Are you being swindled?

– and maybe, not just you, but the entire human race?

Who is doing the swindling, and what can you do about it? Is there some secret cabal with a detailed master plan? Personally I don’t find extreme conspiracy theories very convincing. I think the state of the world is more like a train wreck than a well ordered plan – the unintended consequences of a lot of players pursuing their own short-term ill-conceived goals. On the other hand it’s clearly true that a tiny minority of the human population have been consistently successful in expanding their power and wealth at the expense of everyone else.

If you are lost, the two things you need are a map of the terrain and knowledge of the point on the map that corresponds to your current location. When you’ve completed this book you will have a map of the current state of this world And you will have a perspective on your own position within it, that empowers you to create a future that inspires you.

Whether the  concern that brought you to this investigation is the relevance of your education, the security and significance of your employment, the value of your pension, or the challenge of creating a just and harmonious global society, you will discover that all of these issues are interconnected.

The fragmentation of knowledge into different subjects is an obstacle to reaching real understanding. Most books on Economics and Finance don’t connect with the activities of real enterprises which create real wealth by doing real work. Many contributions to the debates about sustainable living are made without a firm understanding of the underlying physical and engineering basis on which our needs and desires are met. It is impossible to understand why so little progress has been made towards a fair and just global society living in harmony with Nature, without gaining an insight into the processes of Government and the behind-the-scenes manipulation by special interest groups. In this exploration we will draw on insights from economics, history, archaeology, mathematics, physics, biology, engineering, philosophy and many other disciplines. These will provide complementary perspectives on the one underlying unified reality. Even if your knowledge of some of these areas is zero, I’ll make them accessible to you. The notes and bibliography will provide a resource for you to investigate any of these topics in greater detail if you want a deeper understanding.

This is like a giant jigsaw puzzle: as you read the book you will build up different parts of the image, which will eventually fit together to form the overall picture.

The first theme will explore the world of Finance. It will open by revealing the slowly dawning scandal of our vanishing pensions – a re-run of the endowment mortgage fiasco a couple of decades ago.

I will cut through the confusion around the bogus science of economics. I’ll tease out the few core concepts that do have some validity, and explore the myths and conceits, the delusions and the disconnections from reality. I’ll demonstrate why the economic statistics we are fed are fraudulent; and show why GDP is hopeless as a measure of human well-being.

I will describe how banking and stockbroking would work in a sane world – indeed how they actually did work in the recent past, before they degenerated into being the operation of a gigantic casino.

We will look at the inflation of the currency – how it invalidates two of the three fundamental functions of money; how it is caused, and who are the winners and who the losers. I’ll give you a brief history of money and a revelation of its rampant debasement in the past few decades.

I’ll give you a quick explanation of how to interpret financial statements, whether for an enterprise that you operate or one that you consider investing in, or even for you as an individual to exercise control over your own personal finances. We will look at the root mechanism behind booms and busts in stock markets and property.

You will see how the financial system was manipulated to dispossess millions of family farmers in the United States, and transfer their land to a handful of vast agricultural corporations.

And I’ll reveal how the central banks have strayed from their core mission of preserving the integrity of the currency – to rig the system in favour of themselves and their collaborators; and I will unmask the cover story propagated by their cronies in the media.

The second theme will bring you up to speed with handling Numbers and Patterns. If you have ever felt confused by calculations or statistics, this section will be hugely liberating for you. This will give you the tools you need to appreciate fully the presentations in the other threads.

I will start by showing you how to make sense of big numbers in the millions, billions and trillions.

You will find out how to grasp the significance of ratios, proportions and percentages without needing to reach for a calculator.

I will demystify the dynamics of exponential growth.

The third theme will investigate is the phenomenon of Wealth – what it is, how it is created, how it is destroyed, and the ways it is moved around. We will look at the various forms that Capitalism has taken at different times, and address the question of whether there is any viable alternative. We will investigate what it means to be wealthy; what it takes to become wealthy in half a lifetime or less. We will look into some case studies of dramatic examples of wealth creation, such as Steve Jobs going from penniless to $217,000,000 in four and a half years. We will establish that money is not the same thing as wealth. We will clarify what is meant by the specific form of wealth known as Capital.

The fourth theme will examine the notions of Work, Energy, Wealth and Power – how these are involved in the process of wealth creation, and how they are constrained by the two Laws of Heat and Movement, and by the finite stock of resources on the planet. We will see why it is impossible to build a perpetual motion machine, and consider the implications of that. We will investigate what is physically possible for the standard of living for every person on the planet.

The fifth theme will examine the operation of human societies. We will distinguish the institution of Government from its inception 6,000 years ago with the founding of the City States to the present day, and show how all the various forms serve to enrich the insiders at the expense of the rest of us. We will uncover the political, economic and cultural obstacles that stand in the way of the provision of a decent standard of living for everyone on the planet.

The sixth theme will outline The System of the World – the interconnections between energy, ecology and economics; the processes that determine population, prosperity, pollution and conflict.

