Classical economics treats money as if it’s the foundation of economic systems. But that doesn’t explain why people want things in life that money can’t buy.
Environmental economics is the study of how organisms try to get energy and resources they need to live and that they can use to grow and reproduce. Human economics is a subset of environmental economics, where we all try to get the things we need to live and prosper.
Money is a very complex social development that’s built up around a simple technological development. The real value of money comes from an interaction between psychology and physics, where we perceive opportunities to gain decision making power by using or controlling resources.
Our financial system is contributing to the environmental crisis because it’s built up around people’s perception of the meaning of money, which began thousands of years ago with people finding an easier way to trade with each other. We perceive some parts of how the environment works more easily than others. Like with everything else, it’s the effects we don’t notice our financial system is having on the environment that’s causing the environmental crisis.
46: The Evolution of Economics
ACT I
Scene 1
What is money?
Get out a dollar bill. What kind of an invention is that?
Is it technology? Is it a social development? Why can you walk into a bank or a store anywhere in America and trade five pictures of George Washington for one picture of Abraham Lincoln? Why do we all love pictures of Abe Lincoln five times more than we love pictures of George Washington?
Money is a really complicated, really important invention, because it embodies a lot of our motivations in different ways. And not in the same ways for all of us.
Understanding how our economic system is contributing to the environmental crisis depends on understanding what money means to people.
Scene 2
Let’s suppose we lived 50,000 years ago.
I had a good day catching fish. You had a good day gathering wild cabbages.
Now I could trade you a fish for a cabbage, and we could both have fish and cabbage for supper. That’s an easy deal to make.
But what if it was more complicated? What if you wanted something from me, but you didn’t have anything I wanted? And what if you had something that someone else wanted, but they didn’t have anything you wanted?
You have something to trade, and you want to get something by trading, but you can’t find anyone to do both parts of that with.
So you go down to the beach and find some pretty seashells.
We get a lot of those shells on our beach. We make jewelry out of them all the time. We trade a lot shells and jewelry with people who live inland from us.
You offer me 20 good shells for a fish. I say I want 30. Eventually we settle on 25.
I don’t really need 25 shells for anything. But you and I both know I can use them to make something for myself, or I can easily find someone else who will be willing to trade me something for them.
They’re small and they don’t go bad. So it’s easy for me to carry them home and save them for some time when I need them.
Scene 3
Eventually, in some parts of the world people started doing that with gold and silver.
If you stamp silver and gold into small pieces, you can trade it to people. Then those people can either turn it into jewelry or save it to trade to someone else. If you have a standardized size for the pieces, that makes it easy for people to measure how much they’re trading.
That’s how coins started.
Eventually kings took over that process. They had people mint all the coins, so they’d be standard sizes. They had all the coins stamped with their royal seals, to remind everyone where all that gold came from. It was like the king was already wearing all the jewelry the gold could make now.
Scene 4
Then something new started happening. Some people discovered that they could steal some of the gold by cutting pieces off the coins and people would still trade them as if they were whole coins. Now people were treating 9/10 of an ounce of gold as if it was the same thing as a whole ounce.
Then someone else could cut another piece off a coin. Now 8/10 of an ounce of gold meant the same thing as a whole ounce.
Sometimes people got really carried away with that. Sooner or later people could cut the whole coin away except for the royal seal.
Eventually people realized it wasn’t the gold people were trading anymore. It was the royal seal. People were trading the symbol of their money on the belief that other people believed in it and would keep trading it.
Scene 5
That’s when governments started minting cheaper coins.
All they really needed were durable images of their royal seals. Why print them on gold coins when they could print them on silver coins? Why print them on silver coins when they could print them on copper? Or even cheaper metals, like nickel or zinc?
Why print the government seal on metal at all, when you could print it on paper? That’s why we keep pictures of George Washington and Abraham Lincoln in our wallets now.
ACT II
Scene 1
Have you ever heard of Fort Knox?
When our government started printing dollars on paper, people could go to the bank and trade their dollar bills for gold. For every dollar there was in circulation, somewhere in the country the government was holding a dollar’s worth of gold.
That was the gold standard.
Eventually people realized we didn’t even need that. People believed in the value of dollar bills so much that they hardly ever traded them in for gold. All that gold was just sitting around collecting dust.
So they quit using the gold standard. Now you couldn’t walk into a bank and trade your dollars for gold.
Scene 2
Now that people stopped thinking of money in terms of gold, two new things happened.
First, now that people couldn’t trade dollars for gold, they stopped thinking of dollars as having any connection to anything in the physical world. Now there was no common reference point for measuring the value of a dollar.
Now it was basically money in a game. If you play Monopoly or Life or any other game that uses money, you all agree that the game money is worth whatever the rules of the game say it’s worth.
