The wealthier we get, the poorer we seem to be

It isn’t just inflation; it’s the second law.

Those of you with long memories will recognize me as the fool who claimed that the laws of thermodynamics apply to money. I still do.

I also finished my book on the topic.

There are many applications of the second law, but I will go for the long hauler of the bunch with this post.

Everything we build, every piece of infrastructure we create, and every valuable service we provide only exists while we maintain it. Rust never sleeps. Bridges corrode and fall down. Highways wear out. The second law applies to everything we build.

It follows that the more we build, the more “stuff” we must maintain. So, we must put work into maintenance instead of our sustenance or new creations (growth).

We try to get around this problem using “growth,” but we’re still on a finite planet, and that’s NOT going to work anymore. We need to learn to do “degrowth,” but that’d be another post elsewhere. The point of this post is that we aren’t doing maintenance work that nobody is willing to pay for, and as a result, we aren’t as wealthy as we think we are.

We’re trying to “grow” and get more stuff, but the maintenance of the stuff we have is eating us up. We tend to blame inflation and the government, and yes, they can have some effect, but they can’t fix physics.

The more we build and grow, the more we have to maintain; the second law is not breakable. We break other things instead, and there is no shortage of breakage.

My own contribution is here, and while the laws are apolitical, their application is nothing if it is not.

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That’s because the dumbest thing you can do in America, tax-wise, is to work for wage & salary income. Once you accumulate sufficient capital to eliminate the need to subject yourself to the supervision of an employer, life is sweet.

intercst

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Truly, that IS the dumbest thing an American (or a Brit, an Aussie, or a Kiwi) could do. The tax system is shocking.

However, and I hate to tell you this because it is so contrary to everything we currently do, making money from having money, making money from owning things is a violation of the First Law. Ownership-based income has to be taxed into non-existence if you want to achieve a stable, sustainable economy.

Building an alternative is a not-simple thing.

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I DO remember. Congrats on the book. That takes real work, and I have failed twice so far in my life in the same ambition.

I simply insist that mostly it isn’t the STUFF that we have made and do not maintain that is leading us to “thermodynamic” collapse, but far more our taking our socio-politco systems as givens. They need more than maintenance, they need constant updatings, and we aint doing the work.

david fb

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The more we build and grow, the more we have to maintain; the second law is not breakable.

There are a few YouTubers who produce content about the flaws in urban planning, most notably in the US and Canada that fit your mapping to thermodynamics. Think of it as ever-growing cost entropy.

The underlying thesis of their content is that a series of somewhat random decisions in a couple of major metro areas in the early 1900s then after WWII were adopted across the rest of the country without any thought to long term consequences to produce the world as most Americans (and Canadians) see their daily existance. An existence filled with sprawling suburbs, horrible combinations of strip malls and “stroads” which are neither human / bike friendly streets nor suitable roads.

One of the videos in this genre highlights how zoning laws for housing density and parking lot sizing to accomodate peak traffic levels for Xmas shopping 3 days a year trigger massive sprawl completely unsuitable for traversing via bike and too varied to serve well via public transportation routes, resulting in a huge majority of people entering the workforce requiring an expensive car. This has had profound impacts on the accumulation of wealth which of course leads to the wealth discrepancies we see now.

Another video analyzes the combination of zoning laws, building codes and tax subsidies to illustrate how they combine to support SPRAWL of NEW construction while eventually starving a city of tax revenue to support the infrastructure of roads, sewers and utilities created by that sprawl. Detroit is a good example. When the population drops by 50% across (say) 50 square miles, the citizens don’t all agree to leave the same 40 square blocks so the city, county, water, electric, gas and sewer districts can all simultaneously agree to cap everything up in that quadrant, ignore it and save money. Instead, the population dwindles from EVERYWHERE, cutting the tax base without actually reducing outlays for that infrastructure one cent. That puts the community in a financial death spiral.

I highly recommend those videos. Just search for “stroud” in YouTube and watch anything by Not Just Bikes, City Nerd or Strong Towns among others.

WTH

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In Wellington, NZ it is as simple as the water pipes under the streets.

Many are now about a century old.

Half the city water supply is lost. The cost to repair is immense, and we are going into the summer season with a 30% chance of severe water restrictions before we reach next winter.

Bad designs exacerbate the problems, but as I said in the OP, there are a lot of places where the laws tell me we can’t continue BAU.

I finished it. And my daughter informed me that a lot of her friends aren’t fond of reading and “Could I make a series of Tik-Tok presentations?” :roll_eyes:

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Your daughter’s humor is very good.

