Wired for Survival: The Rational (and Irrational) Choices We Make, from the Gas Pump to Terrorism

This chapter is from the book

Wired for Survival: The Rational (and Irrational) Choices We Make, from the Gas Pump to Terrorism

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This chapter is from the book

This chapter is from the book 

Wired for Survival: The Rational (and Irrational) Choices We Make, from the Gas Pump to Terrorism

Learn More Buy

• "There is nothing in the world but change. Our life is only perception."
• —Marchus Aurelius, Meditations (170s AD)

It is cliché to observe that we have entered a new period of global growth and change or that we face innumerable threats to our current way of life. The global order we have known for several generations has profoundly changed, and there is no going back: To survive and prosper, we must think differently and make different choices than we have made in the past.

The most telling indication of this change is the trend in global per capita gross domestic product (GDP), which is the value of all goods and services produced in the world, divided by population. Since 2000, global per capita GDP has been rising at the rate of 3.2% per year. At first glance, this may not seem like such a big number. But as economic historian Angus Maddison points out, these changes are remarkable when compared with previous growth spurts.

In the first modern high-growth cycle, which occurred over the period 1870–1913, world per capita GDP grew at an average annual rate of 1.3%.¹ In the next big spurt, which occurred over the period 1950–1973, annual per capita GDP increased 2.9% on average—a jump over the prior period, but still below today's rate of 3.2%. Where nineteenth-century industrialization doubled real per capita GDP in 50 years in the United Kingdom and the United States, China has doubled its real per capita GDP in just nine years.

Current growth trends are particularly interesting because they are the result of changes in the emerging economies, which have been growing at an average annual rate of 5.6% compared to 1.9% for the developed countries.² The combined output of these countries, which in recent history have been the least developed and poorest countries in the world, now accounts for more than half of world GDP and nearly half of all world trade. Moreover, together they hold over 70% of global foreign exchange reserves, which is the cash in the global economy cash register.

What does all this mean? History teaches us that rapid, sustained growth and lots of money sloshing around in the global financial system has important implications for resource allocation, geo-politics, and human development. Using Angus Maddison's estimates, until 1820, today's emerging economies dominated the global political economy for 18 centuries, producing 80% of world GDP. But the old world was labor intensive with limited technology or productive investment. Growth was slow and inconsistent, and human development faltered as the vast majority of the world's population struggled just to survive.

Although growth took off with the industrial revolution, the structure of the global economy has been quite skewed. Most of the world's GDP has been produced and consumed by 20% of the world's population, who have resided for the most part in the advanced economies in Western Europe, North America, and East Asia. Life is a persistent struggle to survive for the majority of the world's population, who are ill-educated, often sick, short-lived, and struggling to live on less than $1 per day.

However, old patterns are changing. A leading indicator is the demand for energy resources, particularly oil, which fuels commerce and trade. The emerging economies now consume over half of the world's energy and account for four-fifths of the growth in demand for oil.

Global growth trends raise concerns about the ability to produce adequate energy to meet demand because historically, growth is energy intensive. Maddison estimates that per capita energy use rose eight times from 1820–2001.³ On the surface, there appears to be little cause for alarm: The geological evidence suggests that world supplies are adequate to manage a transition from non-renewable to renewable fuels. And prices are rising, which theoretically provides both an incentive to invest in production and the means to do so. For most of the two decades prior to 2000, the world price of crude oil hovered around $20 per barrel. Since 2000, prices have steadily but noisily increased to over $100 per barrel.

Yet rising prices have not closed the gap between demand and supply. The International Energy Agency predicts that the world is facing a supply crunch that will push oil and gas prices up to record levels over the next five years. Production is constrained by persistent underinvestment in technology, field maintenance, refining capacity, development of renewable substitutes, regulatory obstacles, geological challenges, and disruptions in supply chains created by shortages in inputs such as equipment and skilled labor, or conflict, piracy, and terrorism.

Although higher prices may be necessary for investing in improving the energy security value chain, they are not sufficient—and they may be a double-edged sword. In the past, high prices have led to rises in inflation and interest rates that have dampened growth. Some estimate that expensive oil may retard growth by 1.5% of GDP. Moreover, prices may not reflect economic fundamentals, in which case they are not a good signal for investment. Energy analysts estimate that as much as a third of the increase in oil prices can be attributed to "political factors."

The "political factors" that affect oil prices create considerable consternation for investors and policy makers. Analysts typically assume that markets form and operate unfettered by government interference. However, the emerging economies and the developed economies are not playing by the same rules.

For starters, few of the countries and firms that control energy production are committed to liberal political and economic ideals. The institutions that are most closely associated with secure participation and property rights, enforceable contracts, and sound financial intermediation reliably function in just three of the top oil-producing countries and in only one of the top net-exporting countries. In the remaining countries, which account for about 77% of world production and about 93% of net exports, exchange is based on personal relations with limited recourse to the rule of law. Moreover, entire regions in the global energy system are wracked by ethnic and political conflict that frequently disrupts investment and trade, and imposes significant costs on transacting.