That’s how people see real life money now too. It’s worth whatever the rules of real life say it’s worth. That means our collective perception of the value of our dollars.
Even when we disagree on the value of our money, because inflation is driving up prices and we can never be sure how much anything is going to cost anymore, if someone offers you a dollar and you take it, now you’re holding a piece of paper that’s worth whatever someone else is willing to trade you for it.
Scene 3
That means money now works according to the math of our perceptions of its value, and that’s separate from the physical world where we produce anything that really is valuable to us. That means that every time someone charges someone else interest on a loan, they’re inventing money.
Let’s say I have 100 dollars, and you really need 100 dollars. You have a job, but you aren’t going to get paid until next week. So you ask me to lend it to you.
I say, “Sure, I’ll give you 100 dollars today, if you pay me 150 dollars next week.”
That sounds like a good deal to you, so you agree to it. You pick up 3 extra hours at your job delivering pizza to make the 50 dollars to pay me back.
That means you spend 3 hours driving your car around, burning gas and putting milage on your car, all because we agreed that you’d pay me 50 dollars to give you the money you needed a week before you were paid. You used up gas for no other reason than because we agreed that you’d pay me an extra 50 dollars.
If you hadn’t needed to work the extra 3 hours, you could’ve done anything else with your life for those 3 hours, like playing your guitar or going running or playing with your dog or whatever it is you like to do. You and I just made up a number of dollars you were going to pay me, and then you had to take resources out of the world to get the money.
ACT III
Scene 1
That leads into the other thing that happened after we stopped using the gold standard.
At the end of World War II, the governments of many of the countries in the world got together for a meeting, called the Bretton Woods Agreement. This was kind of like a United Nations meeting, but it was a few years before the United Nations was founded. They had the Allies of World War II there, and the major oil producing countries there.
The war had just made the US the most powerful country in the world. Because it was the only major country in the world that made it through the war without our economy getting smashed. All the other main participants in the war, in Europe and Asia, just had millions of their people killed and bombs dropped on their cities and factories and bridges and railways for 6 years.
So the Americans negotiated a good deal for themselves. They got everyone to agree that from then on oil worldwide would be bought and sold in US dollars.
Scene 2
If you save up your money from delivering pizzas and you go visit another country, you can trade your American money for Canadian dollars or Mexican pesos, or whatever they use there. That doesn’t sound like a big deal.
But international economics on the level of countries doesn’t work that way. Think about what the Bretton Woods Agreement means. The key to economic and political power is oil. And now the key to buying oil internationally is US dollars.
Many countries produce oil. But only the US can print US dollars. That means we always have US dollars to buy oil. All the other countries in the world have to sell something to Americans to get our money to buy the oil they need. Or at least they have to sell something to someone else who got US dollars by selling us something.
Everyone having to pay for oil with US dollars means either directly or indirectly, people importing oil to other countries always involves a business deal with Americans. Assuming they’re good business deals for the Americans, that means every time other people import oil, Americans make money.
That means other countries that need to import oil have to keep exporting natural resources. That means they have to keep logging their forests or mining their minerals or whatever it is they do, regardless of what that does to their environment.
All over the world people depend on oil products to power the trucks and trains that distribute their food. So having a healthy forest next year won’t do them any good if they run out of oil and their food distribution infrastructure breaks down this year.
Scene 3
These are called petrodollars. It’s kind of like the gold standard, because it does connect the value of money worldwide to a resource. But the big difference between gold and oil is that we’re using up oil. Every day, there’s less oil left in the world than there was the day before.
That means petrodollars have inflation built into them. The number of dollars effectively in circulation goes up every time someone charges someone else interest on a loan. Because now that person needs more dollars to pay off the loan. But the resource at the center of the supply and demand relationship that gives the dollars their value keeps getting smaller and smaller.
Scene 4
Economic systems depend on energy. Because life depends on energy.
If you decided to stop eating, every day you would have less energy remaining. When your energy reached zero, you would die of starvation.
In the same way, a machine with no fuel to power it is just a pile of metal. A car with no gas is just a lawn ornament.
That means economic activity depends on fuel.
Look at your dollar bill again. Now we can say that picture of George Washington is a claim on future economic activity.
You still have that dollar because you haven’t needed to spend it yet. But at some point in the future, you’re going to use it for something. The dollar you have today is going to pay for whatever a dollar can pay for next week or next month or next year.
ACT IV
Scene 1
Have you ever heard of peak oil?
When people started drilling oil, in the late 19th century, there was a lot of it in the world. They burned some of the oil to power their oil drilling machines.
In the beginning, they were extracting about 100 barrels of oil for every barrel they burned. That gives us what we can call the Energy Return on Investment, or EROI.
