. However if the annual savings are put into investments which yield 10% – and this income re-invested – they would reach that £400,000 target in just 39 years! Of course, as already mentioned, many retirees are making the painful discovery that their investments have not been making anywhere near that 10% return. That wouldn’t even have been an unrealistic expectation. Any reasonably well-run business ought to be able to make a profit of 10% on capital employed; and in fact stock market gains plus dividends paid have exceeded this performance over most of the last few decades. One reason for the poor performance of pension funds, as noted previously, is that much of the profits that ought to have accrued to the fundholders had been highjacked along the way and diverted into the pockets of salesmen, fund-managers, stockbrokers and bankers – not to mention into the grotesquely inflated remuneration of senior executives in large publicly-quoted corporations.

And there’s another reason too: since 1997 the UK government has had its nose in the trough. One of Gordon Brown’s first moves as Chancellor was to eliminate the tax relief on dividends paid into retirement accounts, in a breathtakingly dishonest and cynical move. On reaching office, Brown realised that he couldn’t balance the books without an increase in taxation. On the other hand, if he increased general tax levels he would alienate the voting population who had just brought the Labour government into power; and if he increased tax on the super-rich he would antagonise the billionaire media moguls whose support was desperately needed. So he scooped up a windfall from a move that would not have been noted much at the time, but which he must have known would have disastrous longer term consequences. With most pensions already under-provided, this could only make the situation far worse by the time these investments reached maturity. Public perception of the heist was minimised with the co-operation of the media, whose owners knew which side their own bread was buttered on.

Over longer time-scales the results are even more extraordinary. What would you imagine an investment would return at 3% compound interest over 350 years? Keynes gave an amusing real-life illustration, writing in 1930. He observed that when Francis Drake returned to England in 1580 and presented the gold he had looted from Spanish galleons to Queen Elizabeth, she used it to pay off the national debt and was left with a balance of £42,000. She used this to set up the Levant Company, the East India Company and the Hudson Bay Company. These formed the basis of Britain’s global trading empire, and Keynes suggested that they might typically return a 6.5% profit per year on capital employed and re-invest half of that in expanding the enterprises. That 3% cumulative growth over 350 years would magnify the capital by a factor of about 100,000 – to a figure of £4.2 billion – which was the approximate value of Britain’s overseas investment holdings at the time he was writing.

Growth in any reinforcing-feedback system follows the classic exponential curve: 

Although a common perception of the nature of exponential growth is that nothing much happens for a while, and then it suddenly takes off, this is actually an illusion. In reality, the curve is self-similar along its entire length. If you took any segment – whether in the ‘flat’ part or the ‘taking-off’ section, and re-scaled it to fit in the same frame, it would look identical.

This is clearly seen if we re-plot the graph with a logarithmic vertical axis – one that has a constant ratio between each marker rather than the familiar linear scale, with its constant increments. A logarithmic scale is like the shutter speed dial on a camera: each change of one stop doubles the amount of light that reaches the sensor. So when the speed is 1 millisecond, one more millisecond will cause a certain brightening of the image, but when it is 125 milliseconds (1/8 of a second), it needs to be extended by another 125 to get the same brightening effect.

Although we often have trouble envisioning logarithmic scales, in fact they are very common, especially in relation to our sensory perception. At a low volume setting on your hi-fi there might be one tenth of a watt of power being fed to the loudspeakers; turn it up slightly to get a couple of just-perceptible increases of level and it will be sending one watt, and for another couple the output will be running at ten watts. The same subjective increase again would require 100 watts.

It’s a defining feature of exponential growth that a certain period will cause the value to double, and then the same period will double it again, and so on. There is a simple relationship between the percentage rate of growth and the doubling period.

The doubling time can be calculated by dividing 70 divided by the rate of growth. For example:

• With a return of 7% per annum, an investment would double in 10 years;
• with a return of 10% it would double in 7 years;
• and for 2% it would take 35 years to double in value.

Declines in value – for example the reduction in purchasing power of currency due to inflation – can be thought of as a negative rate of interest, and the same logic applies. So losses accumulate dramatically as time passes. Assuming that the central banks achieve their “target rate of inflation” of 2%, that would mean that if you put away £1000 at the age of twenty-five, it would be worth only £500 by the time you are sixty. More detail on this in a later section on inflation within the Finance thread.

Exponential growth is a mathematical abstraction, but projection beyond a certain point always leads to an unsustainable position whenever we are talking about physical quantities in the real world.

To return to the example of breeding rabbits from the discussion in Section 1.7, each breeding pair typically produces six litters of six pups in a year, and rabbits become fertile after about six months (the exact numbers depend on the breed and the circumstances). So one pair would produce about 36 offspring in a year, plus the first litter will have added another 12 grandchildren and the second litter another 6, making 54 in all. Let’s ignore that last six to allow for the fact that older rabbits will be dying off, and call it 48.

After two years there would be 48 squared, or 2304 rabbits.

After 3 years it would be 48 cubed, or 110,592.

