The Slippery Grip of Growth – Guest Post by Hawkeye

1) Whither Growth

Never has a society spoken so much about growth, yet achieved so little.

Time and time again predictions of recovery and a return to normal levels of economic growth have proven premature. The phrase “triple dip recession” has now entered the lexicon in the UK as GDP figures look like turning south again. One wonders how long it will be before quadruple, quintuple and sextuple dips take their place as common phrases to describe the UK’s mire.

With each announcement of GDP slippage, the news is delivered as somewhat of a surprise to politicians, economists and the commentariat in general. We’ve never had a high regard for journalists and politicians but economists on the other hand are deemed to be infinitely more sober and trustworthy. After all, they are the subject matter experts, armed to their teeth with teams of highly qualified forecasters and the very latest in advanced statistical models. Far too advanced for us mere mortals to understand, you hear! Yet it is the economists who are the people who keep getting it wrong. Not all economists are cut from the same cloth, but the strand of economic dogma that graces our most prestigious institutions and has the ear of policy makers and the media is varyingly referred to here as the “mainstream” (other terms are available, including Neoclassical, traditional, orthodox, central tradition, and in its most ardent form: Chicago School).

It goes without saying that statistical projections of the future have margins of error. Therefore, the failure of standard macro economic forecasts to predict our repeated slumps is often attributed to these statistical errors (maybe with a few post-hoc rationalisations thrown in for good measure, such as that pesky weather we keep having). But the very premise of statistical error is that on balance, errors are neutral. Therefore our real performance should turn out to occur higher than predictions as often as it turns out lower. Yet that’s not the way things have turned out, with many forecasts turning out to be over optimistic [1].

Chicago (school), we have a problem!

A recent chart from the IMF shows how there has been a general slowing of developed country (G7) growth since the 1990s. There is still some residual growth, but the trend in growth rate is clearly downwards. At the current trajectory the G7 economies risk being in constant decline from about 2015:

This is not what is written in the standard Neoclassical economists’ tea leaves. Economies are meant to bounce back to their “long run” trend of about 2-3% growth per annum (I put long run in quotes because this has only really happened in the last 200 years or so, and therefore not that long in proper historical terms). Hence there is the sign of at least some soul searching within macroeconomics. As covered in the post “Money makes our heads go round” (http://www.golemxiv.co.uk/2012/11/money-makes-our-heads-go-round-guest-post-by-hawkeye), one major gap in macro-economic modelling is the failure to account for debt, money and banks, and bit by bit, the mainstream is starting to play catch-up [2].

But could there be something even more important missing too?

2) A short history of growth theories

Ultimately, when one breaks it down, the main task of economics has attempted to answer two fundamental questions:

Where does economic growth come from, and how should we best allocate the proceeds of economic output?

The Neoclassical school believes it knows the answer to both these questions. Perhaps the clearest single expression of their “answer” is the Solow-Swann model of economic growth (http://en.wikipedia.org/wiki/Neoclassical_growth_model). Of all macroeconomic theories this single model perhaps best encapsulates mainstream thinking on the subject. Whether from the political left or the right, the underlying foundation is the same.  Growth is declared to derive from two main input factors, labour and capital, moderated by improvements in technological innovation. Wages represent the share of contribution played by labour, whereas rents, profits and interest represent the contribution of capital (a conveniently slippery term if ever I saw one, but lets save that for another day). Therefore, if we want more growth, we just need to increase the quantity of labour and capital or the efficiency of either through technology.

But, what if this mainstream model of economic growth has an even bigger flaw in it, beyond the careless oversight of money, banks and debt? What if all standard economic growth models have no better grounding in reality than attributing progress to something like magic fairy dust and the power of mind over matter? What if they are nothing more than a set of arbitrary and flawed mathematical equations that can only exist on paper rather than the real world? What if they are actually ignoring and contradicting known laws of physics?

Well, it is no exaggeration to say that the standard Solow-Swann growth model (and its close relatives) is in fact a complete work of fiction. Statistical fiction. And to demonstrate this I will call in witnesses including the perpetually popular TV physicist Brian Cox, an obscure Nobel chemist from the early twentieth century, and the recent bemusement over the UK’s productivity decline. Together, they can all shed light on the West’s floundering growth situation.

But before we get into the statistical flaws, we need to journey back in time.

Our story of economic growth theories begins at around the start of the economic profession itself. Not with Adam Smith, but a few decades beforehand in 18th century France with a curious group who were known as the Physiocrats. Being just the cusp of the Industrial revolution, this was a time when a large proportion of people worked the land; i.e. agriculture, farming, lumber-jacking, and even mining. To the Physiocrats all wealth originated with productive work on the land, as this is where the raw materials for subsistence living, industrial production and even extravagance were obtained (think palaces, fine clothing and jewellery).

Quesnay’s Tableau Economique (http://en.wikipedia.org/wiki/Tableau_%C3%A9conomique) was developed in 1759 to show the linkage between various sectors of an economy. It clearly defined the inputs of one profession as being derived from the outputs of another. In Quesnay’s worldview, the economic process was explicitly represented as a means of transforming lower grade inputs into more useful and worthwhile outputs. All output ultimately traceable back to the original source of land based resources. A key feature of this structure is that the transformations happen in one direction only, as the system can’t work in reverse (i.e. jewellery, fine clothing and palaces cannot in themselves make fruit grow). As their name implies, the Physiocrats were practical people, acknowledging the very real process of economic production; the fusion of manual efforts and raw inputs being converted into more useful and valuable states. Mankind as father, but earth as mother.

But as Europe (especially Britain) began to industrialise, the view of natural resources as key inputs began to wane. Adam Smith led the way in celebrating human ingenuity as the cause of wealth, mainly to fend off the growing popularity of Mercantilism (production for export and trade). Instead, specialisation and division of labour being deemed to create the new riches of increased productivity.  Fast forward some 230 years and this human ingenuity argument is still at the centre of most explanations of the cause of growth. We are told that mankind can unlock perpetual growth, provided the right prescriptions are followed; whether it is to let market forces unleash ingenuity, let the entrepreneur find new ways to innovate (i.e. Schumpeterian Creative Destruction), tear down trade tariffs (WTO), ensure a good education and legal system, stimulate demand through Government spending, promote a climate of business confidence etc. [3].

Instead of any link to the real process of production, through the Solow-Swan model we are submerged in the land of exchanges, transactions and substitutions which unlike the unidirectional Quesnay model, now take on the mathematical elegance of reversibility. Economic and monetary exchanges (e.g. trading) are reversible. A transaction in one direction can be undone. Substitutions of inputs are deemed to be perfectly feasible.  If capital can substitute for labour, then labour can substitute capital (at the right price, of course!). No longer do we have a unidirectional model of physical transformation, but instead the pompous exposition of mathematical elegance. In the mainstream view jewellery, fine clothing and palaces can in fact make fruit grow!  This is the crowning glory of the marginalist method, where money and price are elevated to majestic reverence. All must worship the ubiquitous social convention of monetary exchange; that pseudo-scientific expression of interpersonal trust that always commands us to do the most efficient thing. Extremely powerful stuff that trust, money and prices, but no more tangible really than magic pixie dust (each can vanish before your very eyes!).  All effort has been taken to chase away the demon of physical reality, leaving our subjective preferences, choices, and the ether of trust that “powers” our economy. In their world one can milk a tractor as surely as a cow.

As well as the pre-eminence of reversible mathematics, it is clear that almost all mainstream theories of growth place mankind at the centre of things, whether as the heroic risk taking and entrepreneurial individual or as part of enlightened political and social structures. In some respects this appears quite justifiable. Are not these riches of man’s doing? But if looked at closely, most explanations of what powers economic growth begins to veer into the paranormal when you witness economists invoking such unscientific explanations as sentiment, ingenuity, animal spirits and invisible hands. Abstract thought experiments are invoked to convey and substantiate their model of the way the world works. Evidence and reality seems to take a back seat compared to colourful rhetoric and zeal. This is quite a departure from the Physiocrats view. And if it weren’t for the efforts of a small group of fringe economists and natural scientists, it might have gone entirely unnoticed.

