mandarine

So, here’s where the LETS project is right now: we’ve had the first information meeting yesterday evening, and there were around 50 people. Among those, 30 are sure to join the initiative, and the most important success is that there are 10 volunteers who want to be in the launch team. I was right to bet that I was not the only one considering that starting a barter network was a good idea.

The next step will be to define the structure of the network (especially the legal aspects of the association), as well as the name, the ambitions, etc.

Meanwhile, there is an awful lot of work to be done in the garden to put it in its spring tracks before we have to leave for two weeks (we fly across the Atlantic to visit NYC* and Martha’s Vineyard in late April, because my brother is getting married in New England). Therefore, as far as wisemandarine.com is concerned, it’s going to be a thin dotted line for a while.

(*) we’ll be visiting Emily, Dorr and Hobs (and apparently we’ll miss Becky).

The forest is burning. All the animals are staring blankly at the blazing fire, paralyzed with stupor, watching their world come to an end. Alone, the little hummingbird is flying relentlessly back and forth, each time sipping one drop of water from the river and spitting it over the flames. One of the animals finally says: “your efforts are useless; you are much too small to make any difference.” The hummingbird replies: “I know, but I am doing my share.”

Maybe not everybody is conscious about it, but our world is coming to an end. Runaway global warming in a few decades; peak energy in a few years; economic collapse in a few months. Nobody can deny that most things we’ve grown used to will stop. If this is true, why hold on to our little habits and carry on our little routines pretending, and then watch the world fall apart, aghast and helpless?

I will be putting all my efforts in my community, starting a Local Exchange Trading System, so that we have a local, social and economic safety net, as all I am seeing from our governments is bailout plans and unconditional support to the very system which brought us here. I hope they succeed in slowing down the fall. Meanwhile, the clock is ticking, and I believe I should devote every minute of my free time to this project (while I am gradually stepping back from my wildly funny, unjustly well-paying, and insanely useless job of inventing space machines which will never fly).

Maybe I’ll be back in a couple of months/years, when my project is up and running and I see the end of the world is not as near as I had thought. In the meantime, it is au revoir everyone.

Amicalement,

Mandarine

Only a few weeks ago I was confident that government take-over on the banking and financial front was going to halt the downward spiral of the financial crisis. Now that I have watched the fabulous documentary Money as Debt [update: I absolutely disagree with the conspiracy theory advocated towards the end, but the beginning is still great at explaiing how money come about], I am convinced that the fall will not stop short of a global monetary (and thus economic, and thus social) collapse. Here’s why.

I already mentioned that one’s money was someone else’s debt, and that when the someone else becomes insolvent, money loses its value. What I (and probably you) did not know is that today’s money is highly leveraged debt. Which means that the banking system essentially turns one thousand dollar of debt into roughly ten thousand dollars of money. As soon as there are doubts as to whether the debt will be paid back, the whole pyramid of leverage collapses.

Do you know the famous pyramid-scheme ? This century-old con consists in talking several people into giving you one dollar each, and then send them forth to do likewise with any number of fresh recruits they can trick into the scheme. In an infinite world, this scheme is great and endlessly concentrates money up the pyramid. In a finite world, however, the scheme always ends up collapsing when the bottom levels of the pyramid realise they will never get their dollar back from nonexisting lower level recruits, and understand they have been tricked by the upper levels in the pyramid.

This is exactly what is happening to the financial world (and economic world too, because let’s face it: there is no such thing as a financial vs real economy separation). People have been selling leveraged debt, and the scheme was holding only because the sky was the limit. As long as there was the promise of always more, as long as we could count on sustained exponential growth, paying back a debt with a new debt was nothing to be worried about. The runaway race of leveraged debt was sustainable as long as there was somewhere to runaway to.

I believe that the bursting of the housing bubble is just the first symptom of something far more ominous: the planet is becoming insovent. For centuries or even millennia, the world had relied on the fact that there was always going to be more tomorrow than today. More production, more commodities, more people, more money. The housing bubble burst when the commodity markets had given very clear signs that we were running out of planet to rape. The fact that oil production was peaking sent oil prices skyrocketing. For the first time in a long while (who remembers peak whale oil or peak seal fur?) the planet was sending a signal of exhaustion down the economic pipes. Where everything in the economic world was based on the bet that things were going to be ever cheaper, ever more abundant, now came the news that there was not going to be more oil. This is called a shock, and something had to break somewhere. The economic fabric had to give and it gave where it was weaker: hence the bursting of the housing bubble.