The seventh theme – Making Sense of it All – will explore our search for meaning, and how the resurgence of interest in the higher aspects of human nature over the past few decades may impact our approach to the challenges described in the previous sections.

The concluding chapter will outline the possible scenarios which could unfold as the epoch of the last six thousand years reaches its point of exhaustion.    

Now we will open the Finance thread by examining the disastrous results that most people’s pension plans are returning.

Section 1.2 -The Great Pension Robbery

A great many people reaching pension age today have had a nasty surprise. They are finding out that the pension they get is nowhere near what they had been expecting. Those approaching it have a sinking feeling that it is not going to work out as anticipated.

For example, let me tell you about my own experience. In summary, I was given to expect that I would get a pension of around £14,500 a year for life, and what the plan actually yields is about £2,400 a year. Almost everyone I talk to is getting similar shortfalls.

Let’s have a look at how these pension schemes are supposed to work in theory… In fact it’s exactly the same process as any honest form of wealth generation: there is an accumulation phase and a payout phase.

• In the accumulation phase you pay a portion of your earnings into a fund that is invested in income-earning assets.
• All the income that those assets generate is re-invested back into the fund, so that it grows much faster than it would by your payments alone, by “the miracle of compound interest”.
• In the payout phase, the income that the fund generates is paid out to you, rather than being re-invested.

For pension schemes, it is normal practice for the fund to be invested in an annuity for the payout phase. This is like a life insurance policy in reverse; instead of taking your monthly premiums while you are alive and paying out a lump sum when you die, the provider takes a lump sum at the start and pays out a monthly distribution to you as long as you live. This generates a slightly larger income than if you had just invested the capital yourself in a “safe” investment (such as government bonds). However in that case, your capital would have remained intact at the time of your death for distribution to your heirs. In the case of the annuity, the balance goes to the insurance company when you die. If you live less than the average expected time, it’s a very good deal for them! And I’m sure they have worked out the sums so they don’t do too badly, however long you live.

I still have the letter that I got from the salesman (sorry, I mean the financial advisor) when I took out my pension plan in 1984. What he said was that by paying £70 a month I could expect my retirement fund to be £161,727.00 by the time I retired. This was assuming a 12% growth rate, which he said was conservative. This fund would provide a £40,431.75 lump sum, and leave £121,295.25 to buy an annuity which would give me an income for life of £14,555.00 a year, assuming an annuity rate of 12%.

It’s worth pointing out the £14,555 would have been quite a substantial income in 1984 – equivalent to about £43,000 a year today according to the official inflation figures. Even though wouldn’t be worth nearly as much today, I would still be delighted if I were getting £14,000 a year from the pension now.

But the reality of the situation is this: when I got to retirement age I found that the fund hadn’t grown by anything like the 12% he had suggested. Instead of the projected £160,000, it had £58,000 in it – giving me a lump sum of £14,500 and leaving £43,000 to buy the annuity. But the real kicker was that the annuity rate is nowhere near 12% now – it’s somewhere around 5.5% at best, and so the actual income that I get is only about £2,400 a year!

The financial people just shrug their shoulders and say “Well that was only an estimate! We didn’t guarantee that it would work out like that.”

All this is a re-run of the Endowment Mortgage Scandal, which came to a head in the 1980s. In the late seventies and early eighties, most people buying houses were persuaded to take out endowment life assurance policies that were intended to pay off the house purchase loan at the end of the agreement, and also produce a surplus bonus payment. In the late eighties it became apparent that the estimates of the investment performance had been ludicrously over-optimistic, and the payouts were going to be nowhere near large enough to pay off the loans.It’s not only personal pension plans that are running into trouble. People who are relying on company schemes which promise 2/3 of the final salary for the rest of their lives might be in for a nasty shock too. The funds that the companies have been paying into are running into exactly the same sorts of problems that the personal ones are showing. They may be paying out as agreed at the moment, but further down the line the cupboard might turn out to be bare.

There are a lot of issues raised here which I’ll discuss in much more detail later, for example:

• Just look at the ridiculously precise figures he quoted me, given the speculative assumptions that the calculations they were based on. Isn’t it absurd that he quoted the final value of the fund to eight significant figures, when it turned out to be over 63% off at the end of the day? (I call this the delusion of spurious precision – this is a whole subject in itself, that I’ll deal with in a later section:  How to Avoid Number Bafflement, within the ‘Numbers’ theme). That wasn’t his fault – he just punched the numbers into his computer and quoted the figures that it spat out (as no doubt he was trained to do by the company). And how successful would an advisor be who said “You might end up with about 160 grand, give or take 100 grand”? But he would at least have been honest!
• Was the 12% a year growth rate he suggested completely fanciful? Given that the UK stock market index went from 1040 in 1984 to over 6400 in 2013 (a compound growth of over 7% annually), and that most of the blue chip companies paid annual dividends of about 4%, I would have been able to get around 11% annual growth myself by simply investing directly in a cross-section of major industrials and re-investing the dividends. Where did the rest of it go? It went into the pockets of the practitioners of the financial system.
• The 12% annuity rate he quoted was at least representative in 1984, but how come it has gone down to 5.5% or less now, with such disastrous effect on the pensions of people now reaching retirement age?
• Why has inflation reached such epic proportions in the last few decades? And who wins? And who loses?

