Suppressing volatility makes the world more dangerous

It's counterintuitive that suppressing volatility in human affairs would actually make the world a more dangerous place. But that is precisely the thesis of a recent article by Nassim Nicholas Taleb and Mark Blyth which appeared in Foreign Affairs.

Taleb, a former Wall Street trader, achieved fame with his book, The Black Swan: The Impact of the Highly Improbable. In it he was concerned with so-called "Black Swan events," rare, unforeseen, high-impact events that shape human history. His focus has been on markets though he has always tried to make the case that Black Swan events occur in nearly all fields of human endeavor. Now Taleb and his fellow author, Blyth, are extending this analysis to the so-called Arab Spring.

They point out that government policy is often explicitly designed to smooth out fluctuations. We prefer central bank intervention, fiscal stimulus and bailouts to sharp recessions. And likewise, in foreign policy America and Europe have preferred the seeming stability of dictators in the Arab world to the vagaries of democratic governance. But both the world economy and Arab society have now been shaken by events that were not supposed to happen, an economic crash and grassroots uprisings which deposed regime after regime.

Taleb has said again and again that suppressing volatility in markets and in society in general may work for a time. But instead of moderating volatility, it creates rigid systems that prove catastrophically unstable like dams which seem sound until they break.

We humans wrongly believe that by preventing frequent small setbacks, we will avoid any major setbacks. But, just the opposite has turned out to be true. By trying to avoid minor, but frequent recessions and by trying to avoid political unrest and gradual reform in the Arab world, we have unleashed major events that may yet prove far more damaging to our tranquility than if we had allowed more frequent, but smaller upsets.

I have summarized the reasoning in the previously cited Foreign Affairs article because I want to apply it much more broadly. Let's take agriculture. It has enabled humans to store food in large quantities and thus manage difficult times due to such events as a poor harvest or a war. But by smoothing out volatility in the food supply in this way, we have invited famines that result from heavy reliance on a few or even just one crop. That is, we've avoided small frequent failures by designing a system that will break down catastrophically once in a great while.

Modern farming has doubled down on this strategy by increasing yields tremendously at the cost of degrading soil, increasing monoculture farming based on fewer and fewer crops (meaning less genetic diversity to avoid disease), and heavy reliance on a far-flung complex supply chain for the necessary inputs of fertilizer and herbicides.

All the while, the very fossil-based fuels that make modern farming possible--to run the machinery, fertilize the crops, kill the pests and weeds and transport the harvest--these fuels are changing the climate in ways that already threaten harvests and will threaten them even more as our climate careens further and further into volatility--turning suddenly too wet in some places and suddenly too dry in others.

In the area of public health, we have traded natural immunity to diseases for that provided by vaccines. From a moral point of view we can do no less than offer effective vaccines for deadly or debilitating diseases to as many people as possible. Consequently, deaths from infectious diseases have declined dramatically. The volatility in population has essentially been suppressed.

But modern transportation now makes it more and more difficult to isolate deadly pathogens which can travel across the world in a matter of hours in an airliner. Dense urban populations linked by road and air transport make the next deadly worldwide epidemic all but inevitable. And, we must acknowledge that the current population is no longer being selected by natural factors for robustness in the face of disease; that means we can expect that such an epidemic will hit hard, perhaps harder than the one in 1918.

Told that we must eliminate possible disease-causing germs from our immediate environments, we use antibacterial cleaners in our kitchens and our bathrooms and even on our bodies and in our mouths in the form of antibacterial soap and toothpaste respectively.

But it turns out that such agents don't kill all the bacteria and, in fact, eventually select out those that are most robust against our antibacterial agents. We are making matters worse.

In addition, children who grow up in sanitized environments may not be developing proper immune systems and therefore may be more vulnerable to infectious diseases and allergies as they age.

I am not arguing that humans should never attempt to reduce volatility in their lives. I am making the case that not all such attempts will prove advisable or effective. We can take our desire to reduce volatility to such extremes that we achieve the opposite result: even greater volatility.

If we keep this in mind, we can at least ask whether our next attempt to reduce volatility will actually work in the long run or whether we would be better off adjusting to a certain amount of volatility in our lives in exchange for avoiding catastrophic failures when the dam of low volatility breaks. In more concrete terms, can we judge ourselves prudent if we save ourselves from a hangnail every day only to experience the loss of an arm later on because of our actions?

Is deception no longer an adaptive human strategy?

"A lie is as good as the truth if you can get somebody to believe it." So goes the cynical maxim. Naturally, it contradicts the accepted public morality embodied in the saying: "Honesty is the best policy." That saying is attributed to Miguel de Cervantes though it has been repeated by many others. I rather think that the ancient Roman satirist Juvenal had it right when he wrote: "Honesty is praised and starves."

The way to understand these contradictory statements is in the context of evolutionary success. Animals bear deceptive markings and patterns to camouflage themselves from predators. And, animals have been known to act out lies to deceive their fellow animals. William Catton Jr. relates such a story in his book Bottleneck: Humanity's Impending Impasse:

One of the chimpanzees at the Gombe Field station provided a modern demonstration of this. He had acquired an ability to open locked banana boxes. But he seemed to know it was unwise for him to do so in the presence of other more socially dominant apes who might attack him and take the bananas. To solve the problem this ape perfected the acted lie. By striding purposefully away from camp as if on his way to a good food source, he tricked other apes who would amble after him for a few hundred yards. By doubling back alone to the then deserted camp, he could open a banana box and peacefully enjoy its contents in the absence of the other chimps who, having seen there was no food in the camp other than what was confined to boxes they could not open, did not return with him.