I believe it is not going to stop there, whatever the government bail-out initiatives. These initiatives are merely an attempt at preventing the middle of the pyramid from melting by transferring more debt to the bottom (government guarantees are taxpayer’s children’s debt). Now that everybody realizes that the planet is bust and that there is far more money (and stocks, and bonds, and such like) around than stuff to buy with it, money that was engineered as a bet on an ever expanding future will just vanish, and we’re in for a complete and global monetary collapse.

The collapse can take many shapes, and a historian of economics will be able to depict at least half a dozen. The smooth option is by way of double-digit inflation over a decade. The hard option is by a complete collapse of corporate, then state credibility worldwide, with the very rich trying to be the first ones to jump ship with anything they can snatch from the people down the third class deck.

There is no liberal take on what should be done. Letting the pyramid fall is not a option. Just think what happens when the guy working for the electricity or the water distribution company stops working because he has not been paid in months (remember the collapse of the Soviet Union?). If I was the king of the world, I’d take the following measures:

• tell the rich the game is over - all savings accounts (i.e. the debt weighing down on the future generations) are reset. After all, if I have been saving money, it means I did not need it all that much. This amounts to telling all those who thought they were investing money that they had in fact been donating their surplus to those who needed it more. This measure will guarantee that the people can keep their homes, the contractors can keep their tools, the bosses can keep their factories. Otherwise, we’d see creditors diving from the sky to liquidate everything and put everybody out on the streets and out of work to get money back that’s not worth anything anymore because the economic system would be completely broken as a result.
• tell everyone that there is going to be less for everyone. There should not be job cuts to protect the wages for the few who stay aboard: everybody should cut their wages, possibly work part-time. Otherwise you you just precipitate the fall. Because the crisis will gnaw at people’s purchasing power, there will be economic niches that we must drop (airplanes, probably automobiles), but then we must reallocate the workforce like Roosevelt did with the Civilian Conservation Corps to mend the planet while we still have time.
• Encourage all local economy initiatives. The world’s financial fabric is giving because it was based on trust and that trust has been abused by financial markets. You cannot rebuilt that kind of trust overnight. However, you can still trust your neighbor. Reinventing the economy from the gift stage and the barter stage takes some time. Everyody had better start right now.
• Rebuild a monetary world that does not send the planet on another runaway race, otherwise we’ll be like a fly bouncing forever against the glass ceiling. Interest lending intrinsically leads to the concentration of wealth and exponential growth. There are many wise alternatives to the kind of money we have grown used to. In the thirties, people have had successful experience with local, evaporating currencies: you had to use your money as quicly as possible if you did not want to see it evaporate. This looks like organized inflation, but the prices and wages remain constant, leading to more psychological stability. This removes the temptation of hoarding, hence the tendency of money to concentrate. After all, if money is debt, there is no reason why it should not come with a date limit. If my grandfather gave a hand to your grandfather fifty years ago, you’d find it awkward if I came to you and demanded a payback right now.

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. (Silvio Gesell)

What’s the good side of the recession? It will probably achieve the CO2 emission cuts that give a chance to our children. After all, it’s only fair to say ‘game over’ to the ones who did not play nice with the planet, and not those who come after them.

If you think I am just nuts and that everything is going to be all right, I am glad. Especially if you can come up with convincing data and arguments against these guys, who were my inspiration.

[update: there is another fabulous slide-show that you want to watch to get to grips with the big economic / environmental / monetary picture.]

It has been more than a year that I have been devotedly reading Paul Krugman’s columns on the New York Times website. His very intelligent views on the world’s economy make him one of the top figures of my personal pantheon, right next to George Monbiot.

And guess what: he’s just been awarded the Nobel prize for economics. I feel like a one-man Nobel prize jury.

And vade retro Milton Friedman and consorts. High time for a change of spirit.

Gift economy and intellectual production

I have already said that the commercial model is not the right tool for the promotion and the exchange of ideas. When the cost of replicating something is close to zero, applying a model that was invented to deal with scarcity is just nonsensical. Yet, it is what the French representatives are trying to do right now, by legislating clumsily against illegal downloading, motivated by music labels lobbying, and handicapped by an obvious ignorance of how the internet works.

