[Michel Bauwens has kindly invited me to serialize excerpts from my recently published book The Homebrew Industrial Revolution: A Low-Overhead Manifesto. Over the next several weeks, I will post two excerpts from each chapter (one excerpt a week).]
Peak Energy. In recent decades, the centerpiece of both the energy policy and a major part of the national security policy of the U.S. government has been to guarantee “cheap, safe and abundant energy” to the corporate economy. It was perhaps exemplified most forcefully in the Carter Doctrine of 1980: “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.”
.
This is no longer possible: the basic idea of Peak Oil is that the rate of extraction of petroleum has peaked, or is about to peak. On the downside of the peak, the supply of oil will gradually contract year by year. Although the total amount of oil reserves in the ground may be roughly comparable to those extracted to date, they will be poorer in quality, and more expensive in both dollar terms and energy to extract.
All the panaceas commonly put forth for Peak Oil—oil shale, tar sands, offshore drilling, algae—turn out to be pipe dreams. The issue isn’t the absolute amount of oil in offshore reserves or tar sands, but the cost of extracting them and the maximum feasible rate of extraction. In terms of the net energy surplus left over after the energy cost of extraction (Energy Return on Energy Investment, or EROEI), all the “drill baby drill” gimmicks are far more costly—cost far more BTUs per net BTU of energy produced—than did petroleum in the “good old days.” The maximum rate of extraction from all the newly discovered offshore oil bonanzas the press reports, and from unconventional sources like tar sands, doesn’t begin to compensate for the daily output of old wells in places like the Persian Gulf that will go offline in the next few years. And the oil from such sources is far more costly to extract, with much less net energy surplus.
.
The list of false panaceas includes coal, by the way….
.
Peak Oil skeptics frequently argue that a price spike like the one in 2008 is caused, not by Peak Oil, but “instead” by some special circumstance like a specific supply disruption or speculative bubble. But that misses the point.
.
The very fact that supply has reached its peak, and that price is entirely determined by the amount of demand bidding for a fixed supply, means that the price of oil is governed by the same speculative boom-bust cycle Henry George observed in land. Given the prospect of a fixed supply of land or oil, the rational interest of the oil industry, like that of real estate speculators, will lead them to hold greater or lesser quantities off the market, or dump them on the market, based on their estimate of the future movement of price. Hence the inconvenient fact, during the “drill here drill now” fever of the McCain-Palin campaign, that the oil companies were already sitting on large offshore oil reserves that they were failing to develop in anticipation of higher prices….
.
And given the prospect of fixed supplies of oil, the greater the anticipated future scarcity value of oil, the greater will be the rational incentive for terrorists to leverage their power by disrupting supply. The infrastructure for extracting and distributing oil is unprecedentedly fragile, precisely because of a decline in productive capacity….
.
According to Jeff Vail, speculative hoarding of petroleum and terrorist actions against oil pipelines are not alternative explanations in place of Peak Oil, but the results of a positive feedback process created by Peak Oil itself.
.
It is quite common to hear “experts” explain that the current tight oil markets are due to “above-ground factors,” and not a result of a global peaking in oil production. It seems more likely that it is geological peaking that is driving the geopolitical events that constitute the most significant “above-ground factors” such as the chaos in Iraq and Nigeria, the nationalization in Venezuela and Bolivia, etc. Geological peaking spawns positive feedback loops within the geopolitical system….
.
And the evidence is clear that price really is governed entirely by the fluctuation of demand, and that supply—at least on the upward side—is extremely inelastic. Just consider the movement of oil supplies after the price shock of the late ’70s and early eighties to that of the past few years. As “transition town” movement founder Rob Hopkins points out, the supply of oil has increased little if any since 2005—fluctuating between 84 and 87 mbd—despite record price levels.
.
Overall, the effect of Peak Oil is likely to be a radical shortening of corporate supply and distribution chains, a resurrection of small-scale local manufacturing in the United States, and a reorientation of existing manufacturing facilities in China and other offshore havens toward production for their own domestic markets.
.
This was a common theme during the oil shocks of the 1970s, and has been revived in the past few years. In the late ’70s Warren Johnson, in Muddling Toward Frugality, predicted that rising energy prices would lead to a radical shortening of industrial supply chains, and the relocalization of manufacturing and agriculture. Although he jumped the gun by thirty years, his analysis is essentially sound in the context of today’s Peak Oil concerns….
.
Fiscal Crisis of the State. The origins of corporate capitalism and the mass-production economy are associated with massive government subsidies; since then the tendency of corporate capital to socialize its operating costs has never abated. As a matter of basic economics, whenever you subsidize something and make it available to the user for less than its real cost, demand for it will increase. American capitalism, as a result, has followed a pattern of expansion skewed toward extensive additions of subsidized inputs, rather than more intensive use of existing ones….
