Via: http://theautomaticearth.com/Finance/scale-matters.htmlScale matters. When it changes, other things change as a function of it, often in unpredictable ways. Emergent properties are system characteristics that come into existence as a result of small and simple units of organization being combined to form large and complex multi-unit organizational structures. One can know everything there is to know about the original simple units and yet be unable to predict the characteristics of the larger system that emerges as many units come together to interact as a larger whole.
For instance, knowing everything about an individual cell sheds no light on the behaviour of a sophisticated multicellular organism. At a higher level of organization, knowing everything about an organism does not predict crowd behaviour, the functioning of an ecosystem, the organization of stratified societies, or the dynamics of geopolitics as societies interact with one another. The complex whole is always far more than just the sum of its parts.
Human social organization is particularly flexible when it comes to changes in scale. It can function in a myriad forms - from simple, generalist tribal associations, where everyone knows everyone else and interactions are grounded in established personal relationships, to the most complex, specialized and hierarchical imperial civilizations, where emergent connections and institutional structures must inevitably transcend the personal.
Where human societies find themselves along that continuum will depend on many local factors, including the nature, extent, accessibility and storability of the resource base over time, as well as the potential for leveraging human labour, historically using animals. Energy, and particularly energy returned on energy invested (ie the potential to control substantial energy surpluses) is critical. The greater the extent to which substantial, storable resource surpluses can be amassed and centrally controlled, the more likely a complex hierarchical organizational structure is to emerge. Where surpluses are small, resources cannot be stored, human efforts cannot be leveraged, or key resources are less subject to control, much smaller scale, simpler and more horizontally structured groups would be expected instead.
Forms of organization based on agriculture are inherently both expansionist and catabolic. Existing ecosystems are destroyed to make way for patches of monocrop, rapidly converting the productive potential of the land into human biomass at the expense of biodiversity and soil fertility. Many hands are needed to work the land, so many children are produced, but as they grow up, more land must be cultivated every generation, because the existing land cannot accommodate the rapidly rising number of mouths to feed. Carrying capacity is, however, limited.
This in-built need to expand, sometimes to the scale of an imperium in the search for new territory, means that the process is grounded in ponzi dynamics. Expansion stops when no new territories can be subsumed, and contraction will follow as the society consumes its internal natural capital. Previous agricultural societies have left desert in their wake when that natural capital has been exhausted.
Limits to growth are not a new phenomenon, nor is collapse when expansion is no longer possible. The difference this time is that we are approaching hard limits at a global scale, there is nowhere left to expand to, modernity has greatly increased the scope and the rate of our catabolic potential, and therefore the collapse will be the most widespread human civilization has faced.
Some societies are more despotic than others. Elite control over resources, distribution of surpluses, or monolithic infrastructure, such as major dams, confers power and strengthens hierarchy. Where surpluses are substantial, controllable and storable, and can support a large percentage of the population not required to work the land directly, a great deal of societal differentiation and complexity may develop, with a substantial gap between haves and have nots. The haves are typically part of the rentier economy, or otherwise in a position to cream off the surpluses from the labour of lower social strata.
The degree of general freedom probably depends on the extent to which it is in the interests of the powerful. If it is more profitable for the elite to grant economic freedom, and then reap a large share of the proceeds, than to control society directly from the centre, then freedom is far more likely. When circumstances change, however, that may no longer be the case. Relative freedom is associated with economic boom times, when there is an explosion of economic activity to feed off. When boom turns to bust, and there is little economic activity for a prolonged period, direct control of what if left is likely to be of greater appeal. As we stand on the verge of a very substantial economic contraction, this is a major concern. Freedom is addictive, and taking it away has consequences for the fabric of society.
In our own modern situation, the freedom enjoyed in first world countries is arguably both a direct and an indirect a result of the enormous energy surplus we have benefited from. Energy surplus has allowed us to substitute energy slaves directly for the forced labour that has been a prevalent feature of so many previous societies, and it has allowed us to intensify complexity in order to create many opportunities for innovation and advantage. It has also enabled an increase of scale to the global level, so that hard work for low pay, and unpleasant externalities, could be off-shored while retaining the benefits in the first world, albeit very unevenly distributed within it.