I claim that piracy is not the same thing as theft: when one downloads songs or software, one does not deprive the author of his work. Yet the legislators are trying to make it sound as theft, although we are already paying a tax on all data recording materials (CDs, DVDs, hard drives) as a compensation to the music industry.

In my ideal music world, all music would be self-produced and self-distributed on the web, and artists would be paid either by subscriptions and donations like Radiohead, and/or by selling concert tickets. The web would contribute to their fame, so that I would know and love them when they come on tour near where I live. Probably fewer musicians would become millionaires. Bummer. But I think there are not many musicians who choose music as a way to make money. Behind every artist is a giver. Artists want to give and share pleasure with people. All we need to do to make sure they keep on giving, is to keep them alive (and happy). And I had much rather donate to my favorite artists than buy from their music labels.

Linux and Google

There are two flourishing gift economy examples on the web right now that I want to write about. One is Linux, the other is Google. The motivations are different, but the benefits to the world are huge.

Linux is pure gift: not only can everybody have a free better-than-commercial-grade operating system, but no contributors to Linux can ever get it back and claim it’s theirs. In order to promote the idea of freedom, the licenses behind Linux are made so that nobody can confiscate the code. You can sell a bit of open-source code, but you have to leave it open. Essentially, this tends to force the selling price of any generic code to zero, while still allowing premium charging for specific code (e.g. I want Linux integrated with my business’s accounting system) and consulting support. Because it’s free, it does not show in terms of GDP. But the value Linux brings to the world economy is considerable. The simplest estimate would be Linux market share (10%) x Microsoft revenue (60 bn $), and you have a 6 billion dollar industry powered by pure gift.

Google have understood this, but they want a more tangible share of the benefits, therefore they have a more cunning business model than pure gift. They distribute things for free, but they still like to hold the keys. Then they can leverage the power they have over those keys, in addition to selling ads (which unfortunately I see as official spam).

Google Sketchup

Now a personal example. I stumbled upon a Google tool named Sketchup. It makes 3D drawing as easy as 1-2-3. With its quality, it is on par with 500$ tools for the general public, or 5000$ tools if we consider professional tools (e.g. architecture & construction). And it is distributed for free. It is not open-source, Google can decide one day that version n+1 will be charged 100$, but right now, it is a gift to the world, and more specifically a gift to me.

Some years ago, I had practiced with illegal copies of professional 3D software (3D studio MAX), but had failed to keep up with new versions. Over the past few months, I had been hovering around blender and K3D, two great free and open-source tools, but I found them too complex for what I needed. I do not need to produce a CG animation movie. All I want is sketch my projects in 3D for the next stretch of renovation in my house, and it should not take me longer than sketching them on paper.

And then comes Sketchup. The underlying paradigm is revolutionary, and the upfront personal investment is extremely light. There is also a really fine feature, generally available only with top-notch commercial tools: non-photorealistic rendering. It make 3D look like handmade sketches. Way nicer than pure 3D, which feels bland unless adorned with hi-res textures.

If Google had distributed their tool for 100$ it would still have been extremely cheap for what it can do (and probably considered as dumping by the competition). But I would not have bought it. Not even at 10$. Probably because I would never have known it; and even if I’d known it, and they offered free demo versions, I would not have tried, because 3D sketching was really so unimportant in my hierarchy of things that I would not have bothered. So would everyone else.

But because it was free, I was just one click on a download button away from trying it and loving it. After two hours of toying with the Sketchup toolbar, I could draw a satellite. The next day, I drew my project of composting toilet. Google do not know it, but their contribution to my composting toilet was crucial. I avoided probably four mistakes in the overall design. I found three good ideas. I now have all the dimensions of all the parts I have to make and/or order. And I have a great 3D blueprint that I can share with everybody else on Earth, because I know they can have Sketchup for free.

This example shows how this gift has cascaded into a series of benefits, first for me, and then maybe for the whole world if my initiative contributes to the publicity of composting toilets (I believe composting toilets are the future of sanitation and therefore human health, especially for dry, poor countries). The immediate benefit to Google is that I will obviously contribute my models back to their Sketchup 3D warehouse, so that all architects who want to put a composting toilet (or a spacecraft) in a project will save a couple hour’s work, then they will love Sketchup, then they will buy Sketchup pro, because they know how cool the free version is, and they’ll trust that the pro features are worth the few extra bucks.

So despite the ads, hurray for Sketchup and Google! I doubt that those guys are giving things just for the pleasure of giving. But I do wish more people did as they do.