3) Physics fights backs

In 1921 a Nobel Chemist called Frederick Soddy (best known for making major contributions to the discovery of radioactivity whilst working with Ernest Rutherford) held a series of lectures on Economics [4]. This was to later form the basis of a book published in 1926 called “Wealth, Virtual wealth and debt”. Soddy began by asking how mankind lived; how we came to acquire the material riches of Industrial Development. In answer to that question, Soddy proclaimed that it is almost exclusively by sunshine. His explanation was based on following the energy / food chain that affects all living creatures.  This energy chain was somewhat reprised recently in the first episode of Professor Brian Cox’s TV series “Wonders of Life”. Here we are taken to exotic locations and shown elaborate computer graphics to convey the same point Soddy made 90 years ago in a comparatively sparse lecture hall in London.

Life forms take high grade energy from the external environment and use this to power themselves. The plant kingdom is the biological equivalent of solar panels, absorbing energy from the sun’s rays and creating complex sugars through Photosynthesis. A whopping 130 terra watts of energy is absorbed by 100% biodegradable, 100% recyclable, perfectly sustainable self-replicating “solar breeders” that also happen to look, smell and taste nice too! The animal kingdom takes its energy either from the plants, or from other animals in the form of food. Animals can’t directly acquire energy from the sun, but do obtain it indirectly. As Prof Cox explains in his inimitable big budget way, the natural laws of physics state that order tends to flow into disorder; entropy being the term for disorder. The second law of thermodynamics explains why water can’t flow uphill and that given the arrow of time why (within a totally closed energy system) the normal tendency is for things to deteriorate to a lower grade of usefulness. “Real wealth rots and rusts”, Soddy reminds us. Life on the other hand appears to contravene this process, but in reality this is only because it exploits high quality external energy, in the process creating a localised improvement in order (for the organism), but externally increased disorder (otherwise known as waste and pollution). At first glance it may appear that life is cheating the laws of physics (fighting the process of entropic degradation), but in totality it is not. Life is merely a temporary parasite from an energy point of view; feeding off something or someone else for its personal use, and dumping less useful energy in its wake. Without the external energy source, there is no life.

But what has this little digression got to do with Economics? Professor Steve Keen (author of Debunking Economics) explains succinctly in a video lecture on the subject

(http://www.youtube.com/watch?v=14vVhhNvWX0). The very process of economic production (whether manufacturing or service sector) involves a transformation against the natural tendency of things to break down or degrade. It isn’t scarcity per se that we value in economic exchange, but the superior arrangement of items in our world that wouldn’t necessarily occur automatically (i.e. without some form of anti-entropic intervention). It may not cost us much (in time or effort) to find an exquisite diamond in the ground, or millions of gallons of oil, but the processes of physics, chemistry and biology that created these were against the grain of natural degradation.  The Steve keen video explains that production creates order from disorder and so must obey the second law of thermodynamics. Therefore it must draw on energy inputs to fight against entropy. Production is the economic equivalent of Maxwell’s demon, creating order from chaos. An external energy source is the only way in which such a constructive transformation can take place without breaking the laws of physics. Just like life, from an energy point of view, economic production must be parasitic.

But surely energy on its own is useless without human intervention? True, but human intervention without an external energy source is even more useless. Again, we can turn to Soddy for clarity on the subject:

“Let me illustrate what I mean …. by asking what makes a railway train go. In one sense or another the credit for the achievement may be claimed by the so-called ‘engine-driver’, the guard, the signalman, the manager, the capitalist, or share-holder, or, again, by the scientific pioneers who discovered the nature of fire, by the inventors who harnessed it, by labour which built the railway and the train. The fact remains that all of them by their united efforts could not drive the train. The real engine-driver is the coal.”

To Soddy, all of those man-made initiatives were merely the catalysts, not the fuel of economic activity. They are the efficient cause rather than the material cause. To a chemist, the distinction is clear and profound. Each human intervention has the ability to trigger or constrain productive forces, but each was not the underlying power source of the economic activity. Ultimately it takes real energetic power to create economic activity, as order from disorder does not come freely, in perpetuity or via human will alone. Mankind exploits energy already in existence (fossil fuels being historical solar energy in the form of decayed organic matter) because we can’t create it from nothing. However, the mainstream of economics would have us believe otherwise. For such an overtly materialistic society, one is confused why our economic models pay so little attention to the material world. Instead they are engaged in a self indulgent fixation with mental desires and abstract utility!

It is a shame that Soddy’s views on monetary reform seems to have been used as a way to undermine or distract from his profound insight and argument for a basis of economic growth that adhered to the laws of physics. It would take until the early 1970s for a branch of economics to form that encapsulated the physical basis of economic growth. Beginning in earnest with Nicolas Georgescu-Roegen, whose dense written style and razor sharp mind seemed to be handled by ostracisation from the mainstream rather than direct confrontation [5]. Following in his footsteps, Herman Daly is perhaps the most long standing and potentially cogent of this new wave of Ecological Economists.  A former World Bank chief economist, Daly articulates the fundamental flaw of Neoclassical growth models:

“This, of course, is the famous circular flow diagram, depicting the economy as a circular flow of exchange value between firms and households—as an isolated system in which nothing enters from outside nor exits to the outside. There is no ‘outside’, no environment. The economic animal has neither mouth nor anus—only a closed-loop circular gut—the biological version of a perpetual motion machine!”

http://www.csbsju.edu/Documents/Clemens%20Lecture/lecture/Book99.pdf

4) Deaf, dumb and blind kids

Mainstream economics sees resources and environmental impact as merely a subset of inputs and outputs.  To them, the economy is in control and is the master, wheras Ecological Economists see it the other way around.

Georgescu-Roegen and Daly have spent 40 years directly challenging the Solow-Swann growth model both from this conceptual angle, but also on a very practical point too. A key criticism was the way that the mainstream model only found a modest relationship between capital and labour with economic growth. It turns out that there is a major missing proportion of explanation in the mainstream model. Extra growth is occurring beyond the amounts explained by labour and capital. In statistical terms it is known as the residual error, and represents that part of the outcome in which the model fails to account for. In normal statistical applications this would be interpreted as a key weakness of the model. Rather than accept this as a weakness or attempt to understand and measure the missing inputs that could account for this error, a sleight of hand was resorted to. Solow and others hastily used this residual as a way of declaring that this must be evidence of mankind’s increased technical prowess. This is an evasive and elusive “gap” in the model. The shadow of something real, which with no more scientific prowess than a soothsayer, the economists have declared as substantive evidence of technical progress. How are we to know that this is a correct diagnosis? Is it falsifiable? How has it been measured? Do we know the size of it is correct? How have we established whether it was not caused by something else? Are we to confidently conclude that technical progress can and will always add to growth? Or are the economic priesthood permitted to let this residual fluctuate with the seasons? Not only is this woeful statistical practice, but it is inherently poor science too.

Since 2007, Ayres and Warr have provided perhaps the best set of nails to drive into the coffin of the Solow-Swann model. They demonstrate that energy available for useful work by society provides a remarkably more satisfactory explanation and statistical fit, without having to resort to intangible and mystical concepts such as human knowledge and technology. This forms the basis of their Useful Work growth theory (http://www.insead.edu/facultyresearch/research/doc.cfm?did=1244). But time and time again, these criticisms are ignored.

5) Wealth is, as wealth does

There is certainly a very strong correlation between energy usage and economic output, whether viewed in a cross-sectional form, or longitudinally:

 

 

 

 

 

 

 

 

 

 

 

Scatterplot of Energy use & GDP by country [6].