The size of the global energy surplus is likely to fall very substantially in the coming years. This will inevitably have a major impact on global socioeconomic dynamics, as it will undermine the ability to maintain both the scale and degree of complexity of the global economy. The expansion of effective organizational scale on the way up is a relatively smooth progression of intensification and developing complexity, but the same cannot be said for its contraction. As we scaled up we built structural dependencies on the range of affordable inputs available to us, on the physical infrastructure we built to exploit them, on the trading relationships formed through comparative advantage, and on the large scale institutional framework to manage it all. Scaling down will mean huge dislocation as these dependencies must give way. There is simply no smooth, managed way to achieve this.
A foundational ingredient in determining effective organizational scale is trust - the glue holding societies together. At small scale, trust is personal, and group acceptance is limited to those who are known well enough to be trusted. For societies to scale up, trust must transcend the personal and be grounded instead in an institutional framework governing interactions between individuals, between the people and different polities, between different layers of governance (municipal, provincial, regional, national), and between states on the international stage.
This institutional framework takes time to scale up and relies on public trust for its political legitimacy. That trust depends on the general perception that the function of the governing institutions serves the public good, and that the rules are sufficiently transparent and predictably applied to all. This is the definition of the rule of law. Of course the ideal does not exist, but better and worse approximations do at each scale in question.
Over time, the trust horizon has waxed and waned in tandem with large cycles of socioeconomic advance and retreat. Trust builds during expansionary times, conferring political legitimacy on larger scale forms of organization. Trust takes a long time to build, however, and much less time to destroy. The retreat of the trust horizon in contractionary times can be very rapid, and as trust is withdrawn from governing institutions, so is political legitimacy. This process is already underway, as a litany of abuses of public trust previously obscured by expansion is coming to light. Contraction will rapidly lift the veil from far more trust-destroying scandals than almost anyone anticipates.
Even at the peak of expansion, international scale institutions struggled to achieve popular legitimacy, due to the obvious democratic deficit, lack of transparency, lack of accountability and insensitivity to local concerns. Even under the most favourable circumstances, true internationalism appears to be a bridge too far from a trust perspective. For this reason, world government and a global currency were never a realistic prospect, as much as some may have craved and others dreaded them. Even a transnational European single currency has suffered from a fatal disparity between the national level of primary loyalty and the international level of currency governance, and as such has no future.
As the circumstances supporting economic globalization and attempts at global governance evaporate, and the process goes into reverse, smaller and smaller scale governance structures are likely to join international institutions as stranded assets from a trust perspective - beyond the trust horizon - and lose legitimacy as a result. International structures are likely to fade away, or be torn apart by strife between disparate members who no longer see themselves are part of a larger whole. The socioeconomic impact of the latter process, for which Europe is the prime example, is likely to be enormous. For a time this may strengthen national institutions, but this is likely to be temporary as they too are subject to being undermined by the withdrawal of trust.
Where people no longer internalize and follow rules, because they no longer see those rules as in the general interest, existing national institutions would have to devote far more energy to surveillance and compliance enforcement. The difference in effort required is very significant, and that effort further alienates the governed population in a socially polarizing downward spiral of positive feedback. It also renders governance far less effective. The form of the institutional framework may still appear outwardly the same, but the function can be both undermined from below and overwhelmed from within by an obsession with enforcement until it ceases to be meaningful. This shift is already well underway.
As contraction picks up momentum, the combination, on the one hand, of a desire to control remaining resources and the benefits from remaining economic activity, and on the other the loss of trust and compliance, and consequent movement towards enforcement, is likely to lead to far more authoritarian forms of government in many places. While central control can occasionally facilitate useful responses to crisis, such as rationing of scarce resources, the power is far more likely to be abused for the benefit of the few, as has so often been the case throughout history.
It is within this general context that society will have to function, although considerable path-dependent local variation can be expected. Trust has a very long way to withdraw, especially in places where some form of totalitarianism develops, as this malignant form of governance actively undermines trust among the populace for the purpose of maintaining control through fear. Even in luckier locations, trust is likely to contract enough to undermine the efficacy of any institution beyond municipal scale, and possibly smaller.