Table 1.1. Top World Oil-Producing Countries in 2006

Table 1.2. Top World Oil Net Exporters in 2006

At the industry level, over 90% of the world's oil and gas resources are effectively owned or controlled by the governments of producing countries rather than by private sector firms. Only two of the top 15 firms are privately held: Lukoil, a Russian firm, and Exxon Mobil, an American firm. Of these two private firms, only Exxon Mobil, which controls just 3% of global reserves, is located in a country that consistently favors open markets and the rule of law.

Table 1.3. The World's Largest Oil and Gas Firms

Every continent and every region of the world has energy deposits. However, primary energy supplies are concentrated in Asia, Europe, the Middle East, and North America (Figure 1.1). Promising new supplies have been located in Africa, central Europe, and North America. However, new supplies include unconventional sources located in deep water or in oil sands, and considerable technical expertise and investment is required to make these sources economically viable. Exxon Mobil reports that over the period 2001–2005, it invested $74 billion on six continents to search for new supplies, build new production facilities, expand refining capacity, and deploy new technologies. They expect to augment these investments at the rate of $20 billion per year over the next decade.

Figure 1.1 World energy resources

Source: Organization for Economic Cooperation and Development/International Energy Administration.

Although most of the world's oil supply is controlled by emerging economies, most of the current demand for energy resources originates in developed countries, which account for 78% of world net oil imports. The technical expertise needed to discover and develop energy resources is also concentrated in developed countries.

There is a mismatch in how exporters and importers think and choose that creates conflict in energy trade relations. Leaders in most of the countries with extensive energy supplies limit who can participate in developing and producing resources, make choices about who will participate based on personal relationships, and are selective—even capricious—about honoring and enforcing contracts with investors and producers. On the other hand, governments in many of the consuming countries require their investors, technical experts, and buyers to promote fair and open competition, make impersonal choices based on merit rather than personal relationships, and consistently honor and enforce contracts. When sellers, technical experts, and buyers have starkly different approaches to the terms of investment and trade, it is the balance of power between the parties that decides how business will be conducted.

Table 1.4. Top World Oil Net Importers in 2006

Until recently, the balance of power to set the terms of investment and trade has not allowed any of the participants in the energy trading system to strictly dominate the other. Instead, they have been forced to find middle ground. However, as the emerging economies grow and their demand for energy outstrips that of the developed countries, the balance of power favors the emerging economies and their political and economic habits and preferences. This means that resource conflicts among countries with very different political and economic values will emerge, and developed countries will find it increasingly difficult to influence the terms of trade. Because conflict imposes costs on all countries in the global political economy, energy security is a strategic concern for every country, not just those that are dependent upon imports. We can run, but we cannot hide from the effects of changes in the structure of the global political economy.

Harbingers of a shift in the geo-political balance of power are already evident. Leaders in oil-exporting countries have demonstrated that they will use oil supplies to achieve political objectives. Seven of the major oil-producing countries and ten of the top net oil-exporting countries are members of the international producer cartel, the Organization of Petroleum Exporting Countries (OPEC), which was formed to exert supplier power in energy markets. Political leaders in Iran, Russia, and Venezuela have recently nationalized production, reneged on long-term development and production contracts, and strategically interrupted supplies. And China, eager to assure its own access to energy and other strategic commodities, has adopted a "no strings" approach to bilateral engagement that makes it difficult to enforce compliance with multilateral agreements that are designed to open access and level political and economic playing fields.⁴

The recent actions of major oil-producing countries may have a chilling effect on investment in discovering and developing energy resources, which could further constrain supply. This is because discovery and development requires very large upfront investments in the short and medium term. However, returns on investment do not begin to flow until the resource is extracted and delivered to market, which because of the nature of the resource development and production process, occurs over the long-term. If there is a high risk that producing countries will renege on contracts with investors, the costs of discovery and development increase. In the worst case, it becomes too risky for private investors to invest at all (Figure 1.2).

Figure 1.2 Energy security value chain

Disputes over energy are symptomatic of broader differences in the global political economy that are not easily resolved. Just three of the countries in the world are inclined to limit government involvement in economic matters: Australia, the United Kingdom, and the United States. Most countries are either "nanny states," where citizens expect government to play a strong role in the economy, or authoritarian states, which sharply limit political and economic participation rights. Each of these types of states have different approaches to investment and trade relations.

For example, economic decision making in Canada and the Western European social democracies is fairly concentrated, and policy makers take a corporatist approach, which balances government, business, and labor concerns. The Eastern European countries and India have long-standing socialist traditions and are granting participation rights and opening to markets in fits and starts with frequent reversals. There are several devoutly communist countries in the system including China, Cuba, and Vietnam, which aspire to forge a "third way."

But authoritarianism is perhaps the most common tradition in the global political economy, covering the vast majority of the world's population. Some authoritarian countries are ruled by strong individuals, families, or theocracies, while other putatively democratic or socialist countries cycle between military and civilian control. Authoritarian countries tend to maintain relatively closed economies and restrict interaction with other countries.