 

 

 

 

 

 

 

 

Long term trend of world energy use & GDP

The very embodiment of a wealthy country is its extravagance, whether in the form of elaborate infra-structure, high rise buildings, large houses, etc. All of which require substantial amounts of energy to build and maintain. Likewise, a highly wealthy individual has access to substantial energy resources at their personal disposal. Some if it is direct, in terms of a large and fuel hungry car (or yacht, or private jet!), whereas other times it is indirect, such as visiting nice restaurants and hotels. Being able to command the services of others (who themselves require energy both to live and to fulfil their working duties) or the manufactured products of others is the very embodiment of wealth. We understand wealth as purchasing power, but this doesn’t mean purchasing power (in the form of money or credit) can create energy. So why don’t mainstream economists see the world this way too?

It seems that the two key objections raised to the Useful Work theorem are related to the low cost share of energy and in proving causation. The Cost Share argument goes all the way back to the mainstream Shibboleth about the contribution of inputs to economic activity being reflected by the share of expenditure.  The energy sector accounts for approximately 4% of UK GDP [7], so its contribution to the economy is deemed as no more or no less than this.  But why must we accept this premise in the first place? Pure common sense demonstrates this to be flawed. Take running a car as an example. The costs for putting fuel in the tank may only be about a third of the annual running costs (if one takes insurance, road tax, maintenance, servicing and depreciation into account), but that doesn’t mean that the fuel is only one third of the motive power. All those other costs may hinder your ability to use the car, but none of them propel it. Try running the car without any fuel ! Waving your insurance document around or any other amount of paperwork will not make it go.

The cost share argument is also deeply tautological. It starts with the premise that the cost share reflects contribution, yet it’s not entirely clear what the rationale or justification for this is! As energy has low cost share, ergo it must have a low contribution. But what if the price of energy changes rapidly? Does the cost share ebb and flow in tune to this? We have seen oil prices more than triple recently. Does this mean that energy is now three times more important? If so, then what has changed so rapidly in the real world to make energy that much more important now that we have to pay three times more for it? Surely it still does broadly the same task.

More importantly, what if the supply of energy is reduced? Let’s assume that the cost share of energy remained at 4%, and then at a sudden point in time, energy supply halved. What would the mainstream model predict? If we follow their logic then we should only see a small dent in GDP, of the order of 2%. Of course, the price might change, and this may push up the contribution proportionately. But could it even entertain a dramatic impact on GDP in the way that an energy based model would? Do we really think that our economy could function normally if energy inputs were halved? The mainstream model may suggest so, but a framework that better reflected Quesnay’s Tableau would spot the severity of the issue straight away.

Finally, the cost share premise is surely a deeply unsatisfactory method of prediction, for it allows the contribution to vary over time based on newly observed (therefore constantly changing) values. By its own admission it can’t predict anything because it retrospectively allocates the contribution of inputs! It is akin to Ptolemaic geometry where circles within circles are added when the evidence doesn’t match the prediction. Rather then evaluate the underlying premise to see if the very principle of it is flawed, continuous tinkering is employed in a desperate attempt to try and salvage the overall model. Ever since Newton, science has prided itself on the accomplishments of formal predictive models with universal and permanent constants. In the mainstream economists’ world there are no constants. The value of key parameters can drift up and down, akin to changing the laws of gravity as they go along. They are entirely free to move the goal posts after the ball has been kicked.

The second challenge to any energy based model involves the legitimate point that correlation doesn’t prove causation. This is certainly true, however the proponents of the importance of energy start with a plausible theoretical framework first. This is the laws of physics, as articulated by Soddy, Georgescu-Roegen and most recently Keen. This demands that useful work (i.e. economic activity) is powered by energy. It would be physically impossible to consider the causation the other way around. Try “creating” energy but applying ingenuity, labour and capital. Surely each of these necessitates energy to begin with! We might use ingenuity to discover and exploit energy resources in our environment, but we haven’t made it from nothing. It would be highly egotistical for mankind to believe that he was the creator rather than just a mere curator of energy. Despite the protestations from the mainstream about no proof of causation, the irony is that there doesn’t appear to be any plausible justification for why it could work the other way round. Yet the mainstream model has an embedded assumption of causality in which the mere act of ingenuity can bring forth energy and resources. In other words, humans can actually get something for nothing if they just apply themselves sufficiently. It is a bit like saying that if the world begins to suffer from a lack of energy inputs, it just isn’t trying hard enough to will it into existence. Clearly in their view, the human race is just not being optimistic enough. The other claim is that we should just substitute energy for something else, like labour and capital, completely ignorant of the fact that reproduction of both these require energy in the first place. It’s as if mainstream economics went downhill some time after the Physiocrats and adopted anthropomorphic voodoo instead!

6) The revenge of reality

If, as the mainstream believes, energy and resource inputs (which undoubtedly would have some form of constraint on them in the near future [8]) are not critical inputs or can be substituted by other input factors, then we can all enjoy economic growth in perpetuity! That is the core presumption and consequent prediction of the mainstream model.

As a perfect example of this, the LSE’s recently released report from its Growth Commission resembles a glorious Technicolor celebration of the mainstream tenets of growth; labour, capital and technical innovation [9]. It is nothing short of a verbose exposition of the mathematical Solow-Swann formula for economic growth. Each chapter of their exquisitely produced brochure is an assertive manifesto to harness each of these very human pillars as the elixirs of growth; human capital, man-made infrastructure and man’s abundant curiosity. Not that these aren’t worthy aims in themselves. It is just that by resting on such overt hubris and narcissism, the gaping hole of how we power our existing way of life, let alone one of aspirational expansion, is summarily dismissed with a few cursory platitudes about making the right sort of investments in energy generation capacity. By emphasising the very human aspects of policy making, education, and the role of ingenuity, the LSE report provides a flattering sense of our self importance and potentially misleading long term prospects. The report can be distilled into one simplistic and self-indulgent message: “permanent growth is ours for the taking, if we have the wisdom and the willpower to grasp it”. It is a technocrat’s wet dream.

Contrast this with the Limits to Growth (LtG) model first developed in 1972. This model commenced with a sensible framework of physical variables first and related linkages between them:

“Five variables were examined in the original model, on the assumptions that exponential growth accurately described their patterns of increase, and that the ability of technology to increase the availability of resources grows only linearly. These variables are: world population, industrialization, pollution, food production and resource depletion.”

http://en.wikipedia.org/wiki/The_Limits_to_Growth

There are no ethereal mental variables in this model. It is not based on abstract mathematical formulae or dubious cost share assumptions. In many respects it is a proper 20th century version of Quesnay’s Tableau pared down to the crucial inputs and outputs. There is no room for Deus Ex Machina explanations or post hoc rationalisations. There are variables that one might recognise as technical prowess, but this is a limiting factor (upper limit of maximum efficiency) not a source of productivity.

Unlike the Solow-Swann formula it has a mouth and anus. The LtG model shows an economy that has to feed off resources to grow. More importantly, the waste outputs of production (i.e. pollution) have a feedback loop with a delay to them. It attempts to incorporate the consequences of economic activity, something that is completely omitted from the mainstream model. Two recent reports show how its predictions using the standard model have fared well from 1970 to 2000 [10]:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The critical aspect of the LtG model is the way that a major inflection point in food, services and industrial output per capita occurs once resource extraction peaks (estimated as somewhere between 2010-2015). In other words, once the fastest rate of exploitation has passed, living standards decline, and potentially decline rapidly (essentially halving in 20 years or so).

Mainstream economists may argue that their models have worked very well for the last 40 years, but only if we accept the fact that they were making constantly updated short range forecasts and we allow them to ignore all periods when they were wrong! In contrast LtG has remained a very good long range forecast. If its predictions continue to come true then we are indeed nearing the peak of world economic output, as well as hitting limits with food and other key resources. The global economy may be facing a very serious risk of overshoot and collapse. Therefore two hundred years of compound growth is hitting up against physical limits that wit, wisdom and ingenuity alone cannot arrest.

As Steve Keen quipped

Only madmen and economists believe in infinite growth on a finite planet. Time we restricted it to just madmen.”