It's no surprise that humans have also found deception to be a useful survival skill. Certainly, it is useful in hunting animals. Even today we use the duck blind to conceal the position of the hunter. But deception as an adaptive behavior finds its true test in relations between humans in warfare, in sports, and even in commercial activities. We are more likely to deceive those whom we consider part of the out-group since they represent a possible source of resources for the in-group to which we belong and whose survivability we want to enhance. My in-group, however, is constantly shifting. Is it my family? Does it include my friends? How about my community? My nation? Those whom we consider appropriate targets for our cons depend on what group we place ourselves in at any moment.

All of this was brought to mind by the recent failure of the Harper administration in Canada to overturn a law which prohibits lying on news broadcasts. The change was sought to enable a Canadian upstart cable news channel dubbed Sun TV News to adopt the same style as the Fox News Channel in the United States. Apparently, lying is part of the format and not being able to lie would prevent Sun TV News from fulfilling its proper role in the world of Canadian media.

Does that mean Canadians are getting the truth elsewhere? Well, not lying is not always the equivalent of telling the truth. If you lie, it means by definition that you are saying something you know to be false or at least should have known to be false. But if you are simply mistaken, then people don't call you a liar. They usually try to correct you.

So, there are two kinds of misinformation which we are subjected to every day in human affairs. The first is merely incorrect information. It may very well be the best estimate of the truth by the teller. If we detect the error, we call it an honest mistake. If we don't detect the error, it may have the same effect as a deliberate lie would have on our actions.

For example, it is passed off as more or less incontrovertible that the human economy can grow indefinitely without either running out of resources or destroying the climate. The argument is that high prices for any scarce resource will lead to the discovery of more of that resource or to substitutes for it. All of this will happen in time to avert any catastrophic collapse of human industrial society.

Even among some who accept the reality of climate change, there is a belief that the offending emissions can be brought under control through technology alone, that alternative carbon-free energy sources can be deployed rapidly and in sufficient capacity to replace our current level of energy production from fossil fuels, and that geoengineering projects can be constructed if need be to alter the incoming amount of sunlight or absorb carbon dioxide from the atmosphere. We will thereby save ourselves from civilization-destroying climate change while continuing to live pretty much as we do and with economic growth intact.

People who make these claims are, in my view, simply mistaken about the extent of the challenges. We cannot know for certain whether such people are wrong. But we can judge their chances of being right to be slight based on the evidence. The results of believing such information if it is false can be just as serious as believing intentional falsehoods.

This brings us to another kind of communication that is constructed of outright lies. Claims by industry-funded think tanks include that the Earth is not warming; that if it is, human activity is not responsible; and that such warming will somehow be beneficial to humans on balance. All these claims can and have been shown to be false by the actual scientific evidence. Another demonstrably false assertion is that there is no consensus among climate scientists that humans are changing the climate through their actions.

Catton explains in Bottleneck that the purpose of deception is to create a "false or misleading definition of the situation." The ability to deceive depends on two things, the skills of the deceiver and a situation in which the deceiver's words or actions will be interpreted as truthful. The generally rising prosperity of the last 150 years leads most people to conclude that the future will be more or less like the recent past, namely, continued economic growth with few constraints. So, claims of continuous growth fall on fertile ground.

Those who attempt to deceive the population about climate change also have experience as their ally. Catastrophic consequences tied definitively to climate change are difficult to demonstrate. And, most people have not been touched by frequently cited examples: Hurricane Katrina, the record 2010 floods in Pakistan, the shrinking Arctic icecap. Their experience tells them that at most climate change is benign.

The trends revealed by scientific research are far more troubling than the average person's experience. While the scientific community has endeavored mightily to communicate these trends, the task has proven difficult because of the abstract nature of much of the scientific knowledge which must be communicated. This has made it fairly easy for the fossil fuel industry to muddy the waters with misleading and outright false information skillfully planted in major media outlets.

In the past deception may have been an adaptive behavior for the human species. But, as with any trait, changed circumstances can render previously adaptive behaviors maladaptive. The changed circumstance is that humans are now so numerous and so powerful through their technology that they are are able to undermine the very biosphere which supports their survival.

And, since humans coordinate their activities primarily through language, it stands to reason that if that language is now used most effectively to create a false or misleading definition of the actual situation, then the human community will not be able to act appropriately to ensure its continued survival in the face of multiple threats such as climate change, fossil fuel depletion, soil erosion, water pollution and so on. The ability to deceive then has become so counterproductive that it threatens humans with extinction.

Could this trait be somehow moderated to allow a more realistic assessment of our situation? Partly this would require a new definition of who is included in our community. If the definition remains narrow--for example, my climate-change denying friends in the fossil fuel industry--then there is little hope for change. If the definition can expand to all of humanity, then the need for deception is diminished. I no longer consider people halfway across the globe as part of an out-group who can be regarded as enemies and may be deceived without moral concern.

But overcoming deception will also require the inclusion of scientific information and observations not normally incorporated into what most humans call their experience. Of the two tasks I've outlined, this second one seems the more difficult.

It is discouraging to conclude that a human behavior which has been selected for by nature to enhance our survival has now turned against us. But in this way, language--which is perhaps the highest achievement of humankind--could become our undoing.

Restoring Fortuna to the lexicon of the rich

Fortuna was the Roman goddess of chance and thus entreaties to her were an attempt to insure good luck in any venture. Ancient Romans believed far more than we to do today that chance events played a primary role in their lives.