At this rate, in just eight years the rabbit population would grow to 1,352 trillion – about one rabbit for each square foot if habitable land area on the earth! Clearly other factors would have had to come into play before then.

A few more doublings of the density of transistors on a silicon chip and we will be down to a single atom between one element and the next. Some time before that, Moore’s Law will necessarily have run out of steam.

Investors who were lucky enough to buy Apple stock at the time of Steve Jobs’ return in 1997 and hang on to it will have seen the value of their holding grow by a factor of 400 in twenty years – an astonishing 34% average compound rate of growth (even including the several dramatic setbacks). Expectations of future growth are factored into the current share price. However another nine years of 34% growth rate would take Apple’s valuation to a level that exceeded the entire GDP of the United States. Another four years after that and it’s valuation would surpass the GDP of the whole world!

Section 2.1 – What is Money?

In the 16th century when the Spanish and Portuguese privateers looted millions of pounds worth of gold from the Incas and the Aztecs, they carried it back home, imagining that it would make their country rich. But it had the opposite effect. In reality they suffered from rampant inflation which undermined the functioning of their economy and both countries went into a decline from which they had still  not recovered in the 20th century. This neatly illustrates the point I made in Section 1.4 that money is not the same thing as wealth. If money is not wealth then what is it? The definition of money is that it is “an item or record that is generally accepted as a payment for goods and services”. Since those goods and services are forms of wealth, money can be regarded as a token which represents a claim on wealth. Seen in that light, it is clear why carrying gold back to Spain and Portugal did not increase the wealth of the country. Gold in that context can be regarded as a form of money, but no new goods or services were created by this activity. Therefore what happened was that there was more money chasing the same quantity of goods and services, and therefore the prices of those items rapidly increased. In every inflationary situation there is an element of the quantity of money available outstripping the supply of items to purchase with it. This was clearly seen, for example, in Germany in the 1920s when the Reichbank literally printed banknotes in ever greater quantities and ever larger denominations – possibly with a deliberate  intention of devaluing the currency to ease the intolerable burden of the war reparations which had been imposed by the victorious forces of World War I at the Treaty of Versailles.

Money is now such a pervasive aspect of our lives that we take it for granted, and we also take for granted the current form of the monetary systems within which we operate. Let us look at how this system has developed over time, and the various forms which money has taken at various times in history. Although we are currently going through a transition towards an entirely electronic system, the most familiar forms of money are coins and banknotes, but over time all sorts of objects have been used as money: seashells, bones, tobacco leaves, cigarettes, and so on. But the form of money that has been in most widespread use over the entire course of human history and pre-history is grain – wheat, barley or rice. This would have been the near universal form in which tribute was paid to local warlords, as we discussed in Section 1.6 on the origins of governments. And indeed it would have been the most common form of currency for the payment of taxes right up until the end of the middle ages. This is illustrated by the widespread appearance of tithe barns which are found all over the country. Looking at this example, it is clear that the lords of the manor did not imagine that their form of social structure was likely to change any time soon.

The local landowners would collect their taxes in the form of grain to be stored in the tithe barn, and gradually depleted over the course of the year until the supplies were replenished at the next harvest. The landowner would pay his guards and soldiers and his servants substantially in grain and he would also use grain to purchase items from craftsman and artisans. The tenant farmers themselves would also often pay for goods and services from their fellow villagers with grain, beyond what they required to feed themselves and their families. Grain was therefore serving the principal function of money, which is to act as a Medium of Exchange. The same function could be served by any commodity which has an intrinsic value itself and is reasonably durable. The use of goods to facilitate trade in this manner is called Commodity Money.

According to basic economic teaching, money has three functions: one, as just noted, is that of serving as a medium of exchange. The second function is as a Store of Value. Clearly this example illustrates that function too: when the tenant farmers have delivered the due portion of the harvest to the Lord of the Manor, and he has stored it in the tithe barn in August, it will remain there until it is extracted either for his household consumption, or to use as payment at some time later in the year.

The third function of money is to serve as a Unit of Account. For example, suppose the farmer has no spare grain in June, but he needs the blacksmith to shoe his horses: he could make a promise  to deliver a certain quantity of grain at a later date, after he has harvested the current crop.  This arrangement would be described as “delivery on account”.

In the ancient world, from about 5,000 years ago the three commodities most frequently used as money were gold, silver and copper.  The reason was that these were chosen was that all three metals could be found in a raw form on the surface of the Earth in limited amounts, and all three were regarded universally as being of value. Silver and copper were far more commonly used since the supply of gold was much smaller. There were several advantages to the choice of these metals rather than agricultural products for trading purposes:

• They provided a consistent quality – one pound of silver is completely equivalent to another (subject of course to an assurance of purity), whereas one bushel of wheat may differ significantly from another.
• They are stable and durable over time. Gold does not corrode at all, and silver and copper only marginally, in contrast to food products which may get eaten by pests or spoiled by fungus.
• They are not in demand for consumption, as agricultural products obviously are.