Last minute: Google chrome

Google have just released a brand new web browser. Apparently, it is full of high quality innovations in terms of software innards (pretend to be a geek and read the comic-book release notes). As always, it is free, but it is now even open-source. We can understand what they gain in the bargain: by releasing top-quality tools as open-source code, they are encouraging everyone to adopt their choices as future web standards. Cunning.

Still, this is a fabulous gift. Again.

Introduction

Intellectual property rights in general and patents in particular are monopoly rights under a disguise. For the sake of encouraging innovation and the communication of ideas, society grants exclusive exploitation rights to the company or individual holding the patent, therefore making patents a very effective way for big business to circumvent anti-monopoly legislation.

The justification for inventing the concept of patents in the first place was this one: we wanted to support innovation, so we wanted to reward inventors, and for this we accepted a temporary monopoly in return for sharing the idea (when a patent is filed, the idea is published) and for giving it away (after a 20-year period, the idea goes into the public domain). Obviously, this scheme is more beneficial for society than an absence of protection, which would result in either discouraging inventors, or at least in making inventors keep most inventions secret. When the inventor dies, the idea is lost.

Essentially, it is the general public, or more specifically the customer, who pays for the idea: because of the exclusive exploitation rights granted to the holder of the patent, the product is sold with a higher commercial margin. The good side for the customer is that he/she only has to pay for successful ideas. The ideas which do not make it into a successful product will not generate revenue for the inventors: it is as if these unsuccessful ideas had been ‘given away’ with simply a 20-year delay.

Monopoly is not the only solution

But granting monopoly rights over an idea is not the only way we could encourage ideas. There are at least two other ways.

The first alternative is public research. We do not call them inventors, but I am certain that publicly-funded research scientists are contributing far more efficiently to the world of ideas and innovation than corporations. As soon as they are published, new scientific discoveries enrich the public domain, and they often lead to successful commercial applications from companies who file patents based on industrial applications of free, public-domain ideas.

The second alternative is preemption: society (represented by a government, a patent office, an association, etc.) could buy an idea upfront when the applicant files for a patent. The deal could be the following: how much do you want society to give you (the inventor) in exchange for giving the idea away? This is exactly what big corporations do when they buy patents from private inventors or small businesses. The main difference is that society, now holder of the patent, would choose to give away the idea. The net result is that the inventor has received the same reward, but the general public gets the benefit of the idea for a fraction of the price.

Free ideas have more value than commercial ones

You could argue that 20 years is not long when we consider really really good ideas like the wheel, the bicycle or semiconductors. So why I am so keen on seeing innovation make its way into the public domain as fast as possible?

The first reason is that there is a very stiff threshold effect between something free and something we have to pay for. If I tell you I have an idea which might make your day or even make you rich, but that you have to pay me 10$ first, you would certainly decline the offer. And even if I told you the idea first, and then told you you had to pay 10$ to use it, you would probably decide to try to find another way of doing the same thing rather than pay me the 10$, even though the extra effort you put into it would probably greatly exceed the 10$ mark. Maybe if I had asked you only 1$ or 1c, you would not have been so strong-headed. But if I had given the idea for free, then I am quite sure you would have taken it at once. Or even better: you would have improved on it and probably shared your new idea for free.

This leads to the second reason why I think ideas should all be free: many ideas are just marginally good ideas until they meet a host of other ideas and they can make a fantastic whole. To make a good bicycle, you need the wheel, you need cable spokes, tires, sprockets, ball bearings, a fork with trail, a diamond frame, hollow tubes, welding, light alloys, pedals, cranks, gears, a drive-chain, a derailleur. Each of these is a patentable idea in itself. Imagine you wanted to invent the bicycle and had to pay for all of these but did not know whether you’d sell three or ten, or maybe a hundred bicycles (how could you predict it was going to be the single greatest revolution in human transportation after the wheel?), you would have been stuck.

Ideas have to circulate, they have to meet, exchange, improve each other, talk together, fight. The more barriers between them, the harder it is for them to grow into really great improvements.

Legal costs of enforcing a stupid system

Now imagine I had told you a really good idea for making butter, and then asked 10$ in case you wanted to use the process. You could very well say no thanks and use the idea nonetheless, as no-one would know how you make your butter. Once disclosed, ideas can never be taken back. Therefore it takes a lot of effort to consider ideas like solid objects that can be traded, sold, and taken back.