7) Withering growth, and withering growth thoeries

The traditional model and the predictions made by such hubristic prognoses could get severely tested in the next ten to twenty years. In fact there are already signs of it creaking now. We have faltering economies on every continent. Debt dynamics are not without blame, but Central banks and Government treasuries have been throwing the full policy toolkit at maintaining growth, and yet they cannot understand why it isn’t working. It is almost embarrassing to watch them fumble through these repeated failures. The recent UK productivity riddle is one such example (http://www.bbc.co.uk/news/business-19981498). Employment has slightly increased, yet GDP has stalled. How is this interpreted by the mainstream model? The explanation seems to require us accepting that productivity is declining. How can productivity, which has relentlessly improved for 70 odd years, start going backwards? How are we becoming less productive? We don’t lose technological skill as time progresses, we get better and better. So how does the mainstream attempt to explain such riddles? The answer seems to come back as little better than declaring that technical progress and productivity always goes up, except when it starts going down! Post rationalisation emerges in abundance, along with token amounts of humility from the economic forecasters and the assurance of improved models going forward. This sort of shambolic amateurism would be laughed at in any other walk of life, yet economists still seem to retain a scientific aura. But to truly qualify as scientists, they should be judged by the accuracy of their predictions; nothing more and nothing less. And their track record is going from bad to worse. Their models seem incapable of predicting stagnation let alone decline, so it is doubtful they will fare better in an increasingly constrained future.

However, if energy is placed at the centre of our economic worldview, then we can make the following (testable) predictions:

a) Economies will struggle to substitute away from cheap fossil fuels without severe impacts on growth, as labour, capital and technical innovation cannot sufficiently replace energy (the impact will be far more severe than the cost-share assumption would predict)

b) In the face of increased costs of energy, and potentially constrained supply, many economies (especially the most developed) will struggle to maintain historical growth levels and will stagnate or even decline

c) Risk of political turmoil in struggling economies as the general public is confused and disappointed at weak economic prospects

d) There is an increased likelihood of social unrest, instability, military intervention and even wars in regions with remaining resources as countries compete over the dregs

e) Increased cost of food and water (even in the Developed West) as both rely heavily on cheap energy inputs as well as being highly vulnerable to pollution effects

f) Gradual decline in living standards for most of us (certainly reduced purchasing power, which will inevitably get diverted more towards essentials)

Undoubtedly, mainstream economists will continually resort to a rear guard action, as each new “surprise” requires some form of posthumous retro-fitting of continuous tweaks in a desperate attempt to cling on to their flawed foundations.  But the cavalry of critics is growing in ranks. Reality seems to be getting in the way of the mainstream message and the cracks are getting wider. There have been many fringe contemporary critics on this subject, but there are now signs of this criticism reaching a wider acknowledgement. In the last 6 months there have been the following articles from within more mainstream circles:

- Martin Wolf of the FT refers to the peaking of industrial productivity [11]

- An IMF working paper postulates scenarios in which energy plays a more substantial role in economic growth [12]

- US Investor Jeremy Grantham warns that the days of abundant resources and low prices are over [13]

- A recent report called “Perfect Storm” released by Tim Morgan of Tullet Prebon Research warns of an increasingly volatile near future [14]

For the moment, whilst it still basks in unfounded limelight, mainstream economics remains stuck in its ways; clinging to its mathematical formalism. A formalism that is wonderfully elegant and flawless in every regard, except for the slight problem that it doesn’t actually reflect the real world. Undoubtedly, in the long run, reality will triumph. If only it were the flawed economic models that will wither in future, but regrettably, it is quite likely to be accompanied by the wholesale withering of Western economies too.

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[1] See Zerohedge on the damning level of cumulative GDP forecasts:

http://www.zerohedge.com/news/2012-12-10/sheer-comedy-erroneous-economist-gdp-forecasts-13-simple-charts

And figure 2 of this Federal Reserve report (pg 25), where far more errors over predict GDP growth (below the diagonal):

http://www.federalreserve.gov/pubs/feds/2011/201111/201111pap.pdf

[2] The Economist finally wakes up to the fact that alternate macroeconomic models might actually be more accurate at predicting crises:

http://www.economist.com/blogs/freeexchange/2012/12/reforming-macroeconomics

Whilst Noah Smith makes an interesting case about how macroeconomists (just like military generals) always seem to be fighting a previous war:

“Reading this, one could be forgiven for thinking that macro lurches from crisis to crisis, always trying to ‘explain’ the last crisis, but always missing the next one.”

http://noahpinionblog.blogspot.co.uk/2013/01/macro-always-fights-last-war.html

[3] The Wikipedia page on Economic Growth has a good summary of the main schools of thought on this subject: http://en.wikipedia.org/wiki/Economic_growth#Theories_of_economic_growth

[4] “Cartesian Economics: The Bearing of Physical Science upon State Stewardship”

http://habitat.aq.upm.es/boletin/n37/afsod.en.html

[5] This is dealt with substantially in Herman Daly’s “Ecological Economics and the Ecology of Economics” (1999). A good summary is below:

http://www.capitalinstitute.org/blog/guest-post-not-production-not-consumption-transformation

[6] Source: http://www.gapminder.org/world

[7] Source: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/65898/5942-uk-energy-in-brief-2012.pdf (pg 6). Incidentally the chart on pg 11 showing the rising share of energy imports for the UK is somewhat worrisome to say the least.

[8] A discussion of our energy predicament is way beyond the scope of this post, but useful reference sites are www.theoildrum.com and ourfiniteworld.com. This report by Richard Heinberg is fairly comprehensive http://www.postcarbon.org/new-site-files/Reports/Searching_for_a_Miracle_web10nov09.pdf

[9] The full report is available here: http://www2.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/LSEGC-Report.pdf

[10] “A comparison of the Limits to Growth with 30 years of reality”, Graham Turner http://www.csiro.au/files/files/plje.pdf

“Revisiting the Limits to Growth After Peak Oil”, Charles Hall and John Day

http://www.esf.edu/efb/hall/2009-05Hall0327.pdf

Bear in mind that the LTG report wasn’t actually intended as a formal prediction. The authors were well aware that their parameter estimates may be wrong. Indeed they ran various scenarios making large changes to some of the parameters (the model structure remained the same). The conclusion at the time was that no matter whether we actually had more fossil fuels at our disposal or if we could be more efficient, and even if we could reduce pollution impacts the world was going to hit limits at some point. It was all a matter of timing and extent of overshoot.

[11] “Is unlimited growth a thing of the past”, Martin Wolf http://www.ft.com/cms/s/0/78e883fa-0bef-11e2-8032-00144feabdc0.html

[12] “Oil and the World Economy: Some Possible Futures”, Michael Kumhof and Dirk Muir

http://www.imf.org/external/pubs/ft/wp/2012/wp12256.pdf

pg11 “Maintaining the system therefore requires the constant addition of a flow of energy.”

[13] Reproduced at: http://www.theoildrum.com/node/7853

[14] http://tullettprebonresearch.com/2013/01/21/perfect-storm-report-now-live/

 

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52 Responses to The Slippery Grip of Growth – Guest Post by Hawkeye

  1. Unseen March 19, 2013 at 12:23 pm #

    By coincidence I was reading Soddy’s Role of Money over the weekend and was struck by the similarity of his analysis to that advanced by Positive Money.

    You suggest it “is a shame that Soddy’s views on monetary reform seems to have been used as a way to undermine or distract from his profound insight and argument for a basis of economic growth that adhered to the laws of physics” – do you think Soddy’s views on monetary reform are unsound yourself, Hawkeye?

  2. Hawkeye March 19, 2013 at 12:53 pm #

    Hi Unseen

    Far from it. Soddy was a pioneer in so many ways, yet was treated as a crank and a crackpot. One of my favourite quotes of his goes something like this:

    “Money is the nothing you get for giving something, before you can buy anything”

    I referenced Soddy’s views on money in the post:

    http://www.golemxiv.co.uk/2012/11/money-makes-our-heads-go-round-guest-post-by-hawkeye/

    Banks don’t forfeit anything when they create a loan. This was Soddy’s main criticism. Why should they have the unique ability to do this?

