Sunday, May 1, 2011

Capitalism: The Nuclear Reactor of Economic Systems

I'd like to expand on an analogy I outlined at the Madison Tweetup from yesterday.  We were speaking at Hawk's about the nature and control of capitalism and I realized that, and expressed the thought that, capitalism is very much like nuclear energy. It is a powerful force that can be used for good but, unchecked, it can also wreak untold havoc on the land.  So in the sprit of Schoolhouse Rock I give you Nuclear Capitalism!

Introduction: Nuclear Power for Dummies (Just Like Me)
Let's consider the construction of a typical nuclear power plant for a moment.  What are the components that make up a plant and how do they function?

Pressurized Water Nuclear Reactor
A nuclear reactor is essentially one of these:
I had one of these back in college. You plug it into the wall, put the element in a cup of water and in 3 minutes it boils.  I nearly burned down my dorm when it caught fire.  But I digress.  This little thing does just what a nuclear reactor does.  It boils water.  A billion dollar teakettle.  A sort of "Rube Goldberg" machine for generating electricity.

A nuclear power station is extremely complex, with thousands of components that are intended to ensure safe and efficient power generation.  For our discussion, we'll concentrate on a few of these key components as the analogy unfolds.

The Reactor and Components
The reactor is surrounded by pressurized coolant that it heats to several hundred degrees.  This, in turn, flows through another water-filled container causing the water to boil and turn to steam.  This steam turns a turbine which turns a generator which makes electricity that allows me to run my Mac.  The steam is funneled back through a condenser which turns it back into water and the process repeats.

The reactor sits at the heart of the system. The reactor vessel holds the nuclear fuel and is the element that generates the energy that ultimately produces the electricity that people use.  However, it is not the only component needed to produce this energy.  There are literally thousands of additional pieces necessary to generate the electricity that people use.  We'll explore that process a bit later.  But the reactor is, in our analogy, the core of the financial system which produces Capital.  Through nuclear reaction, energy is produced, much like the growth and accumulation of Capital in the economy.  It is quite literally, the core of the enterprise.  But if allowed to run unchecked, it will quickly heat up out of control and produce a catastrophic event.

In this scene from the film Fat Man and Little Boy, John Cusack plays a nuclear engineer working on the first atomic bomb.  During this experiment, an attempt to gauge the levels of radioactivity as two pieces of enriched uranium are moved closer together, things go horribly wrong.

Failures in the containment of nuclear reactions are extraordinarily dangerous.  Cusack's character later dies a horrible, slow death from extreme radiation exposure.

To prevent an out-of-control reaction like the one in the film clip above, there are numerous systems in place at modern nuclear facilities to keep the system running safely and optimally.  First there is the coolant.  In a capitalist system, the coolant can be though of as the government infrastructure that supports and enables the markets to function.  It is roads and telephone systems and satellites and any number of technological innovation which provide an operating framework for trade.

It is also the regulations that ensure a fair and even playing field for all the players in the game.  It keeps the reaction from overheating and spinning out of control.  But sometimes that is not enough and the system must be controlled more directly.  That is why nuclear reactors have control rods.

Control rods are lowered in between the shafts of nuclear fuel to slow or even stop the nuclear reaction.  This process is initiated when various maintenance activities need to be performed on the plant or when something has happened that requires the plant to lower it's output.  Overloads on the electrical grid, for instance.  In the capitalist system, these would be equivalent to the various monetary levers that the Federal Reserve can use to speed up or slow down the production of Capital through manipulating the bond market and interest rates.

Finally, there is the most important component, the containment.  Most nuclear reactors have at least 3 containment zones which ensure that radiation does not escape.  Radiation is the byproduct of the nuclear reaction.  Obfuscation is the economic equivalent to radiation.  Obfuscation allows the creation of financial instruments with little or no transparency.  And no apparent connection to reality, the so-called toxic derivatives, for instance.  These radioactive financial instruments are what caused the recent economic downturn.  And, like a real radiation leak from a nuclear reactor, they have poisoned the surrounding environment and will take years to clean up.  This is why a strong containment of the capitalist system is needed to ensure that we don't have these kinds of toxic leaks.

So to carry our analogy further along, the containment is like government regulation and enforcement.  When regulation and enforcement are strong an vigorous, capitalism is controlled and operates at peak efficiency.  The system functions transparently and in a well understood manner.  But when regulation is lax and enforcement is corrupt, the system becomes increasingly opaque and difficult to understand or manage.  The reaction quickly spins out of control and toxins escape the containment.

Additionally, there are hundreds of safety system which ensure that the reaction is not running out of control.  They monitor and check the reactor systems 24/7.  If the reactor behaves abnormally, they shut it down.  Much like the SEC and their monitoring of trades in the markets, they will identify and shut down trades or traders which are not functioning normally.

Finally, we have the diesel generators.  Never underestimate the criticality of your backup systems!  We saw how critical these generators were when they failed to work in Japan.  The generators are there to keep the coolant flowing through the reactor in the event of a catastrophic failure in the electrical generation systems at the plant.  So one might think of the diesel generators as a kind of Keynesian demand-stimulus when the economic system slides into recession or depression.  It provides the energy to ensure that the system doesn't collapse.  This is our economic backup system.  It's used to stimulate demand when the private sector has faltered.

Electrical Generation: The Reason for the Reactor
All of this nuclear power is not done for the sake of the nuclear power, but rather to turn that energy into something useful for consumers.  Capitalism is the same way.  The finance industry which is essentially held within the containment in the image above is not the reason for the system, but rather the engine which drives the system.  The reason we have the system is to produce results for everyone.

The reactor's purpose is to produce electricity.  Capitalism's purpose is to produce economic benefit for all (not just the finance sector).  The reactor doesn't exist for it's own ends, but rather as part of a larger  electrical generation system.  So what then, is the purpose of the Capitalist system?  To produce jobs, growth and wealth for citizens.

So in a nuclear reactor, the heat from the reactor's coolant flow boils water to produce steam.  This steam turns the turbine which turns the generator which makes electricity.  For Capitalism, the heat of the financial sector is transfered to the "productive" business segments that create jobs which in turn produce income and wealth for workers.  These workers, in turn, purchase goods and services (like electricity) which drive demand which in turn allow the system to expand and grow.

On paper, nuclear power is not a bad way to generate electricity.  It's carbon-neutral, for example.  But there are other consequences (risk of accidents, spent fuel, etc.) that are beyond the scope of this discussion.  So to with Capitalism, it's not a bad system if you ignore the inherent flaws and knock-on consequences.  These too are beyond the scope of this discussion.

The important takeaway from this should be that Capitalism cannot function safely absent government regulation and control any more than a nuclear reactor can operate absent coolant, control rods and a containment.  The consequences of such arrangements are catastrophic.  See the Chernobyl Disaster, for a good example.  The Chernobyl reactor was built and operated without a containment.  This proved remarkably catastrophic.  Deregulation of Capitalism under George W. Bush and the GOP has also proved remarkably catastrophic.  Clearly the containment around the Capitalist system needs to be repaired and re-enforced to ensure that what happened in 2009 cannot happen again.

I welcome any and all comments on my little analogy.

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