It is a bit like giving you a chair for free, allowing you to take it home, but asking you 10$ for each time you actually sat on it. I would have to plant cameras in your home (or a pressure detector in the chair) to know whether you were using the chair or not. But that would be a violation of privacy, so I would need to go to the courts and get a legal action started if I wanted to go that way.

Ideas are not solid objects that we can apply the standard commercial business model to. Just like digital music, when one wants to go against the laws of physics (I cannot prevent you from copying a file when I want you to be able to download it for listening, and I cannot physically take back an idea I have disclosed), one has to spend considerable effort on legal aspects. And each time, there is no benefit for society, only lawyers get richer.

A few examples of the costs related to forcing ideas into an inadequate model:

• because patents are a property right, the text must be absolutely unambiguous and must follow a very strict pattern, by law. When I could simply publish my idea in a few lines so that my colleagues and competitors worldwide would understand what it is, I have to spend ten times the effort and force the idea into a very awkward mold of matryoshka-doll-like claims, with very awkward language so I leave as few cracks as possible for the competition to break it or find a workaround.
• because patents are a monopoly right, they are a key element in failing to find commercial agreements. The question of what party will become proprietor of whatever innovations result from a given joint project is so important that we are seeing more and more projects delayed or even dropped because both parties could not find an agreement over the corresponding contract clauses. Instead of encouraging innovation, patent laws are in fact holding collaboration back. When you know how much collaboration can boost innovation, you understand that intellectual property becomes clearly counter-productive in those cases.
• because ideas should never be disclosed outside of the patenting process (otherwise the patent is not valid) and because the patenting process is so long (up to several years), we are stuck in the development of a great new idea: we need external funding to proceed, but we can hardly communicate what it is we want funding for. And even if we can communicate, we are asking funding while telling at the same time that we will have exclusivity. I do not know many customers who would love such a bargain.
• legal battles over a patent result in so much legal costs that any commercial profits from the exploitation of the patent would be nulled. Big corporations know it. This is why they favor quantity over quality: nobody will dare to question the validity of 1000 patents. Between them, big corporations merely count patents and mutual patent violations, and they generally do not go to full-fledged legal action. But against smaller businesses, they do not hesitate to unleash the steam-roller.

Costs of monopoly

As mentioned above, legal costs are so high that nobody really dares to question patents. Therefore, big corporations with a lot of cash, a large patent portfolio, and an intimidating team of IPR lawyers can essentially claim monopoly over almost anything and kill off weaker competitors by simply raising the fist of their intellectual property rights.

As they get more powerful and richer, they start intense lobbying in favour of extending intellectual property rights:

• in scope (patenting living things, patenting exotic medicinal plants that aboriginal healers have always used but never published about, patenting genome,…)
• in time (there is intense lobbying from big pharmaceutical firms to extend patent monopoly from twenty years to fifty or seventy years, with the justification of long time-to-market for new molecules)

As they can keep their monopoly only by renewing their patent portfolio, they start a runaway race for innovation. Innovation for the sake of monopoly, not for the sake of any true advantage to the general public. And to make sure the general public runs along, they start spending the monopoly money on advertising. By endlessly fueling our frustration and making stuff with the new patented gizmo appear so much more desirable than the stuff we just bought, advertising contributes to the general dissatisfaction while it feeds landfills. Therefore, not only do we have to pay more for some innovation because it is patented, but as it is an innovation we do not really need, we pay even more for the advertising which frustrates us into buying it; and a little extra for resource depletion and pollution.

Just give

We should just give our ideas away. After all, an idea is the least costly and the most valuable gift.

I will write soon why I even think there is a business model for open-source industrial innovation just like there is one for open-source software. Stay tuned.

When you google 'Airbus Boeing Peak Oil', the top result is this article that I wrote in the summer of 2006. Being a Cassandra proved right gives one all sorts of uneasy feelings, but I will carry on in that direction and offer a revised version of my prophecy, adorned with new details.

In a nutshell: people are talking a lot about the difficulties for airlines with $150-a-barrel oil. But we also have to understand that it is going to be much worse for aircraft manufacturers. They probably know it; but they cannot believe what they know, and they cannot say it either. This is not just another crisis for air transportation and aerospace construction: this is the last crisis until the end of the fossil fuel era.