    I was rummaging through my parents loft at the weekend and came across my old O Level Economics textbook, published in 1971 (the school didn’t deem it necessary to have anything more modern!):

    http://www.amazon.com/Elementary-Economics-HARVEY/dp/0333040872

    I flicked through it out of curiosity to see what it had to say about the way banking works, and the origins of money. Positive Money and Soddy’s diagnosis of the way banking works was actually confirmed by the book, as it describes the process of how banks create money from nothing.

    So either the authors of textbooks on economics are also crackpots, or (as is more likely the case), Soddy was right all along!

  3. Unseen March 19, 2013 at 2:34 pm #

    Thanks for the clarification Hawkeye – I really like the elegant indignation of Soddy’s prose. He was fiercely critical of the notion that the extention of credit by the banks can truly be described as “lending”, as this description would imply that they actually had something to lend in the first place. Reading about Soddy led me to the social credit movement and “greenshirts” of the interwar years, who I’d never previously come across. I couldn’t find out all that much about them online but they seem to have been broadly similar to Positive Money in their aims.

    This is all an aside – I should really try to get my head around the substance of your article!

  4. The Dork of Cork. March 19, 2013 at 2:51 pm #

    If you want to see how Europe works look at Lithuania

    Eurostat energy production and dependence rates 2008 -2011.

    http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/8-13022013-BP/EN/8-13022013-BP-EN.PDF

    Lithuania has gone through what appears a second post Soviet collapse with the closure of its unit 2 reactor in dec 2009.

    A 24.5 % collapse in consumption is major war stuff.

    Lithuania import dependence was 51.2 % in 2009
    81.8 % in 2011

    Wow !!
    This is a HUGE difference.
    So despite a collapse in consumption its import dependence reached almost Irish levels after shutdown.
    Think about that for a second……………………….

    This event has probably rippled throughout the entire Baltic region in a complex (spending power dynamics) manner and has probably killed & evacuated many more people then a Chernobyl style meltdown.

    • Hawkeye March 19, 2013 at 5:45 pm #

      DoC

      That is quite a frightening drop, although how Lithunania managed to have an energy per capita more than Germany in the early 1990s is a curiosity and a half:

      http://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=eg_use_pcap_kg_oe&idim=country:CUB&dl=en&hl=en&q=cuba%20energy%20use#!ctype=l&strail=false&bcs=d&nselm=h&met_y=eg_use_pcap_kg_oe&scale_y=lin&ind_y=false&rdim=country&idim=country:DEU:POL:LTU:CUB:GBR:JPN&ifdim=country&tstart=-308880000000&tend=1268956800000&hl=en_US&dl=en&ind=false

      Most of Europe (incl. the UK) is getting squeezed from two sides; the US on the one hand, and China on the other. As “Steve from Virginia” wrote last year:

      “When fuel supplies are constrained, the only source of new fuel supply is the demand of other countries.”

      And so Europe (starting with the periphery) is getting thrown under the bus:

      http://www.economic-undertow.com/2012/05/08/the-brutal-economics-of-less/

      It’s the brutal economics of less.

      • The Dork of Cork. March 19, 2013 at 6:38 pm #

        Germany is perhaps the most efficient user of energy.

        However this efficiency is the polar opposite of redundancy.

        Germany thinks that because it is efficient in the use of energy to make its mercantile products it does not need to invest in Nuclear power…….the costs of its policy can be externalized on its euro neighbours……….until it cannot.

        Then its pretty much over.
        Its neighbours eventually cannot afford it products and therefore Germany cannot export to afford nat gas imports.

        Think of German car production.

        It must import oil / gas, iron ore and other materials to make a input heavy car – it thus adds great value to these materials.

        But the very act of making this luxury adds greatly to basic life support input costs throughout the eurozone.

        Europe must now sacrifice domestic demand to keep ahead of the entropy posse………as Germany borrows off the entire Eurozone s account to do so.

        You thus get this strange event where Italian oil consumption reaches mid 1960s lows (with a much larger population) so that Germany can afford (be competitive) to export cars to China!

        The euro money cannot be used for local trade / commerce anymore.
        All domestic demand is thus sacrificed to maintain long distance international trade.

        This is far more important for real nation state economies rather then the current large international port known as the EU market state.

        http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-12-051/EN/KS-SF-12-051-EN.PDF

        To use a analogy – think of the EU market state as the plantation owners house with different rooms / countries.
        The hinterland or cotton fields is Asia & Africa.

        But something has gone wrong with the business model…………
        The owner decides to reduce the wages of his domestic servants (Europeans) so as to free up resources for the fields.

        He will most likely never consider that his basic business model is flawed.
        He will merely run down the business (become more efficient) until it folds.

  5. Cora March 19, 2013 at 4:05 pm #

    Wow, that was fantastic
    ‘For such an overtly materialistic society, one is confused why our economic models pay so little attention to the material world. Instead they are engaged in a self indulgent fixation with mental desires and abstract utility!’

    I would like to print this out on stickers and stick them to every chair in every college around.
    I think this is the starting point for understanding what exactly is going on, I suppose my one point of disagreement is that I do not believe that many of the secretive think thanks and policy wonks are as oblivious to these facts as they would like to appear.

    I would like to try and start up a local ‘Occupy Economics’ and with your permission (& whatever fee is standard for such things) make this the founding lecture. I think this is the most important thing for people to grasp and it has the power to cut through all the push me pull you, left/right identity rows that can so easily derail the discussion of everything else.
    This info shows clearly that we need to reevaluate everything now! Right now I feel like we are all in a car that’s going to fast down and veering off to the wrong side, but the driver is someone who we are used to deferring to, so we are all grasping our seat belts, glancing at each other and wondering who’ll be brave enough to yell ‘pull over’ so we can change drivers. Some of us are calming ourselves down by bravely imagining exactly how the crash will unfold, others have their headphones in and their eyes tightly shut, and still other are arguing fiercely but sotto voce about what we should do. One thing that is stalling us is we can’t decide who will be a better driver, so we sit tight and trust in fate?!!
    First we have to yell pull over now, then we have the discussion (which will likely sound like most roadside arguments I’ve seen, ie more shouting than listening until everyone is hoarse) of who is going to drive or even better if we maybe should get out and walk?

    Personally I am not that daunted by having less cheap energy. I agree that the ‘green’ energies are unlikely to fully substitute fossil fuels, but that doesn’t itself frighten me. I think this could be the spur for a sort of second renaissance which just fills me with joy. I think we could use our creativity and imagination and a variety of sustainable energy source and live simpler lives but don’t have to return to the dark ages or necessarily having less happy lives. So for example I am happy to give up dishwasher, flushing loo (we’ve all gone in field at some stage so I really think we should stop being squeamish and go all out for compost loos), tv, hairdryer get my wardrobe down to three outfits, cook less and eat more local raw foods, and even is necessary give up the washing machine as long as I get to keep my laptop and the internet! and hospitals! I think the demand for ingenuity could give us all a new lease of life and free us from the consumerist stupor most of are now stuck in.
    For this reason I almost hope they don’t find the golden algae or whatever that can replace oil. That would just mean business as usual where the globocorps are in control and society continues on becoming more and more atomised. I am currently in love with all things Renaissance, and I don’t think that standard of living (of the italian well to do) would be such a bad period to return to, or for developing societies to aim for, as long as we don’t ressurect the inquisition (although JPII & Ratzinger did their best).
    What does scare me is that if we all don’t wake up soon, that is not what will happen, the people in charge will not look to start a second Renaissance they will look to at all costs maintain the grotesque Marie Antoinette lavishness of their present lifestyle (and when you look at Iraq & Guantanamo that should tell you clearly what they are willing to stomach, never mind austerity). Rather than finding ingenious ways for everyone to live simple fulfilling connected lives, all energy goes into convincing a whole lot of spoiled rich kids they still don’t have enough. So now the average six yr old where my sister lives has an iphone 4!! 6 years old and they sit around at their lavish birthday parties staring at tiny screens! I want to get an Enid Blyton book and beat their parents round the head with it!
    People rightly give out alot about the damaging things many world religions have taught but I think sadly to many are blind to the fact that many scientists and technocrats have quasi religious faith in ‘progress’. Their are people in Silicon Valley who are as mad and dangerous as the average Saudi mullah, they just have way better PR. They will see half the globe starve before they give up their dream of achieving ‘the singularity’.
    So once again thanks and I just wanted to stick in a bit of hopefuleness :
    there is a Ted talk on youtube by Allen Savoury, that was fascinating it is about regreening the desert and I think his ideas combined with terra preta farming could give us all hope. What is equally fascinating about it is how parrallel to what Hawkeye is talking about in economics, scientist and ‘experts’ continued doggedly down the wrong path for so long, despite all the warning signs that they had got it wrong!