Capitalism. Scoundrels and needs. Rich and divestiture to gather more capital.

A shell game across continents taking turns to get rich and to get poor. Demand-side economics to get rich and supply-side economics to get poor. Rinse and repeat.

Capital formation is a beatch.

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The book goes into the political arena, mainly because many of our problems are due to the accumulation of great wealth due to our attempts to break the laws.

In terms of money, those laws are:

  1. Ownership cannot make money (a profit). This is the same as saying, “There Ain’t No Such Thing As A Free Lunch,” but it is not just a saying. It is an unbreakable feature of the universe we live in. So interest can’t be paid or owed on any debt, and rent in excess of the work of maintenance is forbidden. Interestingly, the tenets of the 3 major religions I know of - Judaism, Christianity, and Islam ALL say not to have interest on loans.
  2. Money cannot be a store of value. It has to suffer entropy. It has to be subject to demurrage. It has to “go out of date like a newspaper.”

I’m not the first to think this up. The guy before me was a Nobel Prize-winning physicist, Frederick Soddy, back in the 1920s, and the economists ignored him.

The thing about that wealth accumulation is that it cannot help but eventually become oligarchy or worse, and the definition of money guarantees that we wind up with that accumulation. If we then define it as protected free speech, we’ve doubled down on the mistake.

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All economic profits run to zero.

What do you mean by economic profit?

Economic profit is money earned after taking explicit and implicit costs into account. Accounting profit is the net income for a company or revenue minus expenses. You can determine economic profit by subtracting total costs from a company or investment’s total revenue or return.

The problem stems from these questions:

  1. Who pays us for our work?
  2. Who owns the product of our work?
  3. What is the cost of the product of our work?
  4. What is the price of that product?

What I discovered is that profit belongs to the society that provides money, not to individuals in that society. That result is made necessary by the first law. We get paid for our work, not for the scarcity of whatever it is we produce. We can still ration scarce resources according to wealth, but that is NOT the most efficient way to run any society.

I don’t differentiate between economic or accounting profit, but a whole section discusses it. I look at it as an engineer has to. The laws HAVE to be obeyed, so how can we arrange things so that can happen without going back to hair shirts and primitive lives?

I might argue that on a personal level, I’m trying to simplify and get rid of stuff and yet I feel relatively comfortable, if not wealthy. That’s not to suggest that I am the average consumer. A lot of Information, entertainment (Books, records, CDs, DVDs, etc…) can be stored electronically or streamed taking up less space borrowed/shared from a library and not requiring much in the way of maintenance, at least to the consumer. A lot of what we buy now is consumable and does not require maintenance. Our cars last longer than they did in the 70’s and don’t need much maintenance beyond the regular oil change, tires and the odd repair. Most appliances or electronics items last 7+ years and don’t need all that much in the way of maintenance. If anything major goes wrong, it’s generally more cost-effective to replace and scrap it. I can see the argument on infrastructure, though in a lot of cases, we build things better now. I haven’t read the blog or book. I’ll check it out when I have the time.

Your point about things lasting longer is well taken. That said, infrastructure has been being built for 100 years, often more, and there is no special prize for “keeping it functioning” the way there is for “building something new.”

Nobody says “Wow, Mayor X replaced the sewers in district 3” the way they do for “Wow, Mayor X got a new bridge build between district 3 & 4”. “Maintenance” is the ugly step child of infrastructure.

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@bjchip, congratulations on completing your book.

Your key observation applies to every capital investment, including our homes and cars. My mother used to say that she expected to annually spend 10% of the value of her home (a large, free-standing Brooklyn, NY duplex purchased by my grandparents in the 1930s) for maintenance and upgrades.

I wouldn’t go that far, necessarily. But, having lived in my current home for 20 years, I decided to do some major maintenance this year. The deck was mostly torn down and rebuilt. The guest cabin is being restored. The carpenters are the same crew that repaired the garage after a windstorm blew a large tree down.

People should be aware that the cost of buying a home should include the ongoing cost of taxes, insurance and maintenance. The same is true of buying a car. Some have more expensive maintenance than others, which can influence the purchase decision.

Wendy

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Well, we’ve gifted ourself with an approximately $15k gift this Christmas…a new sewer pipe.

The granddaughter found a leak last week in one of our downstairs (below grade) rooms. Probably hunting to check stuff had gone off to Santa. Good job too. It turned out to be backflow from the crushed sewer pipe going out via a difficult to access route. Our chosen plumbing company were onto it immediately and within a day got the pipe replaced and yesterday we had a bit of demolition to get rid of affected (infected?) parts.