One point about commodity money worth noting is that when used for its utility function, it ceases to be money. That is 100% true in the case of  foodstuffs – obviously if part of your wealth is in the form of wheat, and you eat it, you no longer have it to spend. It is partially true in the case of precious metals: if you make your silver into a bracelet or a candlestick for instance, you cannot both enjoy the use of the object and spend it in the course of trade. However, it will always have at least the intrinsic value of the weight of silver. It may of course have a higher value if the trader you offer it to appreciates the functional or aesthetic qualities of the object.

Around 2,500 years ago various rulers realised that they could facilitate trade by striking gold, silver and copper into coins of a standard weight and a guaranteed purity. In return for the convenience of not having to weigh ingots of arbitrary size, and for the confidence of the quality of the metal, traders were content to accept a slightly smaller metal quantity than the face value of the coin. The difference between the two was known as the Seigniorage and provided a profit for the ruler. This coined form of metallic commodity money became an almost universal standard for trade until the issue of Representative Money became common in the sixteenth century. Coined commodity money remained the normal form of payment for day-to-day transactions of modest size until the early 20th century, when it became progressively replaced by Token Money.

Until 1914, trade in Britain was carried out with copper pennies which contained about a penny’s worth of copper, silver shillings that contained twelve pennies’ worth of silver, and gold sovereigns that contained £1 (twenty shillings) worth of gold. At the outbreak of World War I gold sovereigns were withdrawn from circulation and replaced with banknotes. Over the next few decades, the silver coins were withdrawn and replaced by ones made of a silver-coloured nickel alloy worth much less than the face value of the coin. When Britain changed to a decimal currency system in 1971, the ‘New Penny’ (now 1/100 of a pound rather than 1/240) was a much smaller bronze coin. Some years later the coins were reduced to a smaller size still, and now the ‘bronze’ coins are made of steel with a thin bronze surface plating. Thus all physical money currently is token money.

Representative money consists of a document certifying the claim to a specified quantity of some commodity money (usually gold or silver). It originated when customers deposited gold with goldsmiths for safe-keeping and were issued with a receipt that would entitle the bearer to withdraw the gold from storage. Initially a customer who wished to spend some of his gold would return and withdraw it, but over time traders became accustomed to accept the certificate itself as a means of payment. Goldsmiths developed into bankers, and realised that they could issue more banknotes than value of the gold that they were holding, on the principle that it was unlikely that all the customers would come to claim their money at once. As recently as the 1960s, Bank of England notes used to say “I promise to pay the bearer on demand the sum of one pound in gold”, even though it wasn’t strictly true, since Britain had come off the Gold Standard in 1931. Now the notes just say “I promise to pay the bearer on demand the sum of ten pounds”. If you think about it for a moment you will realise that this is a completely meaningless statement. What are they offering to give you? Another ten-pound note? Two five-pound notes? In other words paper money has also – like coins – become token money. This type is sometime called “fiat money” from the Latin word fiat, which means ‘let it be’.

But notes and coins make up only a very small proportion of the money in circulation – most of it is Bank Money which has no physical presence at all, and consists of entries in the ledgers held by the banks. How this is created, and how this is related to the derisory value of your pension and the insane prices of houses will be the subject of the next segment in this thread. The creation of excess money by banks is correlated with inflation – the erosion of the purchasing power of money – which has been a persistent feature of the economies of all developed countries over the past sixty years. Inflation amounts to a swindle perpetrated against those holding assets in the form of money in favour of those holding other tangible forms of wealth. It also disadvantages those who have less power to adjust their incomes to take account of the reduced  value of money, compared with those who do have such power. It robs savers of the value of their savings, and allows borrowers to repay debts with money that is worth less than the original value of the loan. Clearly a currency which is undergoing inflation fails to serve two of the three functions of money described above; it is not satisfactory as a unit of account, nor as a store of value. The issue of inflation will be covered in greater depth in a future section within this thread.

This is Section 2.1 of my forthcoming book The World in 2100: What might be Possible for Humanity? within the ‘Finance’ theme. When we return to this thread, the next topic will be Banking and Stockbroking in a Sane World. 

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Section 1.8 – Making Sense of it All

 “Why are the middles of your eyes black?”
“They’re not actually black – they just look black because the light goes in there and doesn’t come out again.”
“Why doesn’t it come out?”
“Because it gets absorbed at the back of your eyes.”
“Why does it get absorbed?”
“So that the nerves in the back of your eyes can send messages to your brain.”
“Why do they send messages to your brain?”
“So you can see what’s going on.”
“What is going on?”

That was a conversation  that I had with my son Leo when he was about four years old. All of us start asking questions as soon as we get speech at the age of about two. If there’s anyone around who is prepared to have a dialogue, we carry on asking like this for a few years. But almost everybody gives up before very long. Some of the main questions we ask are:

• “How did I get here”
• “Why am I here?”
• “What should I do, now that I am here?”