    • GeoWaveRider March 19, 2013 at 5:34 pm #

      Cora

      Wow, that was fantastic too….

      I’m not a great debater and so generally keep my thoughts to myself. However the group of enlightened people that I meet on this blog give me great inspiration and I am definitely in when the “revolution” comes, which I’m sure it will. I can set up the computer systems, keep them going and do the maths :-).

      There are too many people asleep and oblivious to what is actually going on as you describe so well in your car passenger analogy.

      How do we wake them from their slumber?

      Brian

      • Hawkeye March 19, 2013 at 5:55 pm #

        Cora

        Happy for this post & excerpts to be distributed as widely as possible. The message is more important than my ego or bank account. In fact I should declare my works as “Anti-copyright”:

        http://en.wikipedia.org/wiki/Anti-copyright

        I’ll also second the comment from GeoWaveRider.

        All the suggestions you make are echoed by a number of genuine “grass roots” movements, such as:

        Post Carbon Institute: http://www.postcarbon.org/ (esp. book “End of Growth”)

        New Economics Foundation (NEF): http://www.neweconomics.org/

        Transition Movement: http://transitionculture.org/

        • Cora March 22, 2013 at 12:56 pm #

          Fantastic thanks Hawkeye,

          athough being honest I guess I was hoping you’d say no absolutely not so then I’d have another excuse for putting actual action on the long finger. I guess I talk a good game about ‘doing stuff’ because I’m hoping enough people will start at the same time that I just get carried on by the herd! Its a very small herd here in Ireland at the moment though. Plus I think Occupy would not be looked favourably on by my employers Clients and so I work for a small business so its taking me time to work up the courage.. urgh, excuses excuses.

          Re not hoping they find the ‘golden algae’, I think backwardsevolution probably explained the point I was trying to make a bit better;
          1. it would take away the impetus to change our current consumerist maerialistic ideologies and the capitalist system which views Labour as being just another resource to be squeezed dry, which I think is so so destructive on a spiritual and societal level and
          2. I think climate change/peak oil are not the only constraints we face, oil is the only resource that can reach a peak, or a breaking point, the eco system is being wrecked on many different fronts – look at the bee situation – that really is frightening.
          3. I would rather see us find a multitude of different solutions, preferably as ‘open source’ as possible – just look at how ugly the ‘dash for gas’ is already proving to be. Fracking is literally insane, poisoning giant areas of the water table so that we can extend and pretend a little longer!

          Thanks for the links Hawkeye, I no about the transition movement but its got a huge image problem I think – its just too crusty and full on for most people. My idea would be to market talks not as anything but discussions, without tryign to make up peoples minds for them – I think the transition movement is great but its for people who are already on board, and they do tend to dress a certain way and the total earnest of the recently converted can just be too much for people just about getting to grips with recycling.

          As for the doomsayers, who want to say there’s no hope unless we kill off 7m – you’re not helping – you play into the hands of some very nasty people with very unpleasant ideas. I don’t think that kind of shock and awe campaigning produces anything good and I don’t admire it from environmentalists anymore than in rapture cults, in fact if push came to shove I prefer the rapture cults I think they are less misanthropic. Many people round here often refer to Naomi Klein’s shock doctrine and really that kind of thing is just the eco equivalent of it. All it achieves is panicking those who believe it into accepting and acquiescing to some pretty unpleasant grand plans, some of them already underway.
          I’m all for promoting ‘stop at two’ (and I did so I can feel nicely smug there all you selfish 3+ parents!Har!) but that’s my limit – after that I say we look at it as a positive challenge rather than sitting around seeing who can be the most serious and pessimistic. Think Gandalf in LOTR, he didn’t tell them there was never any hope when he was trying to persuade them to start out on the only way to fix things, he told them that at the end when they clearly fcuked anyways!
          It think searching to make a catalogue of doom it is a mental disease as sure as wanting to just put blind faith in God or some as yet to be discovered discovery: both stall action. I’m not disputing that the eveidence is in and its bleak but here comes a point when I don’t see the point to it parsing it out. Better to see the problems and do your best to fix them while not allowing ourselves to descend to amoebic levels of morality and without getting transfixed on whether or not its going to work. I mean lets say we only have 10 year s left before the apocalypse how do you want to spend it?

          Playing Casssandra/Saying f it lets live it up while we can/doing your best to not let it happen…for anyone/doing your best to keep you and yours safe?

          Forget gay marraige this is the defining moral question of our time

          My Dad is a 75 yr old who climbs mountains, he always says when the going gets tough you look at where your putting each foot and count your steps – suddenly you’re there! on the other hand if you keep looking up searching for the summit and getting despondent every time you reach a false summitt then the whole thing is pure hell and you may well turn back!

          Ok enough metaphors, thanks for all kind comments,

          Love you all comprades y comadres

    • David Sheegog March 20, 2013 at 6:22 am #

      Cora,
      You should hope that they do find the “golden algae” that can replace oil. Or something. The entire human project for the last 150 years has been advanced with abundant and cheap fossil fuels. I started following energy economics about 12 years ago when Gene Tyner showed me Jay Hanson’s website:

      http://www.dieoff.org/

      Jay Hanson agrees with Hawkeye, except Hanson is one of those who believe mainstream economics is purely a religious cult. dieoff is a vast collection of energy related articles that pull no punches. Enjoy…

  6. Cora March 19, 2013 at 4:24 pm #

    I also think that there is something fundamentalist about the amount of energy and money and time being expended on pushing GM foods on populations that do not want them. No doubt some scientist will descend to tell me that the results are in and GM is fine but then everything from cigarettes to DDT was declared safe by someone holding a science degree at one point, so why should I go against my natural intuition this time?
    I think that the green movement is being coopted and commercialised as surely as feminism was, they will take articles like this and use it to push GM/war, solar/fracking as the goodcop/badcop ‘solutions’. This is where Occupy is so important because in this capitalist system information about the limits to growth won’t be the fall of capital on its own, capital if it jams up against energy limits will turn to the other piece of the equation: labour and put all the burden of exploitation there. Although I think actually this process has been under way for some time now, hence what I say about those in power knowing far more than they let on. I don’t mean all politicians or univerity academics here, I mean more the think tanks and those who gather in the dark so to speak

  7. Jamie_Griff March 19, 2013 at 6:24 pm #

    Excellent essay Hawkeye. You’ve really nailed the location of the blind spot in economic orthodoxy and illustrated its vastness.

    The voices of discontent are growing louder by the day though. Let’s hope the tide can be turned in time to soften out some of those kinks in the last chart.

    For more on the limits to growth – and why crushing levels of debt is one of them – I’d recommend The End of Growth by Richard Heinberg.

  8. steviefinn March 19, 2013 at 8:22 pm #

    Hawkeye

    Thank you for that, a brilliant piece that managed to combine some of my thoughts on energy, general common sense, sustainability, & my limited grasp of thermodynamics into a solid conclusion. You have added many missing dots which I needed to join in order to grasp the reality of the big picture.

    As for the priesthood I always suspected they were full of shite, it seems that their holy model proves this.