Hard times for airlines

First an important premise: there are no serious alternatives to jet fuel for airliners. And even if there were, they could never be cheap in a world of expensive energy. The problem is not that oil is scarce: the production has never been this high — that's why we call it Peak Oil. The problem is that energy supply is not meeting global demand: until demand abates, any type of energy will end up costing the same, be it classical kerosene, gas-to-liquid synthetic jet fuel, or biodiesel. Regardless of the environmental footprint. Just know that if it was technologically feasible, filling an A380 tank with biofuel would use up 150 hectares of yearly yield,considering an optimistic figure of 2000 litres per hectare for Jatropha biodiesel. You'd need 150×2x365×150 = 16 million hectares — the arable land in France — to power the currently ordered A380 fleet.

Meanwhile the fuel efficiency improvements do not come anywhere close to compensating the price surge. Boeing claim that their new 787 will burn 20% less fuel than current jets of the same category (namely the 767 or A330). 20% is how much oil prices rose between the beginning of April and mid-May 2008: 30 years of technological improvement in aircraft and engine design will offset six weeks of price increase, and no technological Deus ex Machina will change that deal.

The obvious consequence is that cheap flights are gone for good. We are currently witnessing a fast concentration of the market, because the fierce competition prevents airlines from transferring the whole fuel bill to their passengers. As the weaker players exit the arena, ticket prices will rise until the few remaining airlines can break even financially. We will see a trend of de-democratization of air travel, and people will gradually change their travel habits, starting with the poorer and newer travelers.

There is a second key element that will drive air traffic down: as planemakers' market forecasts point out, air traffic growth is consistently correlated to world GDP growth. No need to be a psychic to imagine that GDP growth will seriously suffer from expensive energy. When people's purchasing power shrinks because of the energy bill, they will think twice before flying. Note that a major economic downturn could very well stop the rise in oil prices or even reduce them for a while. But it will not help air traffic - unemployed people do not fly all that much.

Meanwhile, environmental awareness is growing worldwide: the global warming theme is increasingly popular with the sort of middle class travelers who used to fill economy seats for exotic vacations. There will be less scuba-diving in the Maldives; less horseback-trekking in Mongolia; less leopard-spotting in Tanzania. Flying is losing political correctness points by the day. This is even beginning to reach the corporate world, although sometimes only for mere greenwashing concerns: more firms are asking their employees to fly less, to favor teleconferencing or to merge meetings. Business travel, the spine of airline profitability, is probably weaker than most hope.

I also see a final, more tricky contributor to airline misfortunes: many airlines have based their financial model upon the resell value of their aircraft. Planes are a huge investment, with a long lifetime — a bit like homes. Maybe you see what I am hinting at. Just as the housing crisis brought many people to bankruptcy, many airlines will lose their financial footing when the industry's obvious overcapacity and gloomy outlook pulls the market value of second-hand aircraft down. All this will contribute to reduce air traffic over the next decades, to the levels of the 1990s, then the 1980s, then the 1970s …

Harder still for aircraft manufacturers

The average natural decay of a fleet because of ageing is around 6% a year. When yearly traffic is constant from one year to the next, 6 planes for every 100 go into retirement, and are replaced by newer planes. This means that if airlines cut the world's capacity by a mere 6% each year, old retiring planes will not need to be replaced, and no new aircraft will be sold at all. A 6% capacity reduction is equivalent to just changing the Tuesday flight of the daily San Francisco to Tokyo service from a 747-400 to a 777-300ER. A reduction the economic press or the general public would hardly notice can make Airbus and Boeing assembly lines grind to a halt. US carriers will reduce capacity by 10% to 15% this third quarter of 2008 alone.

All told, the industry will cut capacity by 9% in 2008, according to James Higgins, analyst for Soleil-Solebury Research. (quote from CNNmoney.com)

In short: airlines make money in proportion to air traffic; aircraft manufacturers make money in proportion to air traffic growth. In a world with negative air traffic growth, the former float, the latter drown. Therefore, although we will probably not see the end of air traffic any time soon, this extremely nasty leverage effect will make aircraft manufacturers suffer considerably.

One might argue that in a world of expensive oil, airlines should scrap all old, gas-guzzling planes and buy new, soberer ones instead. That would be easy if they were making a lot of profit or could promise a bright future. But when the industry is consistently in the red zone, and getting redder, bankers do not follow. Few airlines have sufficient cash to sign billion-dollar contracts without external investment. Therefore airlines will be like people in poor countries: they will be running old vehicles which use up tons of gas because they cannot afford the newer models which make twice the miles per gallon.