.
And the tendency of monopoly capitalism to generate surplus capital and output also increases the amount of money that the state must spend to absorb the surplus.
.
Monopoly capitalism, according to James O’Connor, is therefore plagued by a “fiscal crisis of the state.” “…[T]he socialization of the costs of social investment and social consumption capital increases over time and increasingly is needed for profitable accumulation by monopoly capital.”
.
…[A]lthough the state has socialized more and more capital costs, the social surplus (including profits) continues to be appropriated privately…. The socialization of costs and the private appropriation of profits creates a fiscal crisis, or “structural gap,” between state expenditures and state revenues. The result is a tendency for state expenditures to increase more rapidly than the means of financing them. [Fiscal Crisis of the State]
.
In short, the state is bankrupting itself providing subsidized inputs to big business, while big business’s demand for those subsidized inputs increases faster than the state can provide them….
.
The distortion of the price system, which in a free market would tie quantity demanded to quantity supplied, leads to ever-increasing demands on state services. Normally price functions as a form of feedback, a homeostatic mechanism much like a thermostat. Putting a candle under a thermostat will result in an ice-cold house When certain hormonal feedback loops are distorted in an organism, you get gigantism; the victim dies crushed by his own weight. Likewise, when the consumption of some factor is subsidized by the state, the consumer is protected from the real cost of providing it, and unable to make a rational decision about how much to use. So the state capitalist sector tends to add factor inputs extensively, rather than intensively; that is, it uses the factors in larger amounts, rather than using existing amounts more efficiently. The state capitalist system generates demands for new inputs from the state geometrically, while the state’s ability to provide new inputs increases only arithmetically. The result is a process of snowballing irrationality, in which the state’s interventions further destabilize the system, requiring yet further state intervention, until the system’s requirements for stabilizing inputs finally exceed the state’s resources. At that point, the state capitalist system reaches a breaking point.
.
Eventually, therefore, state capitalism hits a wall at which the state is no longer able to increase the supply of subsidized inputs. States approach the condition described by John Robb‘s term “hollow state”:
.
The hollow state has the trappings of a modern nation-state (”leaders”, membership in international organizations, regulations, laws, and a bureaucracy) but it lacks any of the legitimacy, services, and control of its historical counter-part. It is merely a shell that has some influence over the spoils of the economy….
.
The entente between American and Iraqi government military forces, on the one hand, and the Sunni militias in Al Anbar province, on the other, is a recent example of a hollowed state coming to terms with “Fourth Generation Warfare” networks as de facto local governments. An early example was the Roman imperial state of the fifth century, delegating de facto territorial control to German tribal entities in return for de jure fealty to Rome….
.
If the state does not become completely hollowed out by Robb’s criteria, it nevertheless is forced to retreat from an ever increasing share of its former functions owing to its shrinking resources….
.
In many ways, this is a positive development. Local sheriffs may decide that evicting mortgage defaulters and squatters, enforcing regulatory codes against household microenterprises, and busting drug users fall very low on their list of priorities, compared to dealing with murder and robbery. Governments may find themselves without the means of financing corporate welfare.
.
The fiscal crisis dovetails with Peak Oil and other resource crises, in a mutually reinforcing manner. The imperative of securing strategic access to foreign oil reserves, and keeping the sea lanes open, results in costly wars. The increased cost of asphalt intensifies the already existing tendency, of demand for subsidized transportation infrastructure to outstrip the state’s ability to supply it. As the gap expands, the period between deterioration of roads and the appropriation of money to repair them lengthens. The number of miles of high-volume highway the state is able to keep in a reasonable state of repair falls from one year to the next, and the state is continually forced to retreat and regroup and relegate an ever-larger share of highways to second-tier status. As James Kunstler points out, a highway is either kept in repair, or it quickly deteriorates.
.
….Traffic engineers refer to this as “level-of-service.” They’ve learned that if the level-of-service is less than immaculate, the highways quickly enter a spiral of disintegration. In fact, the American Society of Civil Engineers reported several years ago that the condition of many highway bridges and tunnels was at the “D-minus” level, so we had already fallen far behind on a highway system that had simply grown too large to fix even when we thought we were wealthy enough to keep up. [The Long Emergency]
.
It doesn’t take many years of neglect before deterioration and axle-breaking potholes render a highway unusable to heavy trucks, so that a growing share of the highway network will for all intents and purposes be abandoned.
.
So each input crisis feeds the other, and we have a perfect storm of terminal crises. As described by Illich,
.