  9. backwardsevolution March 19, 2013 at 8:47 pm #

    Hawkeye – very much enjoyed your post. I’m going to read it a few more times before I comment. Job well done!

    Cora – well said too. The “scientists and experts continued doggedly down the wrong path for so long, despite all the warning signs that they had got it wrong” because it was lucrative for them to do so. It paid off for them. Who benefited, really benefited? Follow the money.

    I think there were some experts “in the know” who certainly were not going to come out and tell the truth. Why, that would have ended the party, wouldn’t it? But I agree that there are also some people who do not live in reality, who like to believe that magically technology will take care of everything, or that rocket ships will land on some distant planet and provide an abundance of resources.

    By making believe that there was an endless supply of everything, we have pulled demand forward. We have pulled forward population. The world’s population will peak at 9 to 10 billion? I hope.

    Because of the idiot drivers (to use your analogy) we blindly trusted, we have set ourselves up for one giant head-on collision. If we had kept the world population at no more than one billion, mankind could have sustained itself most likely forever. Now we’re going to have a crisis.

  10. groop March 19, 2013 at 9:58 pm #

    Hawkeye, fantastic post that has resurrected a thought that keeps popping up from time to time that I have struggled with: namely the thought that capital creates energy.

    This at first glance seems a strange thing to conceive, that the man-made construct of capital can create energy, but in some sense it does seem to be valid. e.g.

    More capital is created by a central bank
    This capital is spent on research, development and deployment of a range of renewable energy technologies

    In this sense capital would have indeed allowed the capture and harvest of a greater amount of renewable energy than before.

    I wondered what other peoples thoughts are around this – as mentioned – i have struggled with this for a while.

    • Hawkeye March 20, 2013 at 10:38 am #

      Hi Groop

      I’d say that the physics point of view states two things:

      1) you can’t create energy as such, only exploit energy in existence

      2) it takes real energy to extract energy resources, so you have to focus on the Net Energy gain from primary energy generation (known as EROEI)

      The capital you refer to for exploiting renewable energy must have required an energy investment in the first place. This is the flaw of mainstream economics which is to presume that capital can be created from nothing but human will alone, which is surely absurd.

      Many of the links in the article cover this point (and I do apologise for having so many, only I wanted to ensure that there was enough evidence to back up my arguments and give people curious to know more enough threads to follow up) but perhaps the best single one is Steve Keen’s Youtube video:

      http://www.youtube.com/watch?v=14vVhhNvWX0

      For more details on EROEI, see the Wikipedia link:

      http://en.wikipedia.org/wiki/Energy_returned_on_energy_invested

      Yes, we should certainly invest in renewable energy generation, but we shouldn’t delude ourselves that this investment can come at zero cost (money or energy), or that it will lead to sustained levels of energy creation (it is likely to be a lower EROEI therefore eroding into net energy surplus for economic activity)

      Therefore renewable can’t sustain growth, then can only attempt to mitigate or slow down our economic decline (i.e. make some of the drops in the LtG graph a bit shallower and not so “kinky”, as JamieG would say).

      Other views on the subject are available, for instance the Diamandis book:

      http://www.abundancethebook.com/

      But if you click on the tab of “evidence for abundance” there isn’t much that would actually qualify as evidence in my mind.

      • groop March 20, 2013 at 10:39 pm #

        Hawkeye, thanks for the response and links, the grounding of economy modelling in resource and energy inputs is really something to be welcomed.

        I guess the problem I have with my thinking is related to the ‘capital’ created rather than the energy side.

        My simplified understanding of debt and money revolves around a couple of simple thoughts:

        Central banks can create and presumably destroy money as and when they see fit.
        Private banks can provide credit or debt to people/governments who wish to take on that debt. Basically, they bring forward the future expected revenue streams of people/governments and create it in the here and now. If the future revenue streams fail to appear, the money is effectively destroyed.

        This is an anathema to energy, as it cannot be created or destroyed, and a kWh is a kWh 40 years ago, and is 40 years time. Energy cannot be brought forward into the here and now. There is no equivalent of the time value of energy.

        I think my overly simplistic understanding of money creation is why I struggle with whether money actually does need to have had much energy involved in its creation.

        Seems the abundance book gives a fairly positive outlook on the future and I, like you, am not convinced on the technology that allows us to live ‘abundant’ lives.

        Writing this, I have just thought of an actual law that economists could actually hang their hat on, and would be a solid basis for the future as I cannot foresee it ever changing.

        There will ALWAYS be externalities.

        Many thanks again Hawkeye for getting my brain engaged.

      • CArratiaM March 20, 2013 at 10:54 pm #

        Thanks for a masterpiece post Hawkeye, very nicely explained!!

        Groop, regarding your thought that “capital creates energy”, as Hawkeye explained it is physically impossible. However, you’re quite right in that it could be considered possible in some sense, meaning that capital invested into energy extraction can make more energy available for human consumption. But that is transforming rather than creating, and the renewable energy available for transforming is inevitably limited by the total sun radiation, rendering indefinite growth impossible.

        That is a consequence of the conservation of energy. But it isn’t just that, and here comes the point concerning entropy production. And this also addresses Cora’s comment above:
        “…I almost hope they don’t find the golden algae or whatever that can replace oil.”
        I do hope they don’t succeed on that thing which could make available a virtually indefinite amount of energy, namely controlled nuclear fusion. Not only to avoid steepened consumerism, but also to avoid the consequences of the massive increase in entropy production that would result from the increased activity. A massive global warming would be inevitable regardless of CO2 or other greenhouse gases, it would just be the heat released by all the running processes. This is explained in

        http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/

        where an “Exponential Economist Meets Finite Physicist” who recalls their discussion:

        “…
        Physicist: … The upshot is that at a 2.3% growth rate (conveniently chosen to represent a 10× increase every century), we would reach boiling temperature in about 400 years. [Pained expression from economist.] And this statement is independent of technology. Even if we don’t have a name for the energy source yet, as long as it obeys thermodynamics, we cook ourselves with perpetual energy increase.

        Economist: That’s a striking result. Could not technology pipe or beam the heat elsewhere, rather than relying on thermal radiation?

        Physicist: Well, we could (and do, somewhat) beam non-thermal radiation into space, like light, lasers, radio waves, etc. But the problem is that these “sources” are forms of high-grade, low-entropy energy. Instead, we’re talking about getting rid of the waste heat from all the processes by which we use energy. This energy is thermal in nature. We might be able to scoop up some of this to do useful “work,” but at very low thermodynamic efficiency. If you want to use high-grade energy in the first place, having high-entropy waste heat is pretty inescapable.
        …”

        • groop March 21, 2013 at 12:02 am #

          CArratiaM, thanks for the link and the post, most interesting. The economics prof lost me when suggesting that energy would become cheaper and cheaper – I don’t know why, but this just seems to be plain wrong on a common sense level.

          I’ll need to get the Ecological Economics book – as the quote reverberates with me, as does Cora’s and your view that we are better off heeding limits rather than trying to overcome them somehow. My hope is that humanity can replace fossil-fuels with low-carbon primary energy at a sustainable level. If this is at a level far less than the sun’s daily insolation, then we would be borrowing the energy in a useful form for a while, and then it would revert to low-grade heat at some point. Solar energy would seem to do this on the earth regardless of the influence of humanity.

          • Hawkeye March 21, 2013 at 10:01 am #

            Hi Groop

            Yes, Daly’s collection of essays is very good.

            http://www.amazon.co.uk/Ecological-Economics-Ecology-Essays-Criticism/dp/1840641096/ref=sr_1_7?ie=UTF8&qid=1363856369&sr=8-7

            He has an acerbic style but is very accessible too. He also introduces the works of Georgescu-Roegen and Soddy, again in a nicely accessible manner. I’ve not read any of his other books, many of them are aimed more as textbooks, but may well be excellent too.

            It was good of CArratiaM to refer to Tom Murphy’s blog too, which is an excellent real world analysis of energy and economics from a proper Physicist.