And there’s another question lurking in the background, that often doesn’t get addressed: “What do I want – really?” Most people never get the chance to pause and think about that – they step onto a non-stop conveyor belt with their first day at work, and are more likely to be asking questions like: “Will I get to work on time?”, “Will my boss be mad at me?” “Will I get that promotion?”, “How can I afford to repair the water heater?”, How can I make this paycheque last till the end of the month?”  …and then you die!Later on maybe another question comes up:  “Why bother?” It doesn’t arise at this early stage, because at that time of life, our needs are being met without any effort on our part. But later on, when we have to take care of our own needs and desires, some people just ask themselves: “What’s the point of it all?“. Some sink into apathy, or retreat into escapism. Some even kill themselves.

99% of people give up asking the deep questions by the time they are about seven years old. One of the reasons is that school doesn’t encourage it. In fact most schools actively suppress the habit of asking questions. What do most people get out of the 13,000 hours they spend studying in school? A basic grasp of how to read, write and do basic arithmetic; plus a handful of facts that were crammed before the exams and promptly forgotten afterwards? Have you ever wondered whether the main objective might be to indoctrinate a docile workforce to arrive on time, work to a timetable, accept blindly everything they are told, and do what they ordered?

My point is that asking – or refusing to ask – these questions has dramatic practical consequences. Let’s look at a few examples:

Someone who answers the question “How did we get here?” with a myth of racial or national superiority will more readily resort to violence than one who answers by reference to descent from the a common ancestor, and who sees our species as one large extended family.

People who answer the question “What do I want?” with the proposition “Make as much money as I can”, will behave differently from those who answer it “Search always for peace and harmony”.

Those who adopt the Roman motto: “Dulci et decorum est pro patria mori” (sweet and glorious it is to die for one’s country) will be more likely to fall in line behind a demagogue, than those who choose to believe that it’s insane and pointless to suffer and die (and inflict suffering and death) for an agenda set by elites safely far away from the battlefield.

Someone who has taken the trouble to analyse the structure of an argument, to see whether the conclusions do really follow from the premises, is less likely to be taken in by propaganda in the newspapers and on television, or by glib sound-bites from politicians.

George Orwell – as hard-headed a realist as you will find anywhere – once wrote: “Unless we address the question of why we are here, we will never solve our housing problems, and are merely making it more likely that the atom bombs will do it for us.”

When we return to the Making Sense of It All thread, we will examine the project of trying to understand and explain natural phenomena – the activity known in Newton’s day as Natural Philosophy, and these days called “Science”.

 This is Section 1.8 of my forthcoming book The World in 2100: What might be Possible for Humanity? It is the introduction to the thread on Making Sense ot it All, which – in conjunction with the other six themes of the book – provides a comprehensive survey of the position we find ourselves in at this critical time in human history.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you an overall idea of what the book will cover.

Section 1.7 – The System of the World

Gordon Brown famously announced “an end to Boom and Bust” – a few year later the world was plunged into the biggest economic crisis in history, which almost brought down the global banking system. (Incidentally, we will be examining the underlying mechanism of boom and bust cycles in the Finance thread later in the book).

Richard Nixon, on being elected President in 1968, promised to “fine tune the economy”, prompting a retort from economist J K Galbraith that “obviously the tuning had formerly been too coarse”. Shortly afterwards, the US was experiencing the new phenomenon of ‘stagflation’ – economic slowdown coupled with soaring prices, whereas previously it had been a choice between one or the other.

Alan Greenspan, chairman of the US Federal Reserve stated in 2003 that “the application of more-sophisticated methods for measuring and managing risks had been key factors underlying the remarkable resilience of the banking system“. Five years later the entire system was on the point of collapse.

Governments everywhere are promising to improve the economy, or to be able to make a better job of doing so than their rivals would. Sometimes unemployment is too high, so they try to fix that by reducing interest rates. Shortly after that inflation is running away at unacceptable rates, so interest rates are increased. How well is this working? Sometimes reducing interest rates does reduce unemployment. Sometimes it doesn’t; as in the last few years when interest rates have been reduced effectively to less than zero and yet ‘economic growth’ remains elusive (in most people’s actual experience, whatever the statistics say). Sometimes increasing interest rate does rein in inflation; sometimes it increases it, perhaps because everyone’s mortgage and rent payments then go up. Sometimes we end up with high inflation and high unemployment. Even when things seem to be working just fine, within a very short time they seem to be veering out of control again. All of these issues, and many related ones will be explored in much more detail in the Finance thread, but they cannot be understood without having a grasp of the Systems view of processes, which is what we are beginning to distinguish here.

For as long as anyone can remember, people have been trying to fix problems, yet the problems remain unfixed, or get worse, or morph into different problems.

