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Consumption and Demand are Obsolete

by Ralph Sat Jun 28th, 2008 at 10:08:01 AM EST

Those happy ideas -- consumption and demand -- are even now -- almost unconsciously -- perceived as the engines of economic activity. But such imagery is left over from a time when fuel was abundant and almost free.

In that exciting era, more demand and more consumption translated effortlessly into more use of fuel. More use of fuel obviously benefited the extractors and sellers of fuel, but it also helped those who processed and stored and transported the fuel, and of course also those who fed and clothed the processors and transporters, and on and on and on.

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The US was the largest net exporter of oil in 1950

by Ralph Mon Apr 28th, 2008 at 03:33:17 AM EST

Chalmers Johnson observes that "60 years of enormous military spending is taking a dramatic toll on the rest of the economy."

That is increasingly obvious. But why has the once-reliable US strategy of wasting money ceased to create prosperity? For that matter, how could such a plan ever have succeeded?

To the naive observer, the idea that demand can sustain an economy sounds paradoxical. It is true that, under the assumption that all demand will be satisfied, net demand is equal to net production. But that assumption can only hold when there are abundant natural resources available to the economy in question. Under those happy circumstances, demand for goods and services does indeed have an apparently beneficial effect, in that the rate of utilization of natural resources increases. As those resources flow through the economy, they leave behind a trail of buildings, roads, houses, consumer products and all the other accoutrements of prosperity.

But suppose there are not sufficient natural resources to satisfy demand? At that point the habit of stoking the economic furnace simply by turning up the thermostat fails to work its expected miracle.

Oil, in particular, has supplied the powerful and conveniently deployed energy to create goods and services. The US was a net exporter of oil until some time in the 1960s, due to enormous discoveries of black liquids beneath Texas, Oklahoma and California. The rate of extraction of domestic petroleum was always able to increase to fuel the automobiles, tanks and airplanes necessary to satisfy any level of demand.

But for any mineral resource, the pace of extraction eventually slows, as poorer veins of ore or deeper deposits of oil must be mined. In 1971 the US rate of extraction of domestic petroleum reached a maximum and then began to decline.

At that moment, the era of US prosperity based on unlimited availability of cheap fuel came to an end. Large-scale imports of petroleum began to arrive on our shores from various parts of the world, particularly from the Persian Gulf countries. The US gradually transformed itself from a wealthy producer to a poor but militarily powerful consumer.

In the new era, as long as cheap oil could be pried from the hands of client regimes throughout the world, the US lifestyle could be maintained and expanded. Essentially our economy began to thrive only by theft of other countries' resources. This is of course the colonial model.

Colonial-style exploitation (also known as empire building) as a method of gaining one's living never lasts for very long. For the US, that wondrous period has now decisively come to an end. The old laws of economics no longer function. But the US government does not yet fully comprehend that the rules have changed.

The paradox of reliance on demand to generate prosperity has finally been resolved. Now the US must somehow begin to earn its living rather than simply extracting it from underground deposits of unexploited wealth.

For a country of 300 million human inhabitants spread over a vast continent, and dependent on cheap transportation for its extravagant way of life, that transition must usher in an era of harsh necessity. How well the US will succeed in coping with this scary new age is as yet unknown.

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