ourfiniteworld | (This is Part 3 of my series – A New Theory of Energy and the Economy. These are links to Part 1 and Part 2.)
Many readers have asked me to explain debt. They also wonder, “Why can’t we just cancel debt and start over?”
if we are reaching oil limits, and these limits threaten to destabilize
the system. To answer these questions, I need to talk about the subject
of promises in general, not just what we would call debt.
In some sense, debt and other promises are what hold together our
networked economy. Debt and other promises allow division of labor,
because each person can “pay” the others in the group for their labor
with a promise of some sort, rather than with an immediate payment in
goods. The existence of debt allows us to have many convenient forms of
payment, such as dollar bills, credit cards, and checks. Indirectly, the
many convenient forms of payment allow trade and even international
trade.
Each debt, and in fact each promise of any sort, involves two parties. From the point of view of one party, the commitment is to pay a certain amount (or certain amount plus interest). From the point of view of the other party, it is a future benefit–an
amount available in a bank account, or a paycheck, or a commitment from
a government to pay unemployment benefits. The two parties are in a
sense bound together by these commitments, in a way similar to the way
atoms are bound together into molecules. We can’t get rid of debt
without getting rid of the benefits that debt provides–something that is
a huge problem.
There has been much written about past
debt bubbles and collapses. The situation we are facing today is
different. In the past, the world economy was growing, even if a
particular area was reaching limits, such as too much population
relative to agricultural land. Even if a local area collapsed, the rest
of the world could go on without them. Now, the world economy is much
more networked, so a collapse in one area affects other areas as well.
There is much more danger of a widespread collapse.
Our economy is built on economic growth. If the amount of goods and
services produced each year starts falling, then we have a huge
problem. Repaying loans becomes much more difficult.
In fact, in an economic contraction, promises that aren’t debt, such as
promises to pay pensions and medical costs of the elderly as part of our
taxes, become harder to pay as well. The amount we have left over for
discretionary expenditures becomes much less. These pressures tend to
push an economy further toward contraction, and make new promises even
harder to repay.