The Roman historian and statesman Sallust suggested that virtue invited good fortune. But the Biblical tradition offers the Book of Job as a corrective to Sallust's view, and the Gospel according to Matthew puts a New Testament spin on the vicissitudes of life saying: "for [God] makes his sun rise on the evil and on the good, and sends rain on the just and the unjust."

The Protestant and, in particular, the Calvinist tradition believed wealth was a sign of election, that is, salvation which could only come from God and not through the will of the believer. Nowadays, this religious element has been largely stripped from the explanation for why wealth is distributed as it is. Rather, in place of "election" we have "talent and hard work." No doubt in many cases talent and hard work actually figure into the outsized success of certain individuals. I am confident that my dentist did not succeed in learning how to fill cavities and prepare crowns by mere chance. And, I am more than satisfied that violinists who appear at Carnegie Hall have trained at length to warrant such an appearance.

By contrast, those who amass great fortunes through speculation may merely be lucky. Unlucky speculators are usually sent packing to Peoria and so disappear from the finance pages, something statisticians call "survivorship bias." We don't see the unsuccessful speculators and so wrongly assess the skills of speculators in general by putting too much weight on those who've survived to be counted and therefore read about.

Fortunes are also made by being in the right place at the right time. That can be true of corporate CEOs and individual entrepreneurs. It would be wrong to attribute no skill to them. But it would be equally wrong to rule out luck as a key driver of their success, that is, for the ones who are judged successful. (Survivorship bias applies here, too.)

My sister has spent considerable time in the Far East and reports to me that Asians with which she has been in contact are much more aware of the role of chance in their lives. In part, it may be because of the way they view causality. In Carl Jung's forward to the classic Chinese text, the I Ching or Book of Changes, the renown Swiss psychologist provides a compact explanation of the Chinese predilection for chance over causality, or what Jung himself dubbed "synchronicity." From the lowliest worker all the way to the most celebrated tycoon, Asians regularly perform rituals that are supposed somehow to invite good luck. By contrast, tycoons in the West and particularly in the United States tend to attribute their success to their skills and perseverance. Any reversals, however, are often attributed to bad luck.

We who are mere onlookers to the lives of the one percent or even more particularly the one-tenth of one percent, need no special instruction on the luck of those who, so to speak, "have chosen their parents well." Yet, the scions of inherited wealth often feel the same sense of entitlement as those who actually acquire their wealth through effort and ingenuity.

One's place in the world as a person of wealth looks different, however, if the disproportionate accumulation of money is seen as largely the result of chance. Of course, I agree that hard work ought to be rewarded. But good luck in timing, chance connections, and accidents of birth and thus of access to education often multiply the wages of hard work manyfold. The difference in the talent of the world's finest violinist and it's 50th ranked violinist can't be as great as the difference in their compensation would suggest. The income differential between the top 100 money managers and manager number 1,000 may be entirely due to chance: lucky guesses, connections to wealthy investors, unexpected government interventions in markets and so on.

If the idea of Fortuna could be restored to the lexicon of the rich, we might cease to hear from such charlatans as hedge fund manager John Paulson what an obvious benefit their exertions are to society, let alone their investment clients. (Paulson, a longtime darling of the hedge fund community, saw his lead fund decline 52 percent last year.) At the very least, a better understanding of the role of chance in life would cause people to ignore or even heap scorn upon such pomposity whenever it is reported by the media.

If the accumulation of great wealth is not merely the result of talent and hard work, then it must also be the result of circumstances made possible by society at large. That implies a substantial obligation to others who make such success possible and keep its fruits secure. No billionaire could exist alone on a desert island. No fortune could remain secure without the assent of the population through a nation's property laws and court system. To acknowledge this is to support the necessary public services and infrastructure that allow successful businesses and individuals to prosper by allowing the broader population to share in that prosperity.

Acknowledging Fortuna means acknowledging that luck is partly responsible for my station in life. It means I'm obliged to help my fellow citizens who've been hurt by nothing other than misfortune. And, it means that I'll be entitled to help if misfortune lays me so low that I cannot get back up without some assistance. The latter situation is hard for many to envision until they actually arrive there. That's why it pays to think about such possibilities ahead of time and act accordingly in one's role as a citizen.

My interview with The Smoking Poet

I'm coming out of my holiday hibernation temporarily to post because The Smoking Poet, an online literary magazine, has posted an in-depth interview with me. You may read it by clicking here.

Holiday Break -- See you after the new year

I'll be taking a break from posting this week and next. I expect to post again on Sunday, January 8th. Have a safe and happy holiday!

The incompetent and unscrupulous: Confidence in the age of MF Global

Those who are incompetent require our correction. The incompetent need to know how to succeed. Maybe this takes education. Maybe it takes better judgement. Maybe it takes a thoroughgoing review of their errors. While the incompetent may elicit our scorn, they do not merit our moral indignation.

That is reserved for the unscrupulous. The unscrupulous are sometimes incompetent. But often they are quite competent at taking our money under false pretenses.

What the recent MF Global bankruptcy--the eighth largest in U.S. history--tells us is that the world's financial system may be moving headlong into a collision of incompetence with unscrupulousness. (Full disclosure: I had a small account with MF Global and so have had a ringside seat, so to speak, in the bankruptcy proceedings.) I do not mean to say that before now there was no unscrupulous behavior in the financial system. What I mean to say is that it does not matter how competent someone believes a firm is at investing or handling money; if the firm is perceived as dishonest, that's it!