Different approaches to governing political and economic affairs, uneven patterns of growth, and disparate resources make it difficult to coordinate and cooperate over a host of global security issues that go beyond access to energy. How, for example, can countries with very different values, beliefs, and capabilities address the physical security of territories, critical infrastructure, natural resources, and other common property like the high seas and airspace? How can we protect the personal security of individuals, animal and human health, food supplies, and sanitation, or the security of financial flows and transactions? More generally, as the emerging economies rise, do the developed countries fall, or can we, for the first time in history, find ways to survive and prosper together despite our differences?

Life Is Very Long

Human history is long, spanning more than 10,000 years. However, as the Nobel Prize-winning economic historian Douglass North argues, in all recorded time, only a handful of countries—those we refer to today as the developed countries—have achieved sustained rates of growth and human development. And this accomplishment is very recent, beginning about 300 years ago. Writing with colleagues John Wallis and Barry Weingast, North argues that this experience demonstrates that the key to explaining human development is the transition from a social order that limits access to political and economic participation to one that encourages open access.⁵

Coinciding with the advent of liberalism and modernization, growth has been exceptionally high over the past 300 years. Angus Maddison estimates that world per capital GDP has increased eight times over the past 300 years. This growth has been led by the developed countries, which have slowly opened access to participation in political and economic affairs while coping with any number of changes in the global political economy. Maddison thinks about this progressive opening, or "liberalization," as having two distinct epochs: 1700–1820 and 1820–Present.⁶

Growth in the first epoch, which was dominated by the Dutch, was built on trade and the scientific approach to thinking and choice that emerged from the Renaissance. The nation-state was born. In return for a share of the profits, monarchs granted monopoly rights to private companies. Gains from trade and commerce provided an incentive for elite groups in sovereign territories to improve their terms of trade and the means to develop internal transportation, communication, and navigation. These investments produced some modest technical progress. Political and economic decision making was centralized, hierarchical, and largely authoritarian.

Mercantilism, as this system was called, was nevertheless labor intensive with minimal technology or productive investment, which limited growth and development and created destabilizing social tensions. By Maddison's estimate, average annual growth in per capita GDP in Europe over the period 1700–1820 was just .2%, about the same as the period 1500–1700, which was agrarian rather than trade-oriented. Only a few people could obtain the funds or take the risks required to finance activities that would produce more than a subsistence wage. Wealth accrued to the few at the expense of the many. To participate in the economy, one had to have the right social status, cultivate close personal relationships with rulers, and satisfy their often capricious demands. Even a slight misstep could land a person in dire straights. Labor had very little value and few alternative uses: People could be bought and sold along with the other commodities that filled the holds of merchant ships. Violent political, religious, and social conflicts were common. As best we can tell, life was, in the words of eighteenth century philosopher Thomas Hobbes, "solitary, poor, nasty, brutish, and short" for the vast majority of world population.⁷

Repressive rule and miserable conditions stimulated thinking about political and economic organization.⁸ Enlightenment philosophers argued that scientific thinking could be applied to addressing a wide range of human activity to create better societies. They promoted the development of organizations and systems based on reason rather than tradition or superstition. Newton's "natural philosophy," which combined the mathematics of axiomatic proof with physical observation, captured the imagination of intellectuals, producing a new philosophy of science that emphasized skepticism, reason, and the pursuit of new knowledge.

Philosophers and social activists were particularly interested in the nature of government and the limits of state power. The theory of natural right emerged to challenge the traditional theory of divine right. Those who explained social order in terms of divine right believed that monarchs were the representative of God on earth, God granted them the right to rule, and they ruled with divine powers. God was, in effect, an authoritarian social planner who dictated instructions to representatives and maintained order through a centralized hierarchy of command. But those who explained social order in terms of natural right believed that God ruled through natural laws that govern all forms of life. Rulers had the right to rule, subject to these laws. God was, in effect, an inventor who operated through the rule of law, leaving it to divine creations to discover these rules, and to organize and govern themselves.

If one believed in divine right, then human choice should be based on an understanding of God's intentions on earth. Given their special relationship with God, the people who were best positioned to develop and interpret this understanding were monarchs and religious leaders. But if one believed in natural right, then human choice should be based on discovering the natural laws that operate in the universe and using this understanding to develop systems that were compatible with these laws. The pursuit of reason and the development of science and technology were not alternatives to divine inspiration but served and augmented it. Pushing the notion even further, some argued that natural rights included the universal right to participate in thinking about and making choices about social issues. Radical insurgents argued that choices could be made by interested parties reasoning together as equals rather than by authorities: Commoners could challenge the authority of monarchs, and laypeople could challenge the authority of religious leaders.

Challenges to traditional authority, whether in theory or practice, are rarely well-received. The Enlightenment era proved to be no exception. Scientific thinking, the proliferation of Protestant sects, secularism, and the growth of an independently wealthy commercial class posed a distinct threat to the old order, which generated new conflicts and created pressure for new choices.