The total collapse of the industrial monopoly on production will be the result of synergy in the failure of multiple systems that fed its expansion. This expansion is maintained by the illusion that careful systems engineering can stabilize and harmonize present growth, while in fact it pushes all institutions simultaneously toward their second watershed. [Tools for Conviviality]
.
Decay of the Cultural Pseudomorph. What Mumford called the “cultural pseudomorph,” as we saw it described in Chapter One, was actually only the first stage. It has since decayed into a second, much weaker stage, unforeseen by Mumford, and shows signs of its final downfall. In the first stage, as Mumford observed, neotechnic methods (i.e., electrically powered machinery) were integrated into a mass-production framework fundamentally opposed to the technology’s real potential. But this stage reached its limit by the 1970s.
.
In the second stage, mass production on the Sloan model is being replaced by flexible, networked production with general-purpose machinery, with the production process organized along lines much closer to the original neotechnic ideal.
.
Piore and Sabel describe the “lean” revolution of recent decades as the discovery, after a long interlude of mass production, of the proper way of organizing an industrial economy. “[T]he mass-production paradigm had unforeseen consequences: it took almost a century (from about 1870 to 1960) to discover how to organize an economy to reap the benefits of the new technology.” [The Second Industrial Divide]
.
According to those authors, the shift to lean production in America from the 1980s on was in large part a response to the increasing environment of macroeconomic uncertainty that prevailed after the resumption of the crisis of overaccumulation, and the oil shocks of the ’70s. Mass-production industry is extremely brittle—i.e., it “does not adjust easily to major changes in its environment.” The question is not just how industry will react to resource depletion, but how it will react to wildly fluctuating prices and erratic supplies. Economic volatility and uncertainty means mass production industry will be hesitant to invest in specialized production machinery that may be unpredictably rendered superfluous by “changes in raw materials prices, interest rates, and so on.” As we saw in Chapter Two, long-term capital investment in costly technologies requires predictability; and the environment associated with Peak Oil and other input and cyclical crises is just about the opposite of what conduces to the stability of mass-production industry.
.
Conversely, though, the system prevailing in industrial districts like Emilia-Romagna is called “flexible manufacturing” for a reason. It is able to reallocate dedicated capital goods and shift contractual relationships, and do so quite rapidly, in response to sudden changes in the environment.
.
Although craft production has always tended to expand relative to mass-production industry during economic downturns, it was only in the prolonged stagnation of the 1970s and ’80s that it began permanently to break out of its peripheral status.
.
From the second industrial revolution at the end of the nineteenth century to the present, economic downturns have periodically enlarged the craft periphery with respect to the mass-production core—but without altering their relationship. Slowdowns in growth cast doubt on subsequent expansion; in an uncertain environment, firms either defer mass-production investments or else switch to craft-production techniques, which allow rapid entry into whatever markets open up. The most straightforward example is the drift toward an industrial-subsistence, or -repair, economy: as markets stagnate, the interval between replacements of sold goods lengthens. This lengthened interval increases the demand for spare parts and maintenance services, which are supplied only by flexibly organized firms, using general-purpose equipment. The 1930s craftsman with a tool kit going door to door in search of odd jobs symbolizes the decreased division of labor that accompanies economic retrocession: the return to craft methods.
.
But what is distinctive about the current crisis is that the shift toward greater flexibility is provoking technological sophistication—rather than regression to simple techniques. As firms have faced the need to redesign products and methods to address rising costs and growing competition, they have found new ways to cut the costs of customized production…. In short, craft has challenged mass production as the paradigm. [Sabel and Piore]
.
While small manufacturers in the late 1960s were still dependent on a few or even one large client, there was a wholesale shift in the 1970s.
.
To understand how this dependence was broken in the course of the 1970s, and a new system of production created, imagine a small factory producing transmissions for a large manufacturer of tractors. Ambition, the joy of invention, or fear that he and his clients will be devastated by an economic downturn lead the artisan who owns the shop to modify the design of the tractor transmission to suit the need of a small manufacturer of high-quality seeders…. But once the new transmission is designed, he discovers that to make it he needs precision parts not easily available on the market. If he cannot modify his own machines to make these parts, he turns to a friend with a special lathe, who like himself fears being too closely tied to a few large manufacturers of a single product. Soon more and more artisans with different machines and skills are collaborating to make more and more diverse products. [Piore and Sabel, “Italy’s High-Technology Cottage Industry,” Transatlantic Perspectives 7 (December 1982)]
.
So a shift has taken place, with the work formerly done by vertically integrated firms being outsourced to flexible manufacturing networks, and with a smaller and smaller share of essential functions that can only be performed by the core mass-production firm. As Eric Hunting observed:
.