The same thing happens on scales large and small. Let’s consider that this phenomenon is a product of the assumptions that we make about the way the world works. There’s an unspoken idea in the background that there’s a simple chain of cause and effect that we should be able to tinker with. What we do when we are not getting the results we want? I think that most of us subconsciously have a mental model of the way things work that looks something like this:

And so – we either try to change the process, or alter the inputs that are going into the process. This seems logical, but how does it work out in practice? I would suggest that almost invariably we have one of three outcomes:

• either we are disappointed to find that things don’t change, or don’t change nearly as much as we would have liked
• or we overshoot, and find things that have changed far too much, getting a different result which we don’t like either
• or thirdly, we might get some progress in changing the things that we set out to change, but other consequences arrive as a by-product which are problematic in their own ways

Consider that what was missing from our model is that almost invariably the output in some way affects what is going into the process, so it would look more like this:

Let’s look at a simple example. Suppose you have some rabbits; and the rabbits do what rabbits do – and the result of that is more rabbits. And then all of these rabbits do what rabbits do; and the result is even more rabbits.

This is called feedback, because some of the output of the process is fed back into its input. Note the ‘+’ sign, which indicates that a change in the output tends to affect the input in the same direction. If you think about it for a moment, the rate at which the rabbit population is increasing at any moment will be exactly proportional to the size of the population. This is the defining characteristic of what we call an exponential growth curve. The same sort of curve is generated by compound interest – where the income received from an investment is continually applied to the purchase of more of the income-generating assets. It is the core strategy in every scheme for generating significant wealth within a limited time-frame, as we will be examining in the Wealth and Finance threads of this book. And we will get more insight into the underlying dynamics of exponential growth in the Numbers and Patterns thread.

However, feedback comes in two forms: this first kind of feedback I shall call reinforcing feedback, because it has a tendency to accelerate the results that are output from the process. Let’s now look at another example. If you have a central heating system, there will be a thermostat which controls its operation.

If the temperature in the room is lower than the thermostat setting then the heating will be turned on; and if the temperature is higher then the heating will be turned off. This is the second kind of feedback, which I will call stabilising feedback. In this case, the signals fed back from the output tend to reduce changes in the result, rather than to further increase it as was the case in the reinforcing feedback examples (hence the ‘-‘ sign).

(The technical names for these two types are positive feedback and negative feedback. I didn’t use those because people are sometimes confused by the connotations of the words ‘positive’ and ‘negative’. There is a tendency to associate the word positive with implying something good, and the word negative with implying something bad. But in the case of feedback systems, whether the outcome is desirable or not depends on the circumstances. Positive feedback tends to cause exponential growth, subject to certain constraints. Negative feedback tends to maintain a certain balanced condition. Exponential growth may be a good thing in some contexts; for example, if you are talking about the performance of your investments, or the harvest of your apple orchard. But not so desirable if you are talking about the level of pollution in your environment, or the size of a cancerous tumour in your body).

Stabilising feedback systems are everywhere. When the temperature of your body rises by a fraction of a degree, mechanisms step in to lose heat more rapidly, such as by sweating. If it falls by a fraction of a degree, the body generates more heat, or cuts down the rate of heat loss. Other systems regulate the concentration within the blood of oxygen, carbon dioxide, sugars, lipids and other dissolved chemicals. An elaborate set of feedback loops navigates and steers an airliner to its destination without any action on the part of the pilot. When you turn the steering wheel of your car, a powered hydraulic system points the wheels in the desired direction without needing your muscular effort to move them. Feedback loops within the circuits of an audio amplifier ensure that the sound patterns emerging from the loudspeakers are an accurate replica (at higher energetic levels) of the signals fed into the input.

But this is only the beginning of the story. All feedback loops in the real world are embedded within larger ones. And all the pathways within them contain their own smaller feedback systems, both reinforcing and stabilising. If the network shown in the rabbits example above was the whole story then the world would very quickly be entirely covered with rabbits! Let’s add another subsystem called ‘grass’:

(Note the ‘-‘ sign, indicating that increasing the number of rabbits tends to reduce the amount of grass). And then we could have another subsystem called ‘foxes’:

 

The + sign in these diagrams indicates that changes in that input tends to move the output in the same direction; and the – sign means that the changes in the input tend to move the output in the opposite direction. An increase in the number of foxes will tend to reduce the number of rabbits.

In the real world there is a vast integrated network of feedback loops connecting all of the processes. Here is an attempt to envisage some of these connections in a diagram created by Hazel Henderson:

Complex as this is, it still leaves out a huge number of the interconnections that exist in the real world. And whilst it gives food for thought when contemplating these issues, it is far too complicated to help with drawing useful conclusions. In a later section in this thread I will describe a simpler model containing just 11 variables, with plausible inter-relationships of the effects that alterations in one variable would have on the others:

1. Human population
2. World food production
3. Total industrial production
4. Level of pollution
5. Non-renewable resources
6. Food per capita
7. Consumer goods per capita
8. Services per capita
9. Life expectancy
10. Human welfare index (representing life expectancy, wealth and education level)
11. Human ecological footprint (the total area of land necessary to support the levels of the other variables).

This model was encoded into a computer simulation in 1971. The software allowed for the input of various combinations of assumptions to be fed in regarding policies that humanity might choose to adopt in the next few decades. The output of the program consisted of graphs plotted to depict the values of those variables projected from year 1900 through to 2100. years Eleven different scenarios were produced to reflect different assumptions about the effects of various different policies. Over the last 46 years, several of the projected scenarios have ceased to be possible .