So far the revival of stock and commodity markets around the globe via enormously stimulative budget and monetary policy has assured most people with invested money that the authorities are, in fact, competent to manage downturns, even severe ones. Markets may not be back to their previous highs, but they are a far cry from the devastation of late 2008 and early 2009.

Now the competence of those authorities is being questioned as Europe appears mired in a long battle to save the euro as the currency of its 17-country Eurozone. The question is: Should the average investor--the buy-and-hold investor--stick it out once more and trust in the authorities to make things all better? That is a monumental question.

But soon that question will be competing with an even uglier one? Can I count on the institutions which hold my money and investments--primarily brokerages and banks--to deal honestly and fairly with me? Can I count of them not to steal my money?

As the questions of competence and trust converge, the financial system seems increasingly imperilled. If authorities do everything right, but investors believe they can no longer trust their brokers and banks not to steal their assets, the competence of the authorities in monetary and fiscal policy will simply not matter. And, if investors should simultaneously lose faith in the ability of authorities to handle the roiling financial crisis in Europe and lose trust in their brokers and banks to safeguard their money, we should be prepared for a wipeout that will make 2008 look like a day in the park.

This is the scenario lurking behind the MF Global collapse. Clearly, MF Global was incompetent at managing its risks including the risk that its lenders such as banks and hedge funds would withdraw funding for its positions. (Firms such as MF Global borrow money short-term to buy long-term assets and profit from the difference between the interest payments on short-term funding and the stream of revenues from long-term assets. The short-term funding must be periodically renewed. If this seems risky, it is.) The lenders stopped lending not necessarily because they believed MF Global to be unscrupulous, but because they believed the firm was no longer competent to manage the risks associated with its portfolio of highly leveraged investments. Fearing losses on their loans, they didn't roll over their financing.

Then came act two. MF Global misappropriated protected customer funds to support its precarious positions, especially those in European government bonds which seemed increasingly dicey this fall. Perhaps the firm felt it would be able to pay customers back once the fuss died down, and no one would be the wiser. But the fact that MF Global managers carefully covered their tracks in making the transfers tells us what we need to know. They believed what they were doing was illegal.

Here is the problem that regulators face. Prior to the MF Global collapse they had been able to say that no holder of a regulated futures account had ever suffered a loss of deposits (collateral or cash). Naturally, people lose money on futures positions every day. But that's a far cry from having money which has been deposited to support those positions simply stolen. That makes it impossible to collect money even if you win your bets, since the money that is supposed to be transferred to you from the people on the losing side of the trade just isn't there.

Futures accounts are not insured for such losses for the simple reason that the regulators wisely decreed that customer money and firm money have to be separated, and customer money simply cannot be used for the firm's own trading without customer consent. There was no consent, and there would have had to have been collateral posted or contractual obligations agreed to had there been any consent.

Worse still, the CME Group, owner of many U.S. futures exchanges, was the auditor for MF Global and thereby responsible for making sure customer money was properly segregated and actually in the right accounts every day. One would think that the owner of the exchanges would have a special interest in making sure one of the world's largest futures brokerages--with which the exchanges do business every day in huge volume--is handling customer money properly.

The result of the CME's poor supervision was a huge seize-up in futures trading as a significant portion of the world's largest players in the futures markets found their money frozen, waiting for someone to sort out the mess. Nearly six weeks after the collapse customers are only now getting a portion of their cash back, around two-thirds of it. The rest will have to wait for a claims process, and there is currently no guarantee that the remaining third will be paid back.

Now, if you are a futures trader and especially if you trade on behalf of clients, would you want to continue to trust the current U.S. regulatory system to safeguard your money? Why not go to say, Canada, where regulators appear to take their jobs more seriously and trade there? After all, Canadian customers of MF Global didn't lose a penny.

That's what the domestic futures exchanges and brokerage firms are facing. A gradual and perhaps persistent loss of business to someplace where traders feel assured about the safety of their funds. And, many small traders are simply giving up trading futures at all, believing the regulatory authorities are incompetent and the brokerages too crooked to deal with.

Now, I'm imagining such an outlook migrating to people holding stocks, bonds, and mutual funds at brokerages and mutual fund companies. I'm even imagining that outlook infecting regular checking and savings account holders at banks. It may already be happening in Europe in countries such as Italy and Greece where wealthy people seem to be shifting their money to safer banks in Germany or even outside of the Eurozone altogether.

These types of fears have a way of taking on a life of their own and spreading all of a sudden across the globe. I've mentioned before that Nicole Foss, writer for the financial commentary site The Automatic Earth, has said that liquidity and confidence are the same thing. If I lose confidence that my investments and cash in brokerage accounts and bank accounts are safe for whatever reason, then I will sell my holdings and withdraw my funds moving them to where I think they will be safe. If enough people do this, liquidity dries up as everyone heads for the exits at the same time. There are not nearly enough buyers to handle the sell orders in various markets. And, if people withdraw money from banks, the banks must quickly find some other source of liquidity than customer deposits. Such liquidity problems are already appearing at banks in Europe. And through it all, it will not matter whether investor fears are actually justified.

As the prosecutions of financial malfeasance rise, as the revelations of double dealing and outright theft abound, as the ability of European, American and Asian authorities to calm markets is eroded, the intersection of incompetence and unscrupulousness is poised to fling the global financial system into the dark unknown. These kinds of complete meltdowns have occurred in individual countries with disastrous results; Argentina comes to mind. But a grand failure of this sort on a global scale was only really hinted at in 2008. That's how bad it could be next time.

