How is the Economy Like a Bubble Bath?

On my plane ride home from the Third Biophysical Economics meeting I had an interesting idea. Let me try it out on you just for fun. It is a way to imagine the real nature of the economy as opposed to the imagined economy of neoclassical theory.

Ah, Bubble Baths!

Most everyone has taken a bubble bath at some point in their lives. Remember how relaxing and enjoyable such baths are? The warm water, the luxuriant bubble foam trapping the heat to enhance the experience, the aromatic soap soaking the grime of the day off your skin. Bubble baths are somewhat of a luxury, especially if taken in an oversized tub. You take longer to enjoy the pleasure with good reason. You don't get to do it very often.

Well, that bubble bath is a good metaphor for the economy, the biophysical economy that is.

Consider how it comes into being. You start with an empty tub, put a little bath solution in and turn on the hot water (moderated with a little cold water) from the tap. As the water flows into the tub and churns air into the water, it generates bubble foam that rises above the level of the water (as it rises). This is like our economy. The inflow of hot water is like the inflow of usable energy and physical assets (the water level is like GDP but only of the real productive assets). It keeps things active. As the tub fills up it is like the ‘real’ production economy, something actually physical is getting produced (e.g. the tub is filling with real water). At the same time the foam of bubbles is getting generated and floats ever higher above the rising water line. If you step into the bath before the water line rises to the maximum you sink down into the water and suds and start to enjoy the pleasure. You can easily forget the stresses and strains of the day. You can relax your vigilance and feel at ease, as if nothing bad can happen.

But, since the bath has a finite limit of volume it can hold, you eventually have to turn off the water flow. Then for a while, with the luxuriant bubbles all around you, you settle in to relax and enjoy even more. As you do, however, and after some short period of time, the bubbles start to deflate and the foam that seemed so ‘prosperous’ starts to melt away. At first this is almost imperceptible. But as soon as the water flow stops and the churning ceases, the bubbles start to fade. As more and more soap starts to combine with grime and sweat from your body, the foam melts faster and faster.

The foam, in this metaphor, is the financial system that sits above the real productive economy. It is money created out of almost nothing. Originally its worth was based on the underlying physical production of goods and services, just as the foam in a bubble bath has its origins in water and soap. And just like the expansion of the foam as the water churns, our financial instruments, meant to represent some kind of wealth, began to expand, filled with nothing more than hot air. The connection between the volume of foam (money represented by financial instruments) and the water (real economy) begins to be recognized as a temporary and ephemeral one. What little water is contained in the foam soon melts back into the water in the tub and the foam disappears.

Most of our financial instruments are based on debt in one form or another, and on a bet that in the future we will be able to retire that debt with interest. But the problem is that the debt (foam) could only be created and maintained as long as the energy flowed into the real economy (water) and kept things churning (doing physical work to create real wealth). When the energy flow diminished (water gets turned off), the creation of debt (foam) and servicing it (creating even more foam) is no longer possible. The debt cannot even be retired to make way for new debt because there isn't a surplus of real wealth being created to do so.Any bets you made on being able to retire your existing debt in preparation for creating yet more debt, will be lost. You can't even roll debt over, that is create incrementally more debt before paying off the first round. The suds will melt even if you try to churn the water with your hand. You may create a few anemic bubbles here and there, but you will never get back the luxuriant foam that you had at the beginning.

Next time you take a bubble bath try some experiments. Turn the water off before it fills up; let the foam subside a bit, then turn the water back on full. See what happens. That will look an awfully lot like recessions! See if you can think of a way to keep the spigot on indefinitely (eternally). You could always open the drain, and assuming the water drains out at the same rate it enters you could achieve a steady-state flow. But wait! That won't work either unless you continually replenish the vital ingredient — the soap solution. You could, I suppose, use an electric mixer to churn the existing water, but remember that much of the soap gets used up clinging to grime and won't keep making bubbles in the same amount as before. Moreover, be careful not to drop the mixer into the water! You could end up electrocuting yourself (or having a major accident at a nuclear facility or an off shore drill rig).

The problem is that the tub is a finite resource (volume) and once used up (filled to the max) it can no longer be used to create more bubbles. The party is over. You've had your pleasure and like all things it must come to an end eventually. It turns out that getting out of the bath is a good idea, otherwise you will look like a giant prune!

There is nothing in the physical universe that can keep the bubble bath going forever. The best you can hope for is to get a respite from the toil of the day and the worries of the mind for a little while. Then you have to come up with a new plan. Our economy is like that.

And now you know how long hours of travel warp my mind. When I got home I wanted desperately to take a bubble bath to relax so as to get a good night's sleep. But I couldn't get the metaphor out of my mind. So I opted for a short shower and went to bed. Interestingly, even without the bath, I slept like a baby.

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I just received some photos from Gail Tverberg (Gail the Actuary on The Oil Drum) of us having a good time talking about the end of the world! Here is one. Left to right, Gail, Bob Herendeen (pioneer in BPE), Charlie Hall, Joe Tainter, Jim Kunstler, a friend of Jim's whose name I missed (sorry), me (clipped) and a student (I think Peter).

Comments

[Nemesis]

George, how would one extend the metaphor to include Bubble Ben Shalom Zimbabwe's perpetual QE in crediting banks' balances sheets with hundreds of billions of fiat debt-money dollars?