How many calories do you need to eat every day to be healthy? For most people it’s around 2000 or 2500.
How much energy does a barrel of oil contain? It’s about 5 years worth of your life. Basically that means 2000 calories a day, times 365.25 days in a year, times 5.
Or here’s another way to think of it. How far can you drive a car with 55 gallons of gas? That means it would take you about 5 years to push your car that far.
Scene 2
All that oil people were drilling and refining and selling and buying let people do a lot more in the course of a day and a year and a lifetime than they could without oil.
People have been using oil much longer than any of us have been alive. This is the world we grew up in, so this is our idea of normal life.
But there’s a limit on the amount of oil in the world. It took millions of years for all the oil, and coal and natural gas, in the world to form. We’ve been using it up in a couple hundred years.
Scene 3
Here’s what that looks like.
Take a sheet of paper. Draw an X and Y axis on it.
The vertical line is amount. The horizontal line is time.
A thousand years ago, the only petroleum anyone was using was whatever they came across bubbling up to the surface from a reservoir. In other parts of the world people burned coal they found laying on the ground. That’s where Black Rock Mesa in the Navajo reservation got its name. But let’s stick with oil.
Start drawing a line across the graph at the beginning of the time axis. The amount is very low, and stays low for centuries. So you have a line that starts at zero time and close to zero amount, and it goes forward in time almost completely horizontal. It’s sloping up very gradually, just because the population of the world is slowly increasing.
Then you get to the industrial revolution. In the late 18th century people started figuring out how to mine coal, and how to use it to power machines. They started using it to power factories.
About 100 years later they figured out how to drill oil and use that to power machines. Oil is much more useful than coal or natural gas, because it’s a liquid.
You can’t pull up to a fuel station and pump coal into your car’s gas tank. You can’t pour natural gas into a bucket. Coal and natural gas depend on much more specialized machines and infrastructures to use as fuel. That means you can use them effectively for fewer things.
Scene 4
Now our oil graph is up to the late 19th century.
The line starts curving up. People are using more oil every year. The line is curving up because the more oil they use every year, the more oil drilling machines they’re making every year. Also, people are finding more uses for oil, so the more oil they want every year.
Both of those things increase at exponential rates, meaning, they’re happening faster and faster. So the curve upward gets steeper and steeper.
The limit to how much oil is available to people is because of the amount of oil drilling equipment people have. People keep building more and better oil drilling equipment, and that lets them produce more oil.
Scene 5
Then the line gets to the year 2000. Now we’ve used up almost half of the oil in the world.
It takes a lot more oil to drill oil than it did 100 years ago, because we’ve used up all the high quality oil that’s easy to get to. Now we have to drill for lower quality oil.
And drill in harder to reach places.
That means people have to run their oil drilling machines andoil refining machines a lot more than they used to to get more oil.
Now the Energy Return on Investment has dropped to about 15 barrels recovered for every barrel burned.
Now the economics of drilling oil start working differently. We can’t drill more oil just by building more machines. Now the problem is how long it takes to find the oil and set up the machines.
Now the oil line starts curving in the other direction. It levels off for a few years.
Scene 6
Then another new thing starts happening, right around now.
Our Energy Return on Investment has gotten so low that production just can’t keep up with the demand anymore. Now the oil line starts curving down, more or less in a mirror image of the way it shot up.
Now we’ve planned our lives around using oil so much, and we’ve built so many machines that need it, that we use up everything we can find right away, and it’s never enough.
Before long, we’re going to start sliding down a steep curve. When we can’t get enough fuel to do everything we planned on doing, we’ll have machines sitting around rusting and cars parked in our front yards for lawn ornaments.
Scene 7
Now here’s the big problem. And this is where being born in the 21st century helps you a lot.
Look at the front of the curve, at the beginning of the Industrial Revolution, where the line starts curving up, and gets steeper and steeper. Draw a square around that part.
The field of economics was pioneered in that square. Back in the days when the world was still on the front of the curve. But nobody knew that, because the curve hadn’t been discovered yet.
All they could see was what was in the square. Back then, all anyone could see was that they kept finding more energy and producing more stuff they wantedevery year. So that’s how they thought economics worked.
The only limitation was people’s ambition.
Scene 8
Let’s say your favorite band was playing a concert 100 miles from where you live. You and three of your friends want to drive out there to see them.
How do you plan the trip? How do you plan on spending your money?
You need money for the tickets, money for a meal along the way, and money for gas.
If you have all of that, you can go and have a good time. Your fuel is just one of your expenses.
That’s basically how the study of economics started.
If you own a coal powered factory that produces clothes or shoes or whatever, you need to plan on how much money you’re going to have to spend to make your products, and how much money you’re going to make by selling them. Part of your expenses you have to plan on is your daily consumption of coal.