In the year 2000 our civilization reached an important but largely unnoticed milestone. For the first time the volume of consumer goods produced in ‘job shop’ facilities—mostly in Asia—exceeded the volume produce in traditional Industrial Age factories…. [private email, August 4, 2008]
.
The organization of physical production, in both the Toyota Production System and in the Emilia-Romagna model of local manufacturing networks, is beginning—after a long mass-production interlude—to resemble the original neotechnic promise of integrating power machinery into craft production.
.
But the neotechnic, even though it has finally begun to emerge as the basis of a new, coherent production model governed by its own laws, is still distorted by the pseudomorph in a weaker form: the new form of production still takes place within a persistent corporate framework of marketing, finance and “intellectual property.”
.
Andy Robinson, a member of the P2P Research email list, argued that “given recent studies showing equal productivity in factories in North and South,”
.
the central mechanism of core-periphery exploitation has moved from technological inequality (high vs low value added) to rent extraction on IP. Since the loss of IP would make large companies irrelevant, they fight tooth and nail to preserve it, even beyond strict competitiveness, and behave in otherwise quite “irrational” ways to prevent their own irrelevance (e.g. the MPAA and RIAA’s alienating of customers).
.
And despite the admitted control of distributed manufacturing within a corporate framework, based on corporate ownership of “intellectual property,” Robinson suggests that the growing difficulty of enforcing IP will cause that framework to erode in the near future:
.
…[I]t may be more productive to look at the continuing applicability or enforceability of IP, rather than whether businesses will continue to use it. While this is very visible in the virtual and informational sphere (“pirating” and free duplication of games, software, console systems, music, film, TV, news, books, etc), it is also increasingly the case in terms of technological hardware. Growing Southern economies—China being especially notorious—tend to have either limited IP regimes or lax enforcement, meaning that everything that a MNC produces there, will also be copied or counterfeited at the same quality for the local market, and in some cases traded internationally. I have my suspicions that Southern regimes are very aware of the centrality of IP to core-periphery exploitation and their laxity is quite deliberate. But, in part it also reflects the limits of the Southern state in terms of capacity to dominate society, and the growing sophistication of transnational networks (e.g. organised crime networks), which can evade, penetrate and fight the state very effectively….
.
So long as the state successfully manages to prop up the centralized corporate economic order, libertarian and decentralist technologies and organizational forms will be incorporated into the old centralized, hierarchical framework. As the system approaches its limits of sustainability, those elements become increasingly destabilizing forces within the present system, and prefigure the successor system. When the system finally reaches those limits, those elements will (to paraphrase Marx) break out of their state capitalist integument and become the building blocks of a fundamentally different society. We are, in short, building the foundations of the new society within the shell of the old.
.
And the second stage of the pseudomorph is weakening. For example, although the Nike model of “outsourcing everything” and retaining corporate control of an archipelago of small manufacturing shops still prevails to a considerable extent among U.S.-based firms, small subcontractors elsewhere have increasingly rebelled against the hegemony of their large corporate clients. In Italy and Japan the subcontractors have federated among themselves to create flexible manufacturing networks and reduce their dependence on any one outlet for their products. The result is that the corporate headquarters, increasingly, is becoming a redundant node in a network—a redundant node that can be bypassed….
.
A good example of the weakness of the second stage of the pseudomorph is the relationship of the big automakers with parts suppliers today, compared to when Galbraith wrote forty years ago. As portrayed in The New Industrial State, the relationship between large manufacturers and their suppliers was one of unilateral market control. Today, Toyota’s American factories share about two-thirds of their auto parts suppliers with the Detroit Three…
.
Taking into account only the technical capabilities of the suppliers, it’s quite feasible for parts suppliers to produce generic replacement parts in competition with the auto giants, to produce competing modular components designed for a GM or Toyota platform, or even to network to produce entirely new car designs piggybacked on a GM or Toyota chassis and engine block. The only thing stopping them is trademark and patent law….
.
An early indication that things may be reaching a tipping point is China’s quasi-underground “shanzhai” enterprises which, despite being commonly dismissed as mere producers of knockoffs, are in fact extremely innovative not only in technical design but in supply chain efficiency and the speed of their reactions to change. The shanzhai economy resembles the flexible manufacturing networks of the Third Italy. Significantly, supplier networks for transnational corporations have begun to operate underground to supply components for shanzhai enterprises.
.
Tapping into the supply chains of big brands is easy, producers say. “It’s really common for factories to do a night shift for other companies,” says Zhang Haizhen, who recently ran a shanzhai company here. “No one will refuse an order if it is over 5,000 mobile phones.”