This is Section 1.7 of my forthcoming book Swindled! – The Broken Promise of Western Civilisation, and What You Can Do About It. It is the introduction to the thread on The System of the World, which – in conjunction with the other seven themes of the book – provides a comprehensive survey of the position we find ourselves in at this critical time in human history.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you an overall idea of what the book will cover.

Section 1.6 – Society and Government

In 1963 a car dealer in London’s East End received a visit from a disgruntled customer demanding his money back. When the dealer turned him down flat, he promised darkly to come back the next day “with some of his mates from over the river”. The next day he returned, but before he had a chance to say that, on reflection, and after discussing it with his mates, he had decided to accept the car after all, the door of the office burst open. A large ugly man wearing an immaculately tailored pinstripe suit and brandishing a sawn-off shotgun rushed into the room shouting and swearing, and shot the customer’s legs off, leaving the car dealer to call for an ambulance. This was Ronnie Kray, leader of the notorious Kray Brothers gang, and the car dealer had been paying him protection money. Of course the principal protection being purchased is from the racketeers themselves, but they do also have to step in if any of their clients is threatened by other parties. Not just to keep their own side of the bargain, but mainly to prevent anybody else from usurping their business.

This is actually the core business model of all governments everywhere – to attain and hold superiority in violence, and to eliminate any rivals.  This ultimate origin is hinted at by the symbolism accompanying governments to this day. When the British parliament is in session, a large ornate gold mace lies on the table in the centre of the chamber.

Even the mayor of Winchester is preceded by the bearer of a silver mace on ceremonial occasions. What does this mace symbolise? An actual mace is the crudest and most vicious of weapons used in primitive combat. A development of the club, a mace consists of a heavy iron ball – usually with spikes all over it – attached to an iron or wooden handle. The bearer of such a weapon would have an overwhelming advantage in hand-to-hand conflict – a single blow would instantly disable any opponent, and would  likely prove fatal. The sceptre – a gold rod encrusted with jewels at one end, a recurrent item of Royal regalia – carries similar referential symbolism.

This is the primary service that citizens are offered in return for the payment of their taxes – governments at all times and in all places since the foundation of the city states 6000 years ago have justified their existence by claiming to provide the service of protecting their subjects from – real or imagined – predation. Police forces protect the citizens from theft or violence at the hands of local miscreants, and military forces protect them from subjugation by over-ambitious governments of other states. And, just as with the more blatant example of the gangland racketeers, the police and military forces stand ready to be directed against any subject who fails to pay their taxes, or raises a credible threat to the authority of the government.

 The ‘fasces’ – an axe with a bundle of sticks tied round it – carried before Roman consuls served a similar purpose, to underline the authority of the consul to punish disobedience by beating or beheading.

We all take for granted the features of the world we are born into. One of the features of this world is that it is divided into nation states, and most people most of the time identify with the nation state they live in, and are more or less willing to give it their allegiance. But it hasn’t always been so. How did this come about? The best current  estimate is that our species – Homo Sapiens – has existed for about 200,000 years, roughly identical in anatomy and brain structure to contemporary humans. For 95% of that time they survived by hunting animals and gathering the edible parts of wild plants, much as the remaining isolated tribes of hunter-gatherers do today.

Then, around 12,000 years ago in several widely separated parts of the world – Central America, India, China, and the Middle East – people came up with the idea of cultivating that food rather than going out and looking for it. This enabled a much greater density of human population on a given area of land. Because the farmer could produce more food than was needed for himself and his family, some members of the community could develop specialised crafts and trades –  as potters, weavers, tanners, brewers and so on.

Other aspects of the new lifestyle were of more dubious benefit: the concept of ownership of property, particularly the ownership of land; the domination of women by men that displaced the equality and partnership that had been the norm in most hunter-gatherer communities. And some groups decided that it was easier to steal the food, rather than growing it, or trading honestly for it. And so arose the specialists in violence who offered protection to the villagers in return for an appropriate payment. Since money had not yet been invented the payment would be made directly in the form of goods and services. And of course, just as with modern criminal  gangs, there would always be the threat – whether explicit or implicit – that declining the offer of protection would result in the violence of the protector being turned towards the clients themselves. Of course some governments are more benign than others, and some structures of government less susceptible to abuse, but in all cases their authority is ultimately derived from a willingness – and a perceived capability – to apply decisive force.

“And the life of man, solitary, poore, nasty, brutish, and short.” This is one of the most famous sentences in the English language, written by Thomas Hobbes in his 1651 book Leviathan. In this, possibly the earliest work of British political philosophy, Hobbes was attempting to justify the rule of Kings and other forms of government by asserting that they provided a context for a more prosperous and satisfactory lifestyle than “the natural state of man”. However most anthropologists today are agreed that its opening premise is 100% incorrect on every count. Homo Sapiens has always been a social animal, and enjoyed the support and comradeship of the tribe. The cave paintings of over 40,000 years ago testify to a rich, creative inner life. The agricultural labourers who made up 95% of the population in Hobbes time were no wealthier than the members of any primitive clan, and their life expectancy was actually shorter. It was shorter still for urban factory workers in the 19th century.