When we return to this thread, the next topic will be “What is Money?”. 

Section 1.3 – How big is a million – a billion – a trillion?

“We used to call these astronomical numbers, but now the national debt is bigger than that! Maybe we should call them economical numbers!” – Richard Feinman

All the time we are given statistics on the news and elsewhere mentioning sums of money – or other figures – measured in millions, billions and trillions.  Do you just allow these numbers to wash over you without really comprehending what is being communicated? Do you just assume that somebody somewhere can make sense of this?

I’m going to give you a handle on visualising these sorts of magnitudes.

First of all let’s take a volume the size of a small sugar cube, 1 cm on each side: how big would 1 million of those be?
… It would be a cubic metre – the size of the jumbo bag of gravel.

What about a billion of them? …This would take up the volume of an Olympic swimming pool, 50 metres long. 20 metres wide, and one metre deep.

What about a trillion? They would fill a reservoir – half a kilometre long, 200 metres wide and 10 metres deep.

Let’s think about $1 million in money: suppose it was in $100 bills. You could fit $1 million in $100 bills into a briefcase.>

How about  $1 billion? To carry $1 billion worth of hundred dollar bills, it would take a 20 foot shipping container, stuffed completely full.

And for $1 trillion? You would need a freight train 6 km long, with all the boxcars stacked tight with hundred dollar bills.

What could you buy with $1 million? Well, you could buy a small flat in central London, about fifteen terraced houses in Rotherham, or three fairly high end Ferraris.

With $1 billion you could buy enough Ferraris to sit together nose to tail in a traffic jam on the motorway three lanes wide, and 4 km long.

With $1 trillion you could buy enough Ferraris to sit in a traffic jam three lanes wide all the way from Miami to San Francisco!

How long does it take to earn $1 million? For a typical worker earning $25,000 a year it would take an entire working lifetime of 40 years. For the chief executive of an average Fortune 500 corporation it would take five weeks. For football player Carlos Tevez it would take about nine days. For the world’s top financiers, about 6 hours.

How long would it take to earn $1 billion? Well, for that typical worker it would take it would take 40,000 years. The top 20 sports stars in the world together earn about $1 billion between them in a year. Hedge fund boss James Simon earns $1 billion every eight months.

Examples in the millions:

• $1m –  cost of arming three Reaper drones, with two bombs and two Hellfire missiles on each one.
• $1.5m – cost of one cruise missile.
• $20m – cost to upgrade one nuclear warhead. The United States is currently planning to upgrade its entire stock of 3000 of them.
• $85m – cost of one intercontinental ballistic missile.
• 1m people – the number of lives that could be saved each year if clean water and sanitation were available to them.

Some things in the billions:

• $8Bn – the cost of a nuclear submarine.
• $10Bn – the amount Europeans spend annually on ice cream.
• $20Bn – the United States spends currently each year on nuclear weapons.
• $20Bn – the amount that American citizens spend annually on pet food.
• $100Bn – the amount Europeans spend annually on alcoholic beverages.
• $10Bn – the cost of providing clean water and sanitation everywhere on the planet

Examples in the trillions:

• $8 trillion – the cost of American military expenditure during the Cold War. Presumably a similar amount was also spent by the Soviet Union.
• $5.5 trillion – amount the United States spent developing and building nuclear weapons between 1940 and 1996.
• $18.6 trillion – annual GDP of the United States.
• $14.6 trillion – the net assets owned by the 50 richest individuals in the world.
• $76 trillion – the total value of goods and services traded in the whole world in 2014.
• $1200 trillion – the total value of financial derivatives held by banks and other financial institutions.

This is the first segment in the Numbers and Patterns thread, which will bring you up to speed with the basic maths you need to fully appreciate the other threads, especially the ones on Finance, on Wealth and on Energy. When we return to this thread, the next topic will be The Dynamics of Exponential Growth.

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 “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 taking 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.

When we return to the ‘Wealth’ thread, the next topic will be The Difference Between an Enterprise and a Ponzi Scheme.

Section 1.5 – 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.

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.

Section 1.6 – The Origins of 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.

The next topic in the Society and Government thread will be The Beginning of Government by Consent.

Section 1.7 – Introduction to the System of the World thread

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:

positioning the battle for your mind. Complex as this flowchart 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 of the System of the World thread I will describe a simpler model of the Global Systems, 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. Eleven different scenarios were produced to reflect different assumptions about the effects of various policy choices. Over the last 46 years, several of the projected scenarios have ceased to be possible .

Section 1.8 – An Introduction to the Making Sense of It All thread

 “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”.

Material for later sections of the book can be viewed here:

What is Money?

The Dynamics of Exponential Growth

The Difference Between an Enterprise and a Ponzi Scheme

Where Malthus was Wrong – and What he got Right

The Second Law – Why we need Energy to Create Wealth