Or if you run a business today, part of your expenses is your monthly bill for your electricity. Which you might get from a power plant that burns coal. Then there’s the diesel fuel that you depend on to make your six-continent supply chain work.
On the front of the energy curve, where coal and oil were abundant, nobody had to plan on how much their fuel was going to cost from one day to the next. 200 years ago, if you needed 500 pounds of coal every day to power your factory, you could plan on 500 pounds of coal still costing about the same in 5 years from now, or 10 or 20 years from now.
When classic economists try to use that kind of planning today to figure out what’s going on in the world, they’re basically praying for a miracle to make their predictions work. Because they’ve fallen into the same mental trap that religious fundamentalists have, of making decisions based on beliefs that don’t correspond to reality.
Scene 9
If you assume that fuel is infinite, that makes it one of the supplies you need to produce what you want. That means the limitation on what people can do is their ambition. Then we use money, or gold, to motivate people’s ambition.
But fuel isn’t infinite. It’s the limiting factor in what people can produce, and therefore, the limiting factor in what people can trade. That means it’s fuel, not ambition, that gives money its value.
When fuel is finite, there will always be more ambition in the world than there is fuel. There are 8 billion people in the world now, and we all want the energy we need to live. And we can all imagine having more than we have now.
In our day to day lives we think of fuel in terms of how much money it costs. Because it’s one of the things we need to buy.
But everyone in the world, living their day to day lives for all of history, adds up to the big picture. Where it’s fuel that gives money its value.
Scene 10
Now we’re teetering on the beginning of the down curve of the energy line, and most people in the world don’t understand how that works.
That means that related to our dependence on fossil fuels contributing to the climate crisis, our dependence on fossil fuels is also leading us into a global economic crisis. Call it an energy crisis, or a financial crisis, or another part of the environmental crisis. They all mean that our economies are going to stop providing us with things we’ve come to expect from them.
So how do we change the big picture? By getting more people to see it. By investing our energy into getting people to understand how energy affects us, so they can make different decisions about how to use energy.
Kind of like the way you’re using electricity to listen to me right now.
Scene 11
So how does being born in the 21st century help you here?
You don’t have degrees and careers in classic economics.
Some economists have seen this problem. They’ve pioneered the field of environmental economics. That doesn’t study economics in terms of money, but in terms of the resources and other environmental factors that make the human economy function.
So if economics is something you’re curious about and want to learn more about, you can ignore all the economic superstitions and start with environmental economics. Start with the reliable information.
ACT V
Scene 1
One environmental economist is Dr. Nate Hagens. He has a podcast series on YouTube where he talks to experts in different areas about different parts of the climate crisis, the economic crisis, and everything surrounding them. He calls it The Great Simplification. Because they’re working through all the sensory illusions and making the reliable information a lot easier to understand.
Also, one way or another, a great simplification is coming. Whether people are ready for it or not, in 20 years from now we’re all going to depend on fossil fuels a lot less than we do now. By understanding the problem we can start planning for it and simplifying our lives ahead of time.
Scene 2
At the opposite end of the spectrum is a movie called Margin Call. It’s a fictional movie based on the events leading up to the 2008 recession.
It’s about people who have gotten rich because they’re very good at math and they see the economy as one giant mathematical algorithm. They don’t care where money comes from or how it affects anyone else. They make their money by manipulating the algorithm to bring money to themselves.
Like in any good movie, everyone involved always makes the best decisions they can think of in the situations they’re in for themselves and the people and things they care about in situations most people have never imagined.
Scene 3
How do you depend on less fossil energy?
You can eat locally produced food.
You can grow your own food.
Eat less animal products, or no animal products.
Drive less.
Fly less.
Walk and ride bicycles and use public transportation more.
Use you your air conditioners and heaters less.
Insulate your house better.
These aren’t just ways to save money and help the environment now. These are also investments you’re making to develop good habits and skillsthat will be worth even more in the future.
Scene 4
This, like so many other things in this series, is the beginning of an ongoing conversation. At the center of it all is people making the best decisions they can think of in the situations they’re in for themselves and the people and things they care about in a situation that’s changing in ways few people can understand right now.
Other people are already having the conversation in other podcasts and websites, trying to make sense of our planetary crisis. Like Rachel Donald on Planet Critical. And Daniel Shmachtenberger, spokesperson for a group called The Consilience Project. Now that you’ve listened this far into this series, you understand evolutionary psychology and environmental science well enough to understand what all those other people are talking about.
Like I’ve said, the purpose of education is to prepare students for the future. Whatever is about to happen, the more people who understand the problem, the better we’ll be at keeping it from turning into a global catastrophe.