I missed getting a shot of the 6ft deep hole and pile of earth in the garage but here’s the end result



I’m kicking myself that I missed the optimal point in the concrete set to make my mark

Husband and I had cause to comment that this is our idea of wealth…to have the means to get onto this straight away, worrying only about how quickly it could be done not what we’d have to economise on to do it. Also, hand over a serious tip for the blokes who worked like dogs to get us up and flushing again!

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One additional issue with the way we build now is that we account for esthetics more than we used to. I don’t mean grand public buildings, but rather simple homes. For example, we used to put most of the plumbing on the outside of the building. And that was for two reasons, one, when it leaked it wouldn’t damage the building much, and two, when it needed repair, it was easy to access. Today we do crazy things for our water pipes, we put them UNDER a slab (see post above this one for example), we put them INSIDE walls, all places where there are difficult to impossible to access easily for repair and when they leak they call all sorts of ancillary damage.

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I just read the longer blog post laying out the thesis of the separate book which I may buy. Very thought provoking. As a fellow engineer with a minor in economics, I can vouch for the feeling referenced in the “blurb” for the book… “Not another engineer…”

When the average engineer takes an economics class in Money and Banking and is exposed to the fundamentals of fractional reserve lending and fiat currency, there’s a weird feeling that overtakes you about four weeks into the semester. THIS is what our modern economy is based upon? This cannot possibly end well…

I’ve told the story in this forum previously about the professor I had for that Money and Banking class, Hyman Minksy. He was famous in economic circles for his theories of cyclical fraud and collapse in banking systems due to Ponzi-like schemes being adopted by the entire system, virtually gauranteeing its failure given the mechanics of banking systems.

I’ve also written on my blog and this forum about the hidden complexity of interest rates and how a simple percentage actually conveys risks to an investor or borrower from multiple dimensions:

  • inflation due to monetary policy
  • time-value-of-money over a period of time
  • individual moral risk (will you pay me back or not?)
  • individual business risk (is your individual business operation sound?)
  • industry business risk (is your business field going to survive?)
  • country-specific economic or political risks (buying a McDonald’s franchise in Ukraine during a war)
  • etc.

Two other factors that would have to merit inclusion in an all-encompassing “engineer explains economics and society with math” theory would be:

  • L – learning
  • G – greed

The L factor reflects some upper bound of human brain biochemical functionality that limits how much an entire population can “learn” per year. Individual humans obviously vary greatly based on their formal education and the circumstances in which they live. Certainly, different types of learning for different skills have different VALUE in different contexts. A computer engineer has the ability to learn a new programming language faster than a tribal leader living on a savannah in Africa. On the other hand, that tribal leader can adapt faster to a change in hunting prospects the computer engineer can’t even comprehend.

The L factor I envision reflects a wider “average” ability for mankind to learn something that advances society forward. It’s more like a “Moore’s Law” of the aggregate human mind. If there is a upper bound to this learning parameter, there is also an upper bound in improvements in “productivity” as economists would attempt to measure it. That means there is an upper bound in a modern industrial society’s ability to LEGITIMATELY “grow the pie” over any narrow range of time.

This concept has crucial implications for each of us purely as a member of society or as a wise investor and for governments. If you assume there is such a thing as a natural L factor of humanity that is related to a natural upper limit in productivity gains P, it acts as a useful sanity check when evaluating claims by companies about their growth prospects and share price or evaluating promises by politicians to put a goose in every pot and a $45,000 battery electric vehicle in every drive in seven years. Nothing grows to the sky without bounds.

(Anecdotally, I remember around 1997 pondering an investment in SUN after seeing how many little SUN pizza box servers my company was buying at the time. I looked at SUN’s revenue growth estimates, divided those by the cost per server of their most popular model and concluded that within about five years, there would be nearly 20,000,000 of these running. Okay, CLEARLY tweny million Americans are not all going to want or need or have their own personal web server in five years so what’s up with this stock price?)

The takeaway from that abstraction is that a wise investor should expect a LOWER growth rate from a company as its capitalization goes up. It’s easy to grow 1000% from a base of $100. Harder to hit 500% with $10,000. Harder still to hit 100% with $1,000,000. Much harder to hit 20% with $1 billion. Impossible to achieve 7% over 10 years with $10 billion. Anyone telling you otherwise is merely attempting to separate you from your money.