Contractions as large as the one ahead lead to a major trust bottleneck through which society must pass before any kind of recovery can begin to get traction, but the narrowness of that bottleneck will vary considerably between societies. Societies with well developed, close-knit communities are likely to find that far more trust survives, and that in turn will mitigate the impact of contraction and hasten the recovery that will involve rebuilding trust from the bottom up.
Given that trust is a major determinant of effective organizational scale, and that the trust horizon is set to contract substantially, the scale at which it makes most sense to work will be much smaller and more local than previously. The future will, eventually, be one of decentralization by necessity. The odds of making a positive impact at smaller scale will be substantially higher, particularly if the actions undertaken are predicated upon a simpler society rather than based on current complex systems. It makes sense to focus scarce resources - money, energy, materials, effort, emotional intensity - where they can achieve the most. An understanding of scale and its determinants is critical in this regard.
It is interesting to look at the role of money in relation to trust and societal scale. Very small and simple societies grounded in personal relationships can function on a gift basis, as the high level of trust in a small number of well-known others is enough to mean that keeping track of favours done for one another is not necessary. Favours may simply be performed when necessary and reciprocity taken for granted. Resources may be 'owned' by the group, or made generally available to the group, rather than owned privately and subject to specific exchange.
Scaling up from this point requires interacting with people less well known, where there is less faith that favours done will be reciprocated, so that keeping track becomes necessary. Larger societies are more likely to be hierarchical, with resources privately owned. Exchange of goods or services would then require some form of relative value quantification. It could be decided that everyone's time is of equivalent worth and therefore that, at the simplest level of value accounting, keeping track of hours contributed would be sufficient. Further scaling up would require greater sophistication in both time and resource accounting. Money is the value abstraction that evolves to perform this function, hence the development of a monetary economy is an emergent property of scale. The paradox of money is that even as it allows trust to scale up beyond the personal, its use is fundamentally a measure of distrust in reliable interpersonal reciprocity.
As scaling up continues, along with increasing socioeconomic differentiation, it becomes necessary to interact constantly with completely unknown individuals. For this to function, the necessary trust must vest in the institutional framework itself, in the abstract representation of value that becomes a store of value in its own right in addition to being a medium of exchange, and in the complex web of rules by which it operates in large scale societies. These rules grow progressively more complex with expanding societal scale and increasing complexity, as the nature of money itself becomes increasingly abstract and derivative.
Money in the form of precious metals was replaced by promissory notes based on precious metals, then promissory notes backed by faith alone, virtual representations of promissory notes, promises to repay promissory notes, or bets on the abstract price movements (denominated in promissory notes) of underlying assets, which could themselves by abstract. Trust in the value of these abstractions in turn gives them value, and each extension of monetary equivalence creates the foundation of confidence for the next step.
The initial physical monetary commodity would have been chosen to be relatively scarce and not creatable, facilitating central control over a limited money supply. However, when an expansionary dynamic is underway, and a larger money supply is called for in order to lubricate the engine of a growing economy, a rapidly expanding supply of increasingly abstract monetary equivalents may serve that need, at the cost of the loss of any semblance of control over the supply of what is accepted as constituting money. In other words, inflationary times are grounded in an exponentially exploding supply of human promises, backed by assets that are increasingly over-pledged as collateral even as their price is bid up by the expanding purchasing power granted by confidence in promises to repay. This is another self-reinforcing dynamic.
Our history has experienced many credit-fuelled cycles of expansion, going back to antiquity. Positive feedback spirals continue, relatively smoothly, until they can no longer do so. A limit is reached, and there is typically a rapidly spreading realization that the pile of human promises is very heavily under-collateralized. The trust which had conferred value in abstract promises dissipates very quickly, taking the erstwhile value with it.
The credit which had gained monetary equivalence during the expansion is deprived of it, and the resulting abrupt contraction of the effective money supply becomes a major factor in a positive feedback loop in the deflationary direction - the collapse of the money supply removes the lubricant from the engine of the economy, the fall in purchasing power undermines asset prices and promises consequently become even less well collateralized, driving further contraction.
