Collision Course: Endless Growth on a Finite Planet (17 page)

The 1970s: Oil Shocks and Growth Crisis

Just as the Club of Rome and concerned scientists began to focus public attention on doubts about the consequences of indefinite growth, the world economy ran into trouble. Even before the first “oil shock” of 1973, the United States was failing to maintain the value of the dollar in its postwar role according to the Bretton Woods arrangements,
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as the international reserve currency pegged to gold. The United States had already been expanding the supply of Federal Reserve notes (sometimes known as printing dollars) before August 1971, when President Nixon unilaterally took the dollar off the gold standard; once this was done, the US exchange rate was no longer stable.
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The world’s reserve currency became paper only, backed by confidence alone. As well as providing international liquidity—a role of the reserve currency—the flood of new dollars, before and after 1971, helped pay the mounting debts associated with the war in Vietnam and the domestic antipoverty program instituted by President Johnson. But this fueled inflation at home, which led to inflation in the world economy as a whole.
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These trends were well under way before the Organisation of the Petroleum-Exporting Countries (OPEC) began to raise the oil price, causing the first oil shock of 1973, followed by another in 1979. Economic growth stalled. Geopolitical events played a part: the Yom Kippur War in Israel triggered the Arab oil embargo of 1973, and the 1979 Iranian revolution again restricted oil supply; both contributed to steep price rises. Indeed, the price of oil did not again reach an equivalent level in adjusted US dollars until the price spike of 2008.

OPEC had already been moving to nationalize the oil resource in several countries (including Algeria, Libya, Iran, Iraq, and Saudi Arabia) and thus wrest a bigger share of profits and more power over prices from the big seven oil corporations, all based in the developed world. But oil was still priced in US dollars, and the inflation of the dollar, once it was freed from its ties to gold and other currencies, disadvantaged OPEC countries, reducing the purchasing power of the proceeds of their oil sales.

The first price surge, in 1973, tripled the oil price in a few months. Since it had fallen some 20 percent below the inflation-adjusted US price levels of 1955, some increase was clearly warranted, though a threefold increase lifted it far beyond 1955 parity in US dollar terms. Whether this was fair or not depends on the yardstick used. Western analysts have usually viewed the oil price from the buyer’s perspective, focusing on the escalating price at the pump; they have rarely mentioned the role played by the declining value of the paper dollar. Relative to gold, the oil price did not rise at all during the 1970s.
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Through the 1970s, OPEC’s windfall profits added impetus to the inflation pulse, as oil producers poured huge quantities of the “petrodollars” they were reaping into the global investment pool. Capital seeking profit exceeded profitable avenues for investment, especially in contracting economies. As a result, much of this OPEC cash ended up being funneled through US and European banks to be loaned out to countries in the global south, often for major capital projects such as dams, power plants, or ports—projects that would be carried out by the largely US-based global corporations.
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Many of the immense debts still borne by the borrowing countries originated at this time.

The economic impact of the 1970s oil price blowout involved an unfamiliar combination for the developed world; economists called it “stagflation,” where recession (stagnation) coincides with inflation. The stagflation crisis highlighted the pivotal role of oil: as oil prices rose, so did production and transport costs, and as the increased costs depressed economic activity, the price of virtually everything rose. The Keynesian strategy of priming the pump with government spending, which had assisted governments in tackling the Great Depression of the 1930s and rebuilding the world after World War II, did not guarantee renewed growth when inflation was part of the problem.

The price surges of the 1970s reflected a scarcity that was serious but not terminal; by the mid-1980s prices had reverted to rock bottom again. Part of the price collapse followed from exploration and discovery in places like the North Sea, itself enabled by the high prices. With Arab and Iranian oil back on-stream in the eighties, world supply was again more than adequate for immediate demand. Inflation associated with the price of oil subsided. These events seemed to support the general axiom of economists that price, reflecting scarcity, can always conjure new supplies (box 6.2). American oil production had, however, peaked in 1971, exactly as the Shell geologist M. King Hubbert, the original analyst of peak oil, had predicted.

Box 6.2

When Price Signals Fail

The market occupies a sphere dedicated to short-term profit, divorced from ecological realities, so that when production is robust, prices reflect the immediate glut, not the ultimate scarcity, a situation common both to oil and the Newfoundland cod fishery.

Mainstream economists insist that scarcity is always reflected in price and that price in the marketplace is a reliable mechanism for regulating the flow of resources—indeed, the only efficient one. That alleged efficiency was not demonstrated in relation to oil: though it may have facilitated the recovery of new sources in the 1970s when relatively accessible oil was still available to be exploited, it has been a poor and approximate mechanism as supplies of cheap oil declined (see chapter 14 for the current situation with shale oil and gas). There was no gradual rise in 2007–2008, for example. Instead, prices hit stratospheric levels in a matter of a few months.

The Canadian cod fishery was an early and catastrophic example of the decline of fisheries worldwide. After unprecedented levels of harvesting from the late 1950s, the catch collapsed to nineteenth century levels in the mid-1970s; the fleet renewed its intensity, but cod had virtually disappeared by 1992 and has not recovered (figure 6.1).
^a

Figure 6.1

Collapse of Atlantic Cod Stocks off Newfoundland in 1992.
Source:
Millennium Ecosystem Assessment 2005. Courtesy of World Resources Institute.