The greed factor G is even less mathematically computable but it ties directly into your theory of the relationship between energy consumption and economic growth. In theory, one of the things that the L (learning) factor SHOULD accomplish is allow a society of fixed size to get more VALUE (food, shelter, entertainment, etc.) with LESS work. If you aren’t getting smarter each day through learning, you cannot become more productive at finding your next meal, maintaining shelter over your head, etc. Over many eras of history, some of our leaps in productivity were achieved by leveraging energy and machinery to replace manual labor. Cotton gins, looms, steam engines, automobiles, etc. reduced or eliminated human labor in SOME forms but created demand for additional human labor to produce, refine and distribute the energy needed to drive the machines. To some extent that looks like extra economic activity and value but it really amounts to just a quantification of energy exerted in a different form in a prior means of production.

The key point is that if new technology is capable of reducing the demand for human labor, one would expect to see net labor hours worked per week DECLINE for the same amount of generic “consumption.” If a community of 100 people could maintain 25 homes with 700 square feet per house, tend 25 acres of corn, a herd of cattle, 200 chickens and be self sustaining, once someone introduces a tractor to the ecosystem, in theory the average work load of that community should go down a bit. In reality, the community in aggregate finds something else to want to begin occupying the time freed up by the new tractor. Maybe the first owner of a tractor can harvest his corn in a third of the time and spends the other two thirds making nick nacks to sell to the adjacent town, bringing in more income and now he decides he wants a 1000 square foot house rather than an extra 20 hours of sleep during planting and harvesting season.

It’s this G factor – perjoratively termed greed here – that contributes to the linkage to energy consumption. Somewhere in our 23 pairs of chromosomes is a gene that drives this G factor, either just as pure greed or just a curiosity factor unique to humans that always has us looking for something new to stimulate the brain and keep it active that puts us in this feedback loop of constantly wanting more. It may not be the exact same value across all individuals but the average across the species seems well above 1.0 which feeds into these other mechanisms to create the behavior and consequences we see every day.

Seriously… A very interesting set of concepts and a topic worthy of much serious discussion. Congratulations on the book.

WTH

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And yet it’s been the basis of virtually all successful economies for over a century. Everyone comes to the table with certain biases, maybe especially engineers.

My pet peeve is the financial controllers I worked with, who knew to the penny what something cost but not what it was worth. We did a redesign of a newsroom that included a balcony around a hollow core for the editing suites. (It was in a skinny but tall office building.) He couldn’t get over the idea that having “nothing” in the center meant “less floor space but you’re still paying for it”, rather than “quicker communication” between the tape editors and the reporters. People shouting up and down, or even flying up and down internal staircases was wayyyy better than walking to an elevator, waiting for it, going down a floor, getting the answer, and then reversing to go back to the editing station.

We ended up with the elevator solution, which everybody hated.

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It was going well until the system decided that because I was a noob (what the hell does it know), I was being too enthusiastic and posting too much, so it locked me out for a day. :laughing:
o o o o o o o o o o o o o o o o o o o

I’ll quote myself here -

Our money has been a tool for the success of every human society that has grown larger than a tribe for at least 5,000 years and probably longer (money predates our written histories and its origins continue to be the subject of much debate even today)

Followed by

If these laws apply, our current implementation of money (our societal money) is a diabolical error that requires unending, environmentally destructive growth; it demands continued and increasing emissions of CO2 for the energy to create that growth, in spite of existential climate peril. Moreover, it creates and maintains massive inequality, allowing the winners of the economic lottery to preserve their gains by subverting democracy and preventing change.

Do these problems sound familiar?

So I agree with you; it HAS been the basis of our successes. Yet, it is still fatally wrong in its current form. There’s a reason why it took that form, and I also go into that in the book.

The laws are not biases; they’re laws. The mistake isn’t trivial. It is the difference between the descriptive definitions everyone offers and a philosophically real definition.

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Somewhere way down in the coal min, a few guys are working very hard.

The labor to make this work matters. It is the most concrete part of the entire system. It propels us a long way down the road.

The thing to remember here is that it is not just our labour that becomes work that has value to the society.

The work done is the work of physics, it can be done by the Sun and captured here on earth as hydroelectric power or wind power, or sequestered in the chemistry of coal and oil. It can be work done in a Supernova and locked into radioactive elements billions of years ago (yes, I have questions about that too).

So this isn’t the Labour Theory of Value. It is the work definition of Money.

There’s a lot of trouble coming our way as a result of the many ways our existing money tries to violate the laws of the universe.