Admittedly, a handful of airlines will be in a position to buy the new planes. When all the world's money ends up in oil exporters' hands, they have to buy things from us to avoid drowning under the heap of green bills. Aircraft are a great choice, as they are both hard-currency-intensive and fossil-fuel intensive, which oil producers have a lot of, as per design. Consequently, aircraft sales may in fact undergo an increase because of high oil prices. This I call the "Aboulafia effect". I conjecture that such an increase is inherently short-lived. Middle-East carriers will probably become prominent players, and gradually snatch the bulk of the market from the traditional airlines. But air traffic will shrink nonetheless, and all they will need to do is buy back the recent planes from their victims, scrap the old ones, and make the most of a declining market — something they are becoming good at.

As if matters could be any worse, there will finally be a mean backlash effect: thanks to cheap liquidity seeking asylum, the years 2003-2007 were absolutely euphoric in terms of aircraft orders. Manufacturers had to invest massively in infrastructures and people in order to ramp up production and honor those orders. But these planes will not materialize into deliveries before a couple of years. There is plenty of time for many airlines to go bankrupt or otherwise hit financial turbulence. This will mean massive delivery deferrals, then cancellations, so that assembly lines cannot even hold onto their current backlog. Who knows, we may witness the very curious artefact of a negative net yearly order-book. In the real world, that's called jumping off a cliff with a lot of momentum.

The combined value of the orders for Airbus and Boeing planes exceeds $500 billion at list prices, so large-scale cancellations and deferrals could easily amount to tens of billions of dollars and affect suppliers of engines and other parts in addition to the jet makers. (from the Wall Street Journal)

What next?

When that happens, it will be catastrophic for all the people, organisations, or communities, which now contribute to the aircraft manufacturing adventure. This could send Seattle or Toulouse the way British textile, or French foundries went not so long ago. And do not get influenced by prejudice. Aerospace does not have an intrinsically higher value than those industries we have come to regard as lowly. Today's ghost slums were full of very busy and extremely proud people at the peak of their flourishing trade.

I do not know what the smartest move for aircraft manufacturers is, and I am glad I am not in Tom Enders' or Scott Carson's shoes. Publicly acknowledging that the air travel industry is on the brink of inevitable decline would discourage investors and hasten the fall. And yet, the earlier they can start downshifting, the smoother the forced landing. They should be cancelling the B787 (a little too late for that one) or A350 developments, and simply offer to fit new generation engines on good old 767s and A330s. That would already be at least half the fuel economy, for a much smaller cost, while not forcing new capacity on the market place. Or silently work on a totally new kind of bird, absolutely optimized for fuel efficiency, even if it changes the rules of the game: a Mach 0.62, 20,000ft, turboprop, middle-range, high-capacity, DC-4-comfort machine that would be the soberest flying camel to get people where trains can't go for the next half century.

Or maybe steer away from this dwindling trade altogether and find a new frontier. How about giant wind turbines? If those do not sell, nothing will anyway, so that may be worth a try.

Notes

Many thanks to Richard Heinberg and Julian Darley of the Post Carbon Institute for accepting publication at Global Public Media.

Requests for reproduction or translation should be sent to the Post Carbon Institute.

Barter vs. gift

We often think that when currency did not exist, most societies relied on barter for economic exchange. This is the main argument in favor of the use of money, which essentially allows to delay both halves of barter by materializing debt. In a barter economy, you can only trade what you have, whereas with currency, you can trade what you will (probably) have later.

When the seller (or the lender) realizes later that you cannot in fact honor the debt, then you get a financial crisis, in which everybody starts to question the value of everybody else’s debt (i.e. money loses its value), therefore nobody wants to sell or lend (i.e. accept someone’s debt as payment), therefore many people stop working (nothing to sell), therefore economy grinds to a halt.

But this is not true. Barter may have been the rule for merchant trade (i.e. rare and foreign stuff like beads, salt, silk, spice, etc.), but for daily economic exchange, barter was the exception and gift was the rule.

Somehow, we have been brainwashed into believing that any exchange should be reciprocal. But we must not look very far to find perfect examples of a gift behaviour which is as old as life itself: one expects no quid pro quo when one raises a child or takes care of a family. Obviously we do not ask a newborn baby to give something or do something special in return for nursing or shelter. We do not ask a newborn baby to sign a debt certificate. It is true that some parents have great expectations (you’ll be a famous lawyer, my son), but most parents only want the best for their kids, regardless of what the kids will do to them in the future.