Deconstructing "ethical oil"

When I stumbled across the site EthicalOil.org recently, I thought there was a small chance that it was a parody. And, it turns out that the site reads like a parody in some places even though I am certain that the owners are dead serious.

You see, the site is a defense of the Canadian oil sands industry. The argument it makes is that because human rights standards are much better in Canada than in many other oil exporting nations, Canada should be considered a more "moral" source of oil. In fact, the oil from the oil sands is touted as a "fair trade choice."

Once I'd read through the site, it was hard to imagine why the oil sands industry would even want it online. If these people were working for me with the express mission of defending the oil sands, I would fire them. Let me explain why.

First, the site claims to be based on a book called Ethical Oil: The Case for Canada's Oil Sands. At the bottom of the EthicalOil.org home page the book is described as follows:

In Ethical Oil, Levant [the author] turns his attention to another hot-button topic: the ethical cost of our addiction to oil. While many North Americans may be aware of the financial and environmental price we pay for a gallon of gas or a barrel of oil, Levant argues that it is time we consider ethical factors as well.

I am certain you are now scratching your head thinking you could do a better job of arguing the case than that. Since when, I hear you saying, did things financial and environmental stop being moral issues? That's strike one.

But the embarrassment has only begun. A set of rotating stories under "Featured News" includes a photo of two burka-clad females in front of the White House holding a hand-lettered sign which says "Stop tar sands, Stop Canada, Americans4OPEC.com." This strange scene seems contrived, and it is. The accompanying text reads as follows:

Americans4OPEC: Blame Canada!
Earlier today, I snapped a few photos of Americans4OPEC, which today joined the anti-Keystone XL protests outside the White House. Here’s one of the photos and the group’s press statement. You can visit their website at Americans4OPEC.com

Americans4OPEC statement (sic), which is available on their website:

"For more than 40 years, we Americans have powered our businesses, fueled our cars, and made our lives more comfortable with the help of OPEC oil. We think that special relationship is worth protecting..."

This is the site's attempt at satire (and it's also intentionally misleading). After reading the story or clicking through to the Americans4OPEC site, if you haven't figured out that the burka-clad protesters aren't real and that this is a satire, a note in small type at the bottom (if you make it that far) will tell you that "Americans4OPEC is not a real organization, but a satire created by EthicalOil.org to highlight the choice Americans now have."

Okay, in order for a satire to work, you don't really want to tell the reader up front that what he or she is reading is a satire. You want the reader to figure this out; it's part of the fun. On the other hand, a satire, to be effective, really ought to be funny. This one isn't. Strike two!

Far more insidious is the confusion this site sows about the label "ethical." We might consider the mere purchase of certain products or services as unethical. Or we might consider the conditions under which a product is grown, mined, manufactured, or traded, or a service rendered as unethical.

For example, we might consider the purchase of African ivory as unethical. (It also happens to be illegal.) We might also consider it unethical to eat bluefin tuna--which is highly prized in raw fish dishes such as sushi--because the species has declined so much due to overfishing.

However, we don't say that the purchase of coffee is in and of itself unethical. We now sometimes say that the terms of trade for the coffee growers is often unfair and therefore unethical. And, this accounts for the growth of fair trade certified coffee. The feeling is that the grower ought to get more of the proceeds from his or her coffee than international trade arrangements and powerful food companies have provided in the past.

Obviously, the argument being made by EthicalOil.org is that Canadian oil from the oil sands is more ethical because of the conditions under which it is produced which exhibit higher concern for human rights than in many other exporting countries. And, now we see why the authors of the site do not wish to talk about environmental aspects of the oil sands. Because to do so would force us to include the first ethical category in our discussion: namely, whether it is moral for us to consume increasing amounts of oil or even any at all given the implications for pollution and climate change.

But let's accept for a moment that we should limit our discussion to the relative human rights records of various regimes which export oil. If we buy oil from Canada, or at least refined products made from oil produced in Canada, should we feel better about ourselves? Not particularly, would be my answer. The key fact about tradable oil is that it is fungible. It can be moved virtually anywhere in the world. If we don't buy oil from Saudi Arabia or any of the other regimes thought to be inimical to human rights, those regimes will simply sell their oil to someone else. None of it will go to waste.

The only way those regimes might be penalized is if total consumption worldwide slumped, driving prices down. But this would force us back onto the first ethical category: namely, that the most moral thing we could do is simply to consume a lot less oil. Naturally, the supporters of the site do not want to discuss this logical conclusion of their argument. (The site, however, unwittingly mentions conservation in one paragraph as a means to wean America off OPEC oil. So, the authors are unconsciously aware that reducing overall consumption is really the only way to reduce the perceived evils associated with oil use including that of rewarding oil-exporting regimes having poor human rights records.)

The argument for using less oil overall is simply rejected in the book upon which the site is based. Here's the conclusion to that book (available on Amazon for those who want to check it out without buying the book):

The world isn't throwing out the internal combustion engine anytime soon. In fact, in countries like India, China, and Brazil, the world is buying more cars than ever. So we're stuck with oil for a long time, whether we like it or not. The only question that remains is: if we have to produce oil, and we have to buy oil--and we absolutely must do both--whose oil should we do our best to support? Who can we trust to do it the most morally?

There can be no doubt: Canada does it best. We're an energy superpower. And we're an ethical superpower too, setting international standards for how we treat the environment and how we treat each other. And if our goal as moral citizens is to make the world a better place, then there is only one choice: to pump as much oil as we possibly can out of Fort McMurray. Pump and steam and dig and drill and get that oil out of the sand in any and every way we can. Every drop of oil from Alberta is one less drop from some fascist theocracy, or some brutal warlord; one less cent into the treasuries of Russia's secret police and al-Qaeda's murderers.