This is Section 1.6 of my forthcoming book The World in 2100: What might be Possible for Humanity? It is the introduction to the thread on Society and Government, which – in conjunction with the other seven themes of the book – provides a comprehensive survey of the position we find ourselves in at this critical time in human history. The next topic in this thread will be The Beginning of Government by Consent.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Section 1.5 – Energy

Outline of the Work, Energy, Wealth and Power thread:

In 1865, economist William Jevons remarked that in about 100 years the British coal reserves would be exhausted, and that this would mean the end of Britain’s dominance as a major world power. This must have seemed inconceivable to his readers at that time – at the height of the wealth and confidence of the greatest global empire the world had ever seen, but – as we know now – it was uncannily accurate. By 1965 most of Britain’s coalfields were nearing exhaustion, and its time as a leading world power was indeed over.

In the previous section we touched on the fact that creating wealth involves work. Energy is what it takes to get work done. The energy to do the work of getting your car from one place to another comes from the gasoline that you put in the tank. The energy to run your sewing machine comes from the electric current flowing from the wall socket.  The energy to dig your vegetable patch comes from the sugar in your muscle cells causing them to change shape (the actual biochemistry is more complicated than this, but this is accurate as a summary).

Let’s trace this further back: the energy in the sugar came from the food ate you ate for dinner. The energy in the vegetables came from sugars that were manufactured in the leaves of the plant from energy in the sunlight. The energy in the sunlight came from the fusion of hydrogen into helium in the core of the sun (the same process that releases energy when a nuclear warhead is detonated). The energy in the meat came from plants that the animal ate.

The energy in gasoline is derived from sugars manufactured by marine plankton and other micro-organisms millions of years ago from sunlight that fell on the Earth at that time.

The energy that is delivered from your electric sockets came from the movement of spinning magnets within coils of wire in the generators in the power station. The magnets were spinning because they were connected to turbines driven by high-pressure steam. The energy in the steam came from coal burned in the boilers, and the energy in the coal came from sugars made in the leaves of trees in ancient forests, from sunlight which fell on the Earth between 300 and 360 million years ago.

But suppose the electricity was generated in a nuclear power station? In this case the heat for the steam to drive the turbines came from the breaking up of uranium nuclei into smaller lighter elements. This energy was originally stored in the Uranium by nuclear processes in the centre of stars that lived and died before our sun and solar system were formed.

From these reflections we can draw two conclusions: the first is that energy can take many forms and can be changed from one form to another myriad ways. Careful experiments carried out over the last few hundred years have established that in every conversion process the total amount of energy at the end is exactly the same as it was at the start. This is the First Law of Heat and Movement (it is usually called the First Law of Thermodynamics, but  as with other technical jargon elsewhere in the book, I’m going to substitute words in everyday language. ‘Thermodynamics’ sounds complicated, mysterious, difficult – but it’s just a fancy way of saying ‘heat and movement’, and if I use those words you will know what I’m talking about). Another name is the Law of Conservation of Energy.

When you are driving down the road, some of the energy consumed from the gasoline taken from your fuel tank has took been turned into the energy of the movement of your car, but not all of it. Some has been turned into heat energy making the engine hot; heat warming the air passing through the radiator; and heat in the gases emitted from the exhaust pipe. When you bring the car back to a standstill all that energy of movement is turned into heat energy in the hot brake discs and the air around them. – Unless you have an electric or hybrid car, in which case some of that would have been turned into electrical energy and stored in the battery, in the form of chemical energy.

The second conclusion is that although the total quantity of energy remains constant, the quality of it does not. You cannot use the heat that was dissipated into the environment from the radiator and the exhaust pipe  and the brakes to drive back home again! This observation is the basis for the Second Law of Heat and Movement, and it is the reason why it is impossible to build a perpetual motion machine.

In everyday usage the words energy and power are used more or less interchangeably, and many people are uncertain of the distinction between them. But to an engineer, the concepts are clear: energy, as we have said, is the capacity to do work, whereas power is the rate of doing work (or the rate of transforming one form of energy into another). It takes the same amount of energy to boil a litre of water whatever the power of your kettle, but a 3 kW kettle will do it in one third of the time that a 1 kW one would have. A 300 hp sports car will accelerate to 60 miles an hour about six times as quickly as a 50 hp family saloon of the same weight.

There is of course  another – somewhat related – meaning of the word power: the ability to control or exploit the actions of others, as in political or economic power. Political power depends on economic power, and – as human affairs are ordered currently – both are derived ultimately from military power. Hence the relevance of Britain’s  ability to operate a global empire being dependent on the energy supply from its coalfields. And hence the conflict today over control of the world’s oil supplies. The Work, Energy, Wealth and Power thread will explore these issues in greater depth, and examine their interactions with the other threads.