            I would say that money & debt are giving us the impression that we can sustain and grow our current consumerist lifestyles. It is deluding us into thinking that we can keep growing (and that our savings and investments represent real future purchasing power – but this is a mirage). In my mind the financial crisis is a symptom of us hitting the limits to growth, as no amount of monetary intervention is able to “create” the energy needed for extra growth. Therefore, savings, money & debts will have to be destroyed to get back in line with physical reality.

  11. Phil (Mcr) March 20, 2013 at 2:10 am #

    Great post Hawkeye!

  12. UnlearningEcon March 20, 2013 at 3:03 pm #

    This is a great piece. Makes me regret that I studied economics instead of something useful…

  13. GordonDonald March 21, 2013 at 12:06 pm #

    Richard Heinberg, Post Carbon Institute, (http://www.postcarbon.org/) set out the environmental constraints to unlimited economic growth in his 2011 book The End Of Growth – adapting to our new economic reality:
    “as the era of cheap, abundant fossil fuels comes to an end, our assumptions about continued expansion are being shaken to the core. The end of growth is a very big deal indeed. It means the end of an era, and of our current ways of organizing economics, politics, and daily life…. if we have in fact reached the end of the era of fossil-fueled economic expansion, then efforts by policy makers to continue pursuing elusive growth really amount to a flight from reality.”
    Heinberg, like others who recognise the limits to growth, makes the case for a transition to a ‘steady-state’ economy where human happiness is not measured by increases in GDP. He sees in both Keynesian and Neoliberal economics, not only a shared belief that economies can and should grow, but also a deeper error: “The subsuming of land within the category of capital by nearly all post-classical economists had amounted to a declaration that Nature is merely a subset of the human economy – an endless pile of resources to be transformed into wealth It also meant that natural resources could always be substituted with some other form of capital – money or technology. The reality, of course, is that the human economy exists within and entirely depends upon Nature, and many natural resources have no realistic substitutes.”
    Although Heinberg acknowledges the Marxian view that capitalism, by its nature, has to grow and accumulate in order to survive, he does not really incorporate this into his analysis. I think this then weakens his view of power relations, the class interests in pursuing growth, and therefore finding a feasible strategy to negotiate a transition to a sustainable, steady-state economy. Does corporate power simply have to be shown the evidence so that they realise their errors? As Murray Bookchin (http://en.wikipedia.org/wiki/Murray_Bookchin) pointed out “capitalism can no more be ‘persuaded’ to limit growth than a human being can be ‘persuaded’ to stop breathing. Attempts to ‘green’ capitalism, to make it ‘ecological,’ are doomed by the very nature of the system as a system of endless growth.”

    I think one of the reasons behind the resurgence interest in Marx’s ideas recently, apart from the need to explain the economic crises erupting in global capitalism, is that Marx provides a very different view of the relationship between human beings and nature. the term ‘ecological marxist’ describes those such as John Bellamy Foster, author of The Ecological Revolution and co-author of The Ecological Rift – Capitalism’s War On The Earth, at The Monthly Review (http://monthlyreview.org/) who have developed this line of thinking.
    “Labour,” Marx wrote, “is first of all, a process between man and nature, a process by which man, through his own actions, mediates, regulates and controls the matabolism between himself and nature.” It is this central metabolic relation between human beings and the natural environment which is now being called into question by capitalism on a planetary scale generating constant and ever-growing metabolic rifts. Even as global monopoly-finance capital falls prey to an endless stagnation crisis due to its own internal contradictions, it is also crossing all ecological boundaries in its drive for endless accumulation, thus activating its external contradictions on the broadest, most planetary scale. (from John Bellamy Foster, The Planetary Emergency, Monthly Review, December 2012)

    David Harvey claims to have identified 17 contradictions of capital, three of which he says are fatal. One of these is its reliance on 3% compound growth forever.
    http://www.youtube.com/watch?feature=player_embedded&v=8UD-QqYFJqY

    • Hawkeye March 21, 2013 at 12:57 pm #

      Gordon

      Thanks for the links. Harvey’s lectures and books are always thought provoking.

      I haven’t come across John Bellamy Foster though, but I am intrigued by his ability to synthesise Marx with the Ecological Economics view (judging by his references to Odum, Daly, Jackson, Georgescu-Roegen etc.). Seems like a latter-day Ruskin?

      • GordonDonald March 21, 2013 at 1:59 pm #

        Hawkeye,

        Have you come across Mary Mellor, Social Science professor at Northumbria University? She gave a presentation to the Just Banking conference in Edinburgh last year (http://www.justbanking.org.uk/video/).

        In her book, The Future of Money, she comments on Tim Jackson’s view in Prosperity Without Growth that we do not currently have a macroeconomics based on integrating economy, society and environment.
        “Certainly there is not one in the mainstream, but ideas are emerging through heterodox frameworks. One is ecofeminist political economy, which sees gender as the key to the separation of the economy from society and the environment…. The exclusion from money value of domestic and communal work around human mental and physical existence is akin to the way capitalist patriarchy externalises the natural world. The resilience of the natural world, like caring work, is treated as a free resource.”
        She argues for a ‘provisioning economy’ in which “the provisioning of necessary goods and services would be the main focus of the economy and the activities of production and exchange would be fully integrated with the dynamics of the body and the environment. A money system for such an economy would need to embrace this wider notion of provisioning. It would need to enable the building of a non-gendered, egalitarian and ecologically sustainable provisioning economy. It would therefore need to prioritise these needs and this work in the issue of money…. Privatisation of the social resource of money is central to capitalism; if a provisioning sufficiency economy is to be achieved, money must be reclaimed for the benefit of the public as a whole.”

        • Hawkeye March 22, 2013 at 11:30 am #

          Hi Gordon

          No, not heard of Mary Mellor, but will check out the video. I have been meaning to watch the Just Banking videos for a while. I think Steve Keen was among them, so good to see some UK academic support for this line of thinking too.

  14. Golem XIV March 21, 2013 at 1:32 pm #

    Really great article Hawkeye. Your best yet. Thank you.

  15. Phil March 23, 2013 at 3:29 pm #

    A couple of related good reads:

    Georgescu-Roegen’s 1975 essay “Energy and Economic Myths” -

    http://www.jayhanson.us/page148.htm

    And Christian Kerschner’s paper suggesting the Georgescu-Roegen may have been an optimist :-)

    http://www.web.ca/~bthomson/degrowth/degrowth_vs_steady_state.pdf

  16. David Morey March 25, 2013 at 9:21 pm #

    So let’s look elsewhere for our fulfilments:

    http://philosophybites.com/2009/01/kate-soper-on-alternative-hedonism.html

  17. Landbeyond March 28, 2013 at 6:51 pm #

    I don’t disagree with anything in the article, but was it really necessary to take more than 5,700 words (plus notes) to convey such an obvious truth?

    An economy depends on energy, and economic growth has occurred only with the input of increasing amounts of cheap, convenient energy from fossil fuels. And Paul Krugman and his ilk are dangerous fools.

    Granted it would need some elaboration, especially for those who still haven’t heard of or can’t grasp the meaning of peak oil, but talk about going round the houses! Half as long would have been plenty – and maybe more readers would have made it to the important part.

  18. Hawkeye March 28, 2013 at 7:39 pm #

    Hi Landbeyond

    Fair point it probably was much longer than I originally planned. In my defence I wanted to write something that would stand up to serious scrutiny. I appreciate that the main premise is obvious to many people outside economics, but I really wanted to show how defunct the economic mainstream is, and substantiate the argument. Other authors have taken far longer to get to the point, and others have written nice short punchy pieces too.

    My aim was to show that the very foundation of economic growth theories are flawed, and that this could have serious consequences. Maybe breaking it into a two or three part series would have worked better.

    I know that I did go around the houses a bit, but I hoped that the journey would be fun!! Sorry if it didn’t do it for you, and yes, a loss to us all if some passengers fell off along the way.

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