Even though the world fishery as a whole is in decline,
^b
seafood prices do not properly reflect this fact, and do not much moderate the level of exploitation. Though prices for Patagonian toothfish and bluefin tuna are now extremely high,
^c
this has occurred only as the stocks have approached collapse—and there are sufficient ultra-rich consumers to keep paying the prices in any case (see the discussion of Citigroup’s Plutonomy Report in chapter 15). Daniel Pauly has pioneered the ecosystem approach to fisheries analysis, exploring the phenomenon of “fishing down the web” to ever-lower trophic levels, a process that may end up offering a harvest of little but jellyfish.
^d
Pauly has also stressed that, in estimating the true losses of biomass, original abundance should be taken as the baseline rather than arbitrary benchmarks of a decade or two ago;
^e
the destruction involved in ongoing economic expansion is obscured when comparisons are restricted to recent times. In the case of fisheries, price signals, further distorted by widespread government subsidy, have had little or no influence on the conservation of the resource.
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In the case of exhausted fish stocks, substitutes are unlikely to be generated by high prices.

Notes

a
Millennium Ecosystem Assessment 2005, 58.

b
Pauly 2010.

c
Evans 2012.

d
Gershwin, 2013.

e
Pauly 2010.

f
Pauly 2011, 34–35. Pauly sees the principal obstacles to sustainable fisheries as fleet overcapacity, biomass reductions of at least an order of magnitude for large fish (such as cod, tuna, and large pelagics), wastage of one-third of the global catch on fish-meal, a trade regime that encourages first world importation of third world fish when our own have declined, and the existence of some $30–$35 billion in government subsidies which facilitate overfishing.

Neoliberals Take Charge: Thatcher and Reagan

By the mid-1980s, improvements in profitability and economic growth owed much to the resurgence of adequate oil-supply at bargain prices. The recovery is often attributed, however, to the economic policies adopted by Prime Minister Thatcher and President Reagan, and then gradually by the entire developed world. These policies adopted the economic approaches proposed by Hayek, which had been dormant since before the Great Depression.

Hayek’s central thesis, that government always exercises a detrimental influence on the economy and should not be involved in economic activity, had been put forward in
The Road to Serfdom
, a bestseller that appeared in the United States in a
Reader’s Digest
version within a year of its initial publication in 1944
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and was much admired by Thatcher. Neoliberal rhetoric blamed the 1970s crisis on government “interference” in economic activities, and proposed a new regime of “freedom” for business. According to the neoliberal doctrine, accumulation could be reignited by the triptych of privatization, deregulation, and tax reduction (a program also known as supply-side economics). The practical result was the privatization of the infrastructure of the developed world, the gradual opening of economies worldwide to unrestricted foreign investment, the erosion of progressive taxation, and the celebration of “free trade” as the panacea of prosperity for the globe. This regime remains with us in the twenty-first century. Even after the global financial crisis of 2008 challenged the logic, these prescriptions for economic success still prevail.

Corporate America had never really relinquished its campaign against New Deal policies, or its pro-market, antiregulation, anti-union, anti–social welfare message. However, a modified balance of power between capital and labor did persist in the United States up until the 1970s, exemplified in the greater share of national income held by wage-earners and the far lower share of national income held by the top 1 percent of US households. Wealth follows a similar pattern, but is even more polarized. At the time of the 1929 Wall Street Crash, the top 1 percent of US households held close to 50 percent of the nation’s wealth, contracting to 35 percent around 1940 and rising again to 40 percent during the war. This share had declined to little more than 20 percent in the mid-1970s before neoliberal measures began to be implemented. By 1995, it was back above 35 percent.
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Sections of the business community had never accepted greater relative equality, finance capital in particular. Manufacturers were more likely to settle for the Keynesian approach and the greater share of profits conceded to workers because, on the one hand, there was a grave concern about the spread of communism, and on the other, the devastation of their businesses after the 1929 crash had been triggered by speculative financial dealings during the 1920s.
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Yet, even if these views generated a degree of compromise in that sector through the postwar boom, there was never much tolerance for unions from US business, and the dissemination of pro-business propaganda hardly missed a beat. The acceptance of union participation in society that characterized some other forms of capitalism (in Scandinavia, for example, and Australia to some extent) came under attack from neoliberals worldwide.

Neither did the finance sector accept for long restrictions such as capital controls and currency rules. By the late 1950s the first steps had already been taken to reestablish capital mobility, so that international financial markets revived through the 1960s, putting pressure on the overvalued US dollar. In Harvard historian Jeffry Frieden’s view, everything changed once the shock of the wars, the Great Depression, and the attendant unraveling of the world’s formerly integrated economy began to recede.
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Once the shattered cities of Europe and elsewhere had been rebuilt, the sheer success of the postwar order brought national interests back into conflict with the international economic system. Frieden sees Nixon’s move away from gold as a choice for domestic popularity in a pre-election year, in preference to honoring US responsibility as the linchpin of the postwar international system.
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In any case, free market enthusiasts and their business backers, already organizing themselves into a plethora of think tanks, sought an end to all arrangements extraneous to their priorities. While some sections of some societies saw the erosion of their national ability to control capital flows as a threat, few countries were able to resist successfully.

When the British Conservative Party lost power in 1974, Keith Joseph, a cabinet minister in the defeated government, embarked on a project to make neoliberalism the creed of the party and the nation. Joseph had been familiar with the Hayekian IEA since 1964, and now proceeded to preach the economic policies of Hayek and Friedman. He soon founded his own free market think tank, the Centre for Policy Studies (CPS), with Thatcher as vice president. Joseph went on to elaborate what would ultimately be called
Thatcherism
: breaking trade union influence, fighting inflation with monetary policy, deregulation, privatization, and tax cuts. Five years later, at the end of the “winter of discontent,”
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Thatcher won the May 1979 election. According to his biographer, Mark Garnett, Joseph spent those five years on a “crusade to convert the country to his way of thinking,” believing “it was his duty to fight back on behalf of the free market.”
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