Kunstler Making Sense - Part Two

by Dmitry Podborits

On a more general ground, it is interesting to revisit the earlier made point that when supply/demand imbalances occur, the structure of the society changes in response. This goes very contrary to the central dogma of "freakonomics" (which is really traditional economics in disguise), that as supply/demand imbalances occur, mysterious market forces "make sure" that the adequate substitute is found, irrespective of the laws of physics, chemistry and geology.

Basically, this means that the structure of any observed society (that is not in a state of flux or discontinuity) reflects the balance between supply and demand of all critical commodities, existing in that society.
It also means that when new types of products, services and commodities become available through, say, geological discoveries or the efforts of inventors and innovators, or opening of the new trade routes, the demand for them does not occur immediately, but only builds up gradually and with much effort and large energy expenditures (witness, for example, the enormous expense companies go through in order to get their product accepted in the market), because such penetration of the new product into society essentially means restructuring the society around the newly available product.

This is illustrated by the history of penetration of absolutely indispensable items into the current North American living arrangement such as automobiles, computers, mobile phones and commercial airliners. Take away any one of them (much less several of them), and the structure of the society will change dramatically. However, when these items were introduced, they did not get incorporated into the then-existing living arrangement immediately and without effort. When they finally gained widely acceptence, they forced change, or restructuring, of then-existed living arrangement.

There is an observable diminishing returns effect here: further innovations do not create demand for new products if the new products do not "knock out" already established products occupying the same niche in the existing living arrangement. Thus, a person who was forced to buy a new computer (maybe even reluctantly) when the societal structure changed around him so much that the computerless life no longer adequately worked, may have less incentive to upgrade, even if the new computer, on its own, is overall better, cheaper and shinier.

In this light, maybe certain utterances commonly ridiculed as shortsighted may be viewed more charitably in the new context. Take, for example, the famous pronouncement of a top IBM executive circa 1950 that in the entire world there is market for maybe five computers. That statement reflected the realities of the living arrangement of the time, that's all. Yes, it is an absurd statement from today's standpoint because it would take tremendous changes in the societal structure to have computers as ubiquitous as we observe them today.

However, it is extremely hard even for a very smart person immersed in the daily realities of his busy life to imagine, let alone anticipate, the changes in the societal structure that are lying ahead.

It may be just as difficult for some to imagine the extent and the direction of the societal changes that will result from the supply/demand imbalance (from today's arrangement's standpoint) in the energy supply. This is another notion that freakonomists ridicule without realizing how vulnerable and superficial their criticism looks.

For example, is it possible that in the post-Peak Oil world the price for oil would decline? Yes, of course it is possible -- without even finding the adequate substitute for oil. For example, disappearance of commercial airlines from the historic scene and inability of air travel for most people would make it possible (for a while).

Now, a society without air travel would be a differently structured society, wouldn't it? It would solidly fall within the "other arrangement" notion. There go a lot of things currently taken for granted, such as high mobility, tourism, globalization, and so on. But yes, it is possible -- within the context of a perfect market economy. I would even venture to assert that it is far more probable than finding an adequate substitute for oil. This kind of a change would fit well within the currently understood natural laws scheme.

Is it difficult to imagine a world where some of the ingredients for something like affordable air travel might not be adequately available, and it would have never, so to speak, taken off? Wouldn't our current necessities deemed indispensable today in the easy air travel world seem strange and foreign to people inhabiting that, alternative, living arrangement?

The "efficient markets" religion is so pervasive that people who make pronouncements in the spirit of the freakonomists do not even stop to look around them and think what they are really saying. Where does it come from that a perfect market society has to satisfy every human need?

Well, here is an example of a market society which is still relatively very wealthy: the United States circa 2005. And here is a basic need which even an economist would not dare to dispute: adequate health care for its population. In this society with about 40 million medically uninsured (some of which resort to pulling out their own decaying teeth with pliers, as Malcolm Gladwell reports in The New Yorker), and with the medical care and insurance industries virtually in the crosshairs of the economic "science", how can this market aberration be possible?
Clearly, this need in healthcare can be satisfied under some other living arrangement, as evidenced by countries where we do not observe such a large contingent without medical care. No laws of physics, chemistry and geology would need, most likely, to be changed for that; maybe only something in the public psychology and the currently existing system of priorities and values. What makes people think that under dramatic increases in the cost of energy, much reduced mobility, etc. other life support systems in the currently arranged society (such as, for example, food production and distribution, law enforcement, finance, government services, etc.) will perform better than the healthcare performs currently?

Finally, I'd like to observe the following seeming paradox from the "efficient markets will satisfy every need" standpoint.
I note that many of the residents of Manhattan, as a segment of the US population, are doing better financially than the average, and have more discretionary income. Some of these well-off Manhattanites happen to be economists, and some happen to like horses at the same time.

As it presently stands, horse breeding is generally incompatible with the life in Manhattan. Therefore, the stables in which the economists' keep their horses are typically located far from Manhattan, in places like Long Island, New Jersey and Upstate New York. This circumstance creates, I would assume, a major inconvenience for the economists who visit their hooved friends during the weekends (consider the stress of long distance driving, tunnel tolls, road rage, harassment by truck drivers and other unpleasant circumstances).

It would have therefore followed from the efficient market principle that the economists would be willing to pay extra, if someone figured out a way, or a substitute, that would allow them to keep horses right there, in Manhattan and avoid the inconveniences.
It is possible that someone already tinkered with, say, breeding smaller and smaller horses to fit a Manhattanite's lifestyle, but such substitutes didn't take off, probably because they wouldn't provide the potential clientele with the adequate horse experience. So, this way or another, the current economists' living arrangement for those of them who combine both horses and Manhattan in their lives has been restructured around certain inconveniences. The inconveniences, it appears, are here to stay.

I wonder, how this discrepancy might be explained by the freakonomics worldview.
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Dmitry Podborits was born and grew up in Odessa, (then the USSR).
He immigrated to the US in 1991.
He specializes in analytical software for interest rate derivatives
and works in a major investment bank in New York City.