The last thirty years have seen the latest incarnation of a major expansion cycle, reaching unprecedented heights in terms of trust in the value of abstractions as the exponential growth of the shadow banking system has overwhelmed official monetary channels and control mechanisms. We are now on the verge of the implosion that will inevitably follow as trust evaporates and virtual value disappears. The contraction will proceed until the small amount of remaining credit/debt is acceptably collateralized to the few remaining creditors.
At that point we can begin to rebuild trust in a new monetary system, and by extension a new form of societal organization. It will likely be one with a strong emphasis on central monetary supply control, with little or not scope for the monetization of expansionary promises. The successive 'financial innovations' that built the bubble will be outlawed, as similar phenomena have been before in the aftermath of collapse. Unfortunately, the controls do not last, and a new generation will eventually make similar mistakes once the experience of boom and bust passes once again from living memory.
While there is nothing we can do to prevent the bubble from bursting, or the contraction of the trust horizon that will inevitably occur, we can attempt to cushion the blow and limit the extent of contraction. Understanding the critical role of trust, how to nurture it, how it determines effective organizational scale, and therefore what scale to operate at at what time will allow us to maximize the effectiveness of our actions. In terms of rebuilding a monetary system, it will be necessary in many places to operate at a profoundly local level initially, with the reintroduction of the simplest forms of trust extension above a gift economy - keeping track of hours traded in a time banking process, and local currencies operating within the trust horizon. It will be necessary to build community interconnections actively in order to establish, maintain and increase the necessary trust.
If the process succeeds in halting and reversing the contraction of the trust horizon in places, then new monetary arrangements can be scaled up in those locations when necessary. There will be no need to do so rapidly, as the artificial demand stimulation of the bubble years will have disappeared, inevitably leaving much less economic activity during a period of economic depression, and therefore much less demand for a large money supply to lubricate the engine of the economy.
Governance arrangements operating at a scale in line with local monetary provision will be necessary, and can expect to be more effective than larger institutions substantially beyond the trust horizon. The latter, where they still exist and can exercise power at a distance, are most likely to make it more difficult for society to be able to function rather than less, as they can be expected to resist the decentralization that could allow localities to establish resilience.
Operating at a local scale to build local supply chains and resilience is far more compatible with the human psyche. At times when social organization has expanded to the point where it dwarfs individual actions, and may control them either directly or indirectly, individuals are disempowered by scale. Many feel they have no control over the critical factors of their own lives, which often leads to psychological disturbances such as depression, at present widely addressed with medication. Increasing scale can reduce both empowerment and civic engagement, as it fosters the perception that one can achieve nothing through individual action.
The increasing complexity that accompanies scaling up also occupies time, money and individual energies, leaving little in the way of personal resources to contribute to the public sphere. Of course for the few in positions of control, scale translates into leveraging power, which can effectively become a drug in its own right, but for the masses it is much less conducive to functioning effectively and meaningfully. For a while the masses can be bought off with bread and circuses, and, for some, with aspirations to achieving a position of power and leverage themselves.
This only works while it remains possible to supply sufficient bread and circuses, and while people still believe that higher aspirations may be realistic. Expansions do shake up up established orders enough to open doors for a few to exploit the new niches that open up with increasing complexity, but in the latter stages of expansion, the social strata typically reform and solidify again, so that upward mobility becomes harder or impossible. The combination creates a dangerous situation, where financial implosion and social explosion can happen in a simultaneous dislocation.
The shift to operating at a local scale, over the longer term at least (once the dust has settled), can be expected to improve the balance between individuals and society, albeit at the cost of living in a much simpler, lower energy and less resource intensive manner. The implications of this shift are huge. Almost every aspect of our lives will change profoundly. We can expect the transition to be traumatic, as the dislocation of major contractions has always been. What large scale and extreme complexity have given us only appear to be normal, as they have persisted for much or all of our lifetimes. In fact we stand at the peak of an unprecedentedly abnormal period in human history - the largest in a long series of financial bubbles, thanks to the hydrocarbons that allowed it to develop over decades.
Things look good at the peak of a bubble, as if we could extrapolate past trends forward indefinitely and reach even higher heights. However, the trend is changing as the enabling circumstances are crumbling, and the bubble is already bursting as a result. Our task now is to navigate a changing reality. We cannot change the waves of expansion and contraction, as their scale is beyond human control, but we can learn to surf.
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