Perhaps, rather than bubble bath soap, what he is pumping in is hot air from a finite, high-entropy energy source, the result of which will be such a high price for bubble bath soap that it's cold showers thereafter for the lot of us. :-D

[So Very Doomed]

George, with respect to the Real World, when do you think the bubble formation stops?

[Phil Henshaw]

How about a "complex bubble bath"? I watched a number of the videos from the INTE - Bretton Woods conference, and found them all excellent. I think it would be particularly worth listening closely to what George Soros observed in the changing complexity of the economic system, and its recent change in form.

fyi http://synapse9.com/blog/2011/04/21/new-economic-thinking-what-soros-said/

[Nemesis]

Phil, Soros is among the principal parasitic rentier-financier oligarchs whose values and behaviors have created and perpetuated the financialization of the global economy. Therefore, he benefits from the increasing complexity and lack of transparency and understanding of the system, i.e., he makes it up as he goes along to serve his own parasitic interests and that of his peers.

Financialization will not work hereafter with falling net energy returns to liquid fossil fuels in terms of real per capita consumption and GDP; rather, increasing financialization post-Peak Oil implies an even higher future cost to labor product, investment/production, and over all GDP.

IOW, with the onset of global peak oil production and oil exports, further increases in complexity from financialization and increasing connectedness at longer distances of the global supply chain will result in an acceleration of diminishing returns to the Oil Age imperial trade regime worldwide.

I have no doubt that Soros is aware of this, but he wants to be sure that he influences the debate to ensure he keeps his share of the shrinking global pie of financial wealth before he has to check out and leave his billions behind.

[Dean]

Good analogy as far as it goes, but you need to get out of your Archimedean bathtub and spend some time with nature in the wild. Consider the foam that is kicked up by breaking waves at the beach. Some theories of the origin of life suggest that the foamy bubbles were the first cells where self-replicating organic reactions first occured. Such foams will be around for as long as there is open water on this planet.

Or consider the foam at the base of Niagara Falls. How long has that patch of foam been there? Longer than civilization, and it will persist even when the Falls have degenerated into a series of rapids. Lake Ontario will not stop draining in any sudden way that can be seen as similar to somebody turning off a tap. Unless it's the New York Power Authority's Niagara Power Project bypassing the Falls -- but that just moves the foam someplace else, to the generator outlets that feed back into the Niagara River.

[George Mobus]

Nemesis,

Comment 1: Yes I would agree that a good deal of the froth being created everywhere in the financial world today is just hot air and nothing more. Actually it isn't even hot! All it takes is blowing lots of air. Most of the derivatives markets are nothing but froth.

Comment 2: What you say of Soros is possibly true of most of the financial movers and shakers. They can't be so stupid as to not see what is happening.

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So Very Doomed,

I think the water spigot is already down low so the creation of new bubbles is already in decline. I.e. our economy is already running out of capacity to invest in useful assets. We are just investing in paper assets, which are not assets at all in any meaningful way.

Whatever bubbles are being generated now are from the desperate hand waving of the financial movers and shakers, like Paulson, Geithner, et al. Aided and abetted, of course, by Mr. Obama.

When will everything crash. Well it already is crashing. It may be a while (6 months to 2 years) before more people start to understand what is really happening. First we will visit what economists call a double dip in the recession, i.e. we will soon be seeing a decline in real GDP due to the price of oil having been above $90 a barrel (WTI) for so many months (see It's the Area Under the Curve). But then they will have to see that it isn't just a dip, but the beginning of a long decline to a new, deeper low, probably what everyone will recognize as a true depression.

Only then will more people be able to question the conventional wisdom purported by neoclassical economics. Those of us in the Biophysical Econ arena hope to be ready with answers and realistic scenarios.

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Phil,

Missed you at BPE.

I understand your point, but this analogy was meant for more general readers. I didn't want to press it too hard.

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Dean,

Sorry but I'm having trouble following your point. I would say the sustainability of a "foam" depends on its source of maintenance energy. The Archimedian bathtub had a finite limit of energy input. Stop the sun from shining and your pre-biotic foam will cease to maintain also (wave energy might have stirred it, but sunlight sustained it).

George

[Phil Henshaw]

George, No I didn't get invited to give a talk at BPE, and didn't have a paper I thought people would want to discuss this time either. I actually don't have money to go places unless it seems it would help my somewhat dangerous plan to become self-sufficient on my research... ;-)

Nemesis, I agree with your opinion on Soros from an environmental point of view. I still see his remarkable insight into how the world financial system is coming unglued, with apparently unresolvable conflicting political conflicts largely in control of events they don't understand. If you read my post on it, and think the way he explained how he made his money, by riding the natural bubbles of the economy up, you'll see why in a chaotic world he can't do that now. Hopefully you'd also see that I'm talking about something like reversing a part of his method as how to make finance sustainable now.

Dean, I think yours is an excellent comment, in that the organic processes of environmental systems don't work by Archimedes' principles of weights and measures. They work by the emergence of individual cellular systems. Whether foams were the a structure that biological cells developed from seems like a good test concept, and toss in the extremely high energy cavitation events that occur in making them too, I think. So I wouldn't rule it out, but I think how the bubbles of foams develop their shapes might not be as the limit of an emergent growth process. That's the way the body shapes of both single and multi cell organisms, weather systems, cultures and other cellular designs of nature seem to develop.

[Core Drilling Machine]

Wow..The blog is well written and you have done a wonderful comparison of economy with bubble bath..Great!!Thanks for sharing it..
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