Canadian oil sands oil is the most ethical oil in the world, and the people who invest there, work there, and support the oil sands with their patronage and their encouragement should be proud. Whether they realize it or not, they are all, gradually, helping to make the world a more moral, humane, and better place.

Think about it. The action that will be the most moral is "to pump as much oil as we possibly can out of Fort McMurray." This is only moral if you limit your moral evaluation to the relative human rights records of oil exporters. Otherwise, it isn't. And, you must ignore the necessity of bringing down consumption worldwide to really force any pain on the aforementioned egregious exporters. This is hardly a compelling case. Strike three!

(There's actually a lot more to amuse you or befuddle you with its ineptitude on the EthicalOil.org site if you have the necessary inclination.)

While unlocking the oil in the oil sands is most certainly the carbon bomb for our atmosphere that its opponents say it is, to be fair, so is every other source of carbon fuel, including sources for supposedly "clean" natural gas. It is not so much that the Canadian oil sands are better or worse than other sources of fossil fuels, but rather that their exploitation is made inevitable by the way we live. If we don't like the oil sands, then we must build a society that does not require their exploitation. This is doable with the technology we have (but perhaps not with the politics we have). The originator of the "ethical oil" argument, however, tells us that it will be impossible to build such a society until very far into the future. He is wrong--dead wrong, I would say.

If this is the argument upon which "ethical oil" rests, then it is one of the most unethical arguments ever made. Believing such an argument or using it cynically to deceive others may condemn us to catastrophic and irreversible climate change. And, it will also prevent us from preparing for an orderly transition away from fossil fuels--a transition that may be forced upon us in the not-too-distant future.

Now how's that for ethics?

Oryx and Crake comes to mosquito town

In Margaret Atwood's novel Oryx and Crake the brave new world of genetic engineering has devastated the human population. How this devastation comes about is explained in flashbacks that precede the opening scene. Naturally, the architect of this catastrophe thought what he was doing was a benefit.

What may seem like a benefit to society isn't always a benefit except to those who profit from it. So much has been written about the evils of genetically engineered food crops that it would be redundant to rehearse them all here. But what if the offending genetic technology were to be trained on a human problem that everyone believes ought to be tackled, namely mosquito-borne diseases?

The idea is to create wingless mosquitoes that can't get off the ground and so die practically in the place of their birth. That idea is now a reality. And, where it has been tested, both in and out of the laboratory, it has been a smashing success, bringing mosquito populations down by 80 percent in very short order.

That means that diseases such as dengue fever, yellow fever and malaria which infect tens of millions of people each year would be considerably reduced.

But as with any alteration in an ecosystem, you can never do just one thing. What will the unintended consequences of such mass eradications be? The writer of the article cited above does acknowledge that mosquitoes are part of the food chain and their decline could affect birds and fish. He says that could have consequences for pollination since birds are part of this process for some plants. He also suggests such eradications might open a niche for an even nastier creature.

But then he goes on to say that "this could be one of the most human-friendly modifications we could make to our world. And it would certainly be no worse for the environment than our habit of clear-felling forest areas."

So, there you have it. Humans are creatures who routinely affect the surface of the Earth and the biosphere on a massive scale, so why not this modification which seems so small and so humane? I take my response from Dr. Phil of television fame: "So, how's that workin' out for you?"

This is the same logic that has been used to justify genetically engineered (GE) food crops, and then fiber crops such as cotton and trees, and finally crops that produce pharmaceuticals. Each introduction was always a step forward for human comfort and well-being. Now, we have weeds which resist the herbicide that only a decade ago was supposed to be the great savior of the cash crop farmer by reducing the chemical, labor and financial inputs of those who planted crops that resisted the same herbicide. That herbicide known as glyphosate may now be altering the microflora in the soil in a way that leads to so-called "sudden death" of GE crops.

We have butterflies that die from the pollen of corn. We have rising farmer suicide rates in India where GE cotton that was supposed to increase yields instead fell victim to disease leaving farmers destitute. And, we now have the specter of genetic contamination of food crops with genes from plants grown in the open to produce pharmaceuticals. Would you like a little insulin with your corn flakes?

I have no doubt that this new technique for controlling mosquito populations will spread. It seems as if it will be safer--for humans at least--than chemical sprays and more effective than bed nets. If this method of eradicating pests works well, where will we draw the line? Shall we rid ourselves of rats in cities? Seems like a good idea. How about loathsome raccoons who love our garbage and can carry rabies? Maybe you're feeling a little queasy about that one. Why not get rid of coyotes which destroy so much of our livestock each year? But wouldn't that upset the normal predator/prey balance for other species as well?

The effects of this type of mosquito eradication on local ecosystems may indeed be minor. But, there's really only one way to find out. Try it on a large scale in a lot of places. And, that's what scares me!

Why isn't the Keystone pipeline extension going to eastern Canada?

So much of the discussion surrounding an extension of the existing Keystone oil pipeline system which spans Canada and the United States assumes that the growing production of bitumen (it's not really oil) from the Canadian tar sands is either going to the United States or to China. But the following question ought to be an obvious one to anyone who knows that Canada imports 43 percent of the oil it consumes: Why isn't there any discussion of a new pipeline to eastern Canada where most of the oil consumed is imported?
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RELATED UPDATE October 21, 2012: Canadians could free themselves from oil imports, but will they?