This is Section 1.5 of my forthcoming book The World in 2100: What might be Possible for Humanity?
When we return to the ‘Work, Energy, Wealth and Power’ thread, the next topic will be The Second Law – and Why You Cannot Build a Perpetual Motion Machine.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.

Section 1.4 – Wealth

Section 1.4 – An introduction to the ‘Wealth’ thread

One of the major promises of western civilisation is that it will make us all wealthy. Of course it also claims that it will make us happy, satisfied and fulfilled. But it seems that these days more and more people are depressed, neurotic or frustrated; as well as being broke or burdened with debt.

In a recent discussion on Facebook in response to my question “What is Wealth?”, a lot of the answers concentrated on things like health, friendship, satisfaction, fulfilment and love. It’s a fair point that no amount of possessions can compensate for lack of those things, but of course that’s not the sense in which the word wealth is normally used in everyday speech. Although, funnily enough, if we look at the derivation of the word ‘wealth’ you see that – just as width is the quality of how wide something is, and length is the quality of how long it is – wealth logically would be the quality of how well you are. In fact the Oxford English dictionary’s first definition of wealth is “the condition of being happy and prosperous: well-being”. We would normally refer to well-being as ‘health’.  Actually all of these words come from the same root: whole, hale, heal, well.

So how did wealth come to take on its contemporary meaning: owning lots of stuff, or even owning lots of money? The contemporary obsessive fixation on money is one of the pathologies of our age. Money is not wealth as we’ll investigate in detail later, and we will distinguish the relationship between money and wealth. This is why I have two separate threads within this book: one for finance and one for wealth.

So as a starting point, let’s consider that wealth is stuff that can be owned:  TV sets, washing machines, cars, houses, and so forth. Could it also be used to describe more abstract things: a novel, a poem, a song, a computer program, a design? Could any sort of stuff be called wealth? Obviously if I have a piece of rock, that generally wouldn’t be described as wealth! But suppose other people want that rock – perhaps they find it beautiful, or think that it has magical properties? Then it might count as wealth? So let us say that we could define wealth as as “stuff people want“.

And what is it to be wealthy? To have an abundance of wealth? Apart from the fact that we are in danger of a circular definition here, this begs the question of “How much is an abundance? Ten dishwashers are obviously not going to make me more content than one dishwasher!

And how is wealth to be acquired? In the final analysis there are only two ways to acquire wealth: earn it or steal it. The second method can take many forms, from crude and blatant to subtle and sophisticated. (Just to be clear I don’t recommend any form of that second route! We will go into more detail on that point in the “meaning of it all” theme later in the book). How do you earn? By creating  something that someone wants, and then trading what you’ve created for something that you want. How do you create? By working. And working takes energy. We will follow up that these ideas more fully in the “work, energy, wealth and power” thread of this book.

Does any work count? No, because much of what goes by the name work in today’s world is unproductive or pointless, or even actually destructive. What do I mean by unproductive or pointless? – that there is no more wealth at the end of the work than there was to start with. And destructive work is where there is less wealth at the end. Vandalism, demolition, weapon building, warfare. Consider that accepting payment for unproductive work is a form of theft.

I’m proposing a provisional definition of “being wealthy” as “possessing assets which generate an income adequate for your purposes without requiring activity on your part”. Of course this begs the question of how much is adequate, but we will deal with that in due course. In fact almost everybody aspires to becoming wealthy according to this definition in the course of their life. They look forward to receiving a pension at some time. And yet as we’ve already seen in Section 1.2 – The Great Pension Robbery, they may be disappointed in the outcome. Later on, we will look at some case studies of dramatically successful episodes of wealth creation such as Steve Jobs going from zero to $265 million in four and a half years.

So, if we are happy with the definition of wealth as “stuff people want”, the question arises: “What stuff do people want? – and why do they want it?” The best answer to those questions that I have found is indicated by Abraham Maslow’s ‘hierarchy of human needs’. An understanding of the layers in this hierarchy will support you in answering the question “how much is enough?” It will also provide you with a useful context when you contemplate the question of how you can best create wealth with work that you are happy to do.

According to Maslow’s theories, the needs in each layer need to be addressed before higher ones can be attended to. The physiological needs – for air, water, food, shelter and warmth must be met as a matter of urgency, since their absence threatens survival itself. Next in importance is the need for safety. In the society we live in, the essential lower-level needs are usually met through monetary transactions. But financial considerations need not be a requirement for finding love, companionship, esteem or Self-actualisation. On the other hand, many people may attempt to compensate for inadequacies in these areas by the pursuit of ever greater amounts of wealth and power; a strategy that often becomes self-defeating.

This is Section 1.4 of my forthcoming book The World in 2100: What might be Possible for Humanity? When we return to the ‘Wealth’ thread, the next topic will be The Difference Between an Enterprise and a Ponzi Scheme.

If you haven’t already done so, you can register to receive a free review copy just before it goes on general sale later this summer. Registering will also take you straight to Chapter 1 – The Foundations which will give you more idea of what the book will cover.