Savings and credit

Savings (and then credit) is what you have when you have worked more than what it takes to fulfill your short-term needs (or wants). You can either stash this surplus as hard goods, like a squirrel hides nuts, but most people hoard it as money (or investment). Money (or invested capital) is someone else’s debt. When an insane economy forces goods onto impoverished people in exchange for debt, and then realises that the debt cannot be honored, then people’s savings are hit. Your surplus has melted just like hazelnuts can rot. It seems fair enough, but the crisis goes far beyond simply telling the rich that their surplus has vanished (bummer). And the poor are also hit, first when they get squeezed (e.g. evicted) so that creditors can get crumbs back, then when the economy slows down and they lose their jobs.

What if I had just given my surplus away?

Now imagine we have our brains intact and can live in an economy when we never expect anything in return. If I have surplus, I will give it away, for whatever I feel deserves it best. I will probably think twice before giving my surplus to the rich and old, and instead, it will feel natural to give it to the young (and generally poor), especially if someone had done the same for me when I was young and poor myself.

I do not expect anything in return, I do not think of the surplus as mine and to be returned one day; therefore, there cannot be a financial crisis. But society does get the full benefit of this ‘investment’ in any case, and I will get my interest directly through social recognition (there were rich people before money existed), and obviously indirectly via the healthy society I contributed to.

Note that the people who get gifts from me, even repeatedly, should not consider that they owe me anything nor feel uncomfortable in any way as a consequence of my largesse. In today’s world, only children can do that well.

If you think hard enough, there is no more nor less ‘justice’ in this system than the current one. But it is more robust, and certainly more humane. Probably, a gift economy does not work when you do not know the people. Instead of seeing it as an obstacle against my utopia, I see it as a good reason to get to know my neighbours and make tons of friends on the web. Who knows, maybe I will have to give something to you one day.

Epilogue

We have a saying in France, which goes like this: “Les bons comptes font les bons amis”, which means “Good accounts make good friends”. My personal belief is that “Les bons comptes font les bons comptables, c’est tout”: “Good accounts make good accountants, period”.

The factory has admittedly greatly increased the creature comfort of mankind. Innumerable articles now in general use were luxuries enjoyed only by the gentry and quite above the aspirations of common folk before the factory system was established. The factory has enabled the masses to live under conditions, and to consume “goods, wares and utensils,” which otherwise they could not have afforded. Rich and poor both have been enabled to purchase more goods and more kinds of goods and to consume and destroy them more freely than was previously possible.

It is, of course, difficult to determine how much of the credit for all this is really due to the factory itself and how much to the fact that scientists and inventors directed their efforts to the development of factory machinery and factory methods to the neglect of improvements in domestic production. We have always to bear in mind that the well-being we credit to the factory is based upon comparison between the low prices and high consumption made possible by the factory after it has had the advantage of all the inventions and the increases in scientific knowledge of the past century and a half, and the high prices and low consumption which prevailed under a relatively primitive system of individual production.

in This Ugly Civilization, Ralph Borsodi, 1930

And he’s been proven right in at least one respect: personal computers completely wiped out mainframe computing. I am ready to wager that there are tons of other examples where we believe a centralized model is more efficient when in fact it is not.

Through the very excellent soil and health library website, I have discovered a fascinating author, tackling the contradictions of our industrial model 80 years ago, and forty years before Ivan Illich.

This author is Ralph Borsodi, and his social and economic insight is very sharp ; extremely sharp when you think that he had come to his conclusions in the 1920s.

I will be telling more about the author as I carry on reading his works, and there will be several quotes finding their way into my blog, for there are views I could not express better.

[…] the idea that mankind’s comfort is dependent upon an unending increase in production is a fallacy.

It is more nearly true to say that happiness is dependent not on producing as much as possible but on producing as little as possible. Comfort and understanding are dependent upon producing only so much as is compatible with the enjoyment of the superior life. Producing more than this involves a waste of mankind’s most precious possessions. It involves a waste of the only two things which man should really conserve–the two things which he should use with real intelligence and only for what really conduces to his comfort. When he destroys these two things, he has destroyed what is for all practical purposes irreplaceable. These two things are the natural resources of the earth and the time which he has to spend in the enjoyment of them.

in This Ugly Civilization, Ralph Borsodi, 1930