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Perhaps I should back up a bit for those who are scratching their heads because they know that Canada is a large oil exporter. Canada is indeed a large oil exporter. First, let's note that Canada's total petroleum production was 2.9 million barrels per day in 2010. Canadians consumed only about 1.8 million barrels per day that year. So, how is it possible that 43 percent of their needs had to be imported? (The number was 65 percent for the provinces from Ontario eastward.) The answer is straightforward once you get a glimpse of the North American oil pipeline system. Notice that the one lone pipeline going from Montreal to Sarnia is flowing away from eastern Canada. (Click on the map to see a larger version.)

Source: National Energy Board (Canada)

Most of Canada's oil wealth is found in the western part of the country. And, nearly all of the pipelines run north/south, exporting much of that oil into the United States. When one asks why this is so, the answer given is that this is what has proven to be most economical. Western Canada exports its oil to the United States. Eastern Canada imports most of its oil from abroad. That works fine until there is a disruption in supply. This year, in particular, ought to give Canadians cause for worry given all the social unrest in the Middle East and the civil war in Libya which resulted in substantial output losses.

When Canada's oil riches are combined with its abundance of natural gas--it exports half its production to the United States--and its large deposits of uranium and coal, the country ought to be energy self-sufficient. So, why haven't Canadians pursued energy independence? One member of the Canadian parliament thought he had an answer all the way back in 1972. Don't worry too much if you can't follow his discussion of oil company takeovers at the time. His conclusion, however, is quite clear: The Canadian oil industry is largely foreign-owned and serves the needs of its corporate masters and not those of the Canadian people. Little has changed since then.

The current Canadian government seems nothing more than a subsidiary of the international oil industry which finds it more profitable to ship Canadian crude oil out of the country and add value to it through refining operations elsewhere. So complete is the control of the industry over the government that a witness before a parliamentary committee who broached the subject of Canadian energy independence was told to cease his testimony, and the hearing was immediately adjourned by the Conservative Party chairman who presided.

What might the advantages of building an east-west pipeline from the tar sands to eastern Canada be? Of course, there would be many Canadian jobs created by the building of the pipeline, and that would also benefit the government through increased tax revenues. Ports in the east might become oil export terminals instead of import terminals. Canada would likely build more domestic refinery capacity, both to supply its own needs and to export refined petroleum products. That would lead to yet more jobs for Canadians and yet more tax revenue for their provincial and federal governments. And, that would mean better financed public services for all Canadians.

Naturally, the large international oil companies that control most of the Canadian oil industry want to avoid the high taxes generally levied throughout Canada. Better to ship oil to the lightly taxed United States, refine it there, and sell it back to the Canadians or whoever offers the highest bid.

There is another way in which the international oil companies have thwarted Canadian energy independence. The North American Free Trade Agreement (NAFTA) prevents Canada from reserving more its oil production to itself in the event of an emergency. Canada is obliged to maintain the same ratio of exports to total production that prevails in any preceding 36-month period. No sudden cessation or reduction is allowed unless it is due to a decline in total production, something not in prospect anytime soon in Canada. (It's worth noting that Mexico, a major oil exporter to the United States and a signatory to NAFTA, refused to sign such an agreement.)

NAFTA also prohibits Canada from charging a lower price to domestic oil consumers than to those purchasing exports. It's common practice for countries that are self-sufficient in oil to give domestic oil consumers a discount from the world price, in essence, to control domestic prices. Back in March of this year when vaulting oil prices pushed up the cost of refined products such as gasoline, residents in some oil-rich countries hardly noticed. Kuwaitis were paying 81 cents per gallon for gasoline. Saudis paid 45 cents. And, Venezuelans were paying just 6 cents.

Since Canada imports so much of its oil, it has little choice but to accept the world price. (It could subsidize oil using funds from elsewhere in the economy, but that would be extremely costly.) Whether it is good policy to provide low-cost domestic fuel is questionable since such a policy tends to encourage profligate use. Some exporters that could easily afford low domestic oil prices choose just the opposite course. Norway, the world's eighth largest oil exporter, was charging $9.27 a gallon (including taxes) for gasoline in the same March survey mentioned above. The point remains, however; Canada currently has no choice. Its energy sovereignty has been severely restricted.

Of course, Canada could withdraw from NAFTA by giving six months' notice. This might prove painful as the United States would likely retaliate in several other areas of trade and reciprocal relations. In the alternative, the Canadian government could reopen the NAFTA agreement and alter the section on petroleum to allow it to route some or all of its increasing tar sands production eastward within Canada. But, don't look for this to happen anytime soon.

The impression I get is that most Canadians do not even know that their government has essentially given away their energy sovereignty to the United States through NAFTA. The onesidedness of the agreement was made plain by the U.S. rejection of Chinese National Offshore Oil Corporation's attempt to buy U.S.-based Unocal. There was overwhelming political opposition to this acquisition--even though Unocal had relatively small domestic operations--because the takeover represented an attack on American energy security. Any foreign power seeking access to American oil is probably facing an unwinnable fight. Canadians, however, are basically helpless in the face of American demands for Canadian oil. No wonder American politicians speak of Canada's resources as if they are located inside the United States.

Many who are protesting the Keystone XL pipeline--the formal name for a project to extend existing pipelines that would increase the export capacity of the tar sands to the United States--don't want it because they believe tar sands production produces significantly higher greenhouse gas emissions versus conventional oil production. Some also object to the wholesale destruction of forests, cleared to make way for tar sands mining operations which then cause air and water pollution.

To this list of concerns, Canadians should add a query about why their patrimony of oil resources is being shipped to strangers when so many Canadians remain dangerously exposed to disruptions in oil imports transported from faraway sheikdoms. There is no good reason why Canadians must bear such a risk. But there is one bad reason: Canadians have lost control of their energy resources, and those resources have long ceased to be managed for their benefit.

Which begs the question: Would Canadians want that control back if they understood their predicament correctly?

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RELATED UPDATE October 21, 2012: Canadians could free themselves from oil imports, but will they?

Emperor Vespasian has a solution for unemployment

The Roman Emperor Titus Flavius Caesar Vespasianus Augustus, known to us as Vespasian, was responsible for the building of perhaps the most recognizable man-made structure on Earth after the Egyptian pyramids, namely, the Colosseum. So massive is the structure that a fire, an earthquake, the pilfering of its iron supports, its use as an aboveground quarry for hundreds of years and 2,000 years of weather have nevertheless left much of it standing. When it was new, it was said to hold 50,000 people. Today, millions of tourists still visit and walk on its remaining structure every year.

One would think that given the scope of such a project and the other projects built under his reign that Vespasian would have welcomed suggestions for increasing the efficiency of construction practices. But he didn't. Instead, as historian Michael Grant reports in The World of Rome:

[W]hen Vespasian was offered a labor-saving machine for transporting heavy columns, he was said to have declined with the words: "I must always ensure that the working classes earn enough money to buy themselves food."

Of course, Vespasian had to contend with a slave workforce which he needed to keep busy and free working-class Romans who needed to be fed. We don't allow slavery (unless you count the sweatshops of the world as its successor); but the idle workforce, especially of the unskilled, continues to expand.

I was reminded of Vespasian when Charlie Hall, perhaps the best-known energy researcher you've never heard of, commented at a recent conference that we have built a society where fossil fuels have consistently displaced labor. This has had the unfortunate result that those whose primary aptitude is with their hands are finding less and less work.

Of course, much of the manual work which used to be performed in the United States is now done in the Far East, particularly China. And, the kind of work that most factory workers do there might very well be considered drudgery by many people. Hall's point, however, was two-fold. First, impending declines in available energy to society will likely force such work closer to the markets it serves. This is because rising transportation costs will diminish the advantage of worldwide manufacturing webs in favor of regional and local ones. Second, manual labor often requires skills that we in the United States do not teach as widely as we used to. We aren't ready to make the things we once made. And, all of this remains true even as the ranks of the unemployed swell and energy costs continue to climb.

Certainly, Vespasian's attitude would have prevented the immense advances in productivity of the modern age. But since those advances are largely premised on the growing availability of cheap energy inputs, we may need to re-examine our attitude as those energy inputs become constrained and thus are no longer cheap.

Moreover, continued policies that lessen opportunities for manual labor will, of necessity, doom an entire group of people to the unemployment rolls just because their intelligence shows through in what they make with their hands rather than what they say or write.

I am not here romanticizing backbreaking labor. The one place that mechanization has failed to progress very much in the last few decades is the picking of fruit. Researchers had been looking for ways to harvest fruit mechanically. But an onslaught of cheap immigrant labor into the United States from the 1980s onward pushed real wages down for farm labor so far that mechanized fruit picking did not seem worth the effort. Even in the exploitative world of farm labor the laws of supply and demand apply. An avalanche of new workers depressed wages and doomed the mechanization effort.

We may be facing something similar in the next decade. The financial turmoil of Europe is but the latest chapter in what I believe is an unfolding depression that will take many years to resolve itself. It is worth remembering that as late as 1931, no one alive back then thought they were in a depression, let alone what would come to be called the Great Depression. Back then, of course, governments engaged in very little of what we would call stimulus, and central banks did not regard it as their purview to save the economy and provide full employment. We have bought some time with countercyclical measures from both institutions. But now the effects are running out, and we must face the consequences of too much debt and not enough cheap energy.

During the Great Depression President Franklin Roosevelt proposed and implemented huge government works programs, the results of which can still be seen today in forests that were replanted and dams that were built. Such programs put people to work on useful public projects largely with their hands. Advances in productivity are useful, but useful work is more important to the human psyche and thus to social stability.

Jay Hanson, one of the first to publicize approaching resource limits through his dieoff.com site, was recently quoted as saying that the most important issue to face society in the coming era of limits is what to do with all the young men. No one needs to be reminded what can happen when this subgroup of society sees no useful role for itself. One way in which many societies solve this problem is to send the young men to war. And, certainly, the United States and others might try this as a way to harness the restless mass of unemployed young people. Of course, the stimulative effect of war on the economy is well-known. (This is assuming your country is not being destroyed by the war.)

In the coming era of limits we will need to rely less on fossil fuels and more on each other. "Idle hands are the devil's playground" will become more than a trite aphorism if we do not see that the future will require us to find more work for idle hands. The work is there to do, to restore our environment, to teach the young, to repair our crumbling infrastructure and to rework it for a lower energy future.

Those in the skilled trades are available for these tasks. Those who are unskilled will need to be brought into the workforce, paid decent wages and given reasonable working conditions. We can argue all we want about economic theory and market-determined wage rates for such people. But the alternative to providing decent wages and conditions for the least skilled among us is an army of unemployed, dissatisfied and potentially disruptive people whose potential contribution to society will be wasted because of a slavish devotion to free-market ideology.

The fantasy that machines will more and more dominate our lives will only come true if there is the energy to fuel them. Absent that, we will be forced to rely increasingly on our hands and our feet to do the daily work of living. Vespasian understood that hands and feet need something to do that produces a living. The sooner we see that, the better.