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Beyond Supply and Demand: The Dynamic

Equilibrium Between Global Thresholds


and Allocations
By James Bernard Quilligan, originally published by P2P Foundation

 March 9, 2018

As a monetary adviser, I spent many years questioning bankers on the authenticity of their
balances sheets. What stood out most for me in these discussions was this: the social
demand for commodities is often claimed by banks as having a direct link with the ecological
supply of resources which are extracted, produced and sold as commodities. But this just isn’t
true. Bank reserve assets are not discounted to reflect the decline of the world’s non-
renewable resources. In fact, as society’s ecological debt continues to mount, no one is
actually keeping track.

Consider how odd this is: the demand for goods is used as a proxy for the relative
accessibility of non-renewable resources — yet the increasing scarcity of fossil fuels isn’t
showing up in the price we pay at the gas pump. Same with water and rare minerals, which
are not valued according to their declining availability. Nor does eco-value appear on the
spreadsheets of most stock traders, insurance companies or other businesses.

What’s causing such rampant misreporting and misallocation? I’ve come to see this now as
more a problem of accountability than accounting. Frankly, the challenge is to admit our
mistakes and reconceptualize the modern system of economic valuation, starting with the
theory that it’s based on a fundamental law of equilibrium. Take, for example, Adam Smith’s
idea that the efforts of individuals in pursuing their own interests naturally benefit society, or
the notion that an organic circular flow exists between market prices and people’s incomes.
Are these assumptions valid? And what do we mean by economic balance? Is it a principle of
physics or biology?

Let’s begin by asking, is supply and demand truly able to manage the thresholds of resources
which an environment can sustain, or to ensure that these resources are allocated sufficiently
for the population living in that environment?

In both classical and Keynesian economics, the ratio between the supply of a quantity of a
good or service and the demand for it is determined by the price of this quantity. What is
tallied on the supply-side of this equation are production costs, which include labor, capital,
expectations of future prices and suppliers, and the technology that’s used in production. The
relative availability of materials and energy for production is also listed as a supply cost,
although seldom in ecological terms. The rate at which people and their organizations may
harvest or use a particular resource within its regenerative capacity is not normally registered
on the supply side as an ecological yield, but as a financial outlay. Nor are the negative effects
of pollution, waste, ill-health or risk typically included in production costs.

Conversely, the demand side of the market economy measures consumer income, tastes and
preferences, prices of related goods and services, expectations about future prices and
incomes, and the number of potential consumers. Rather than reflect actual human need,
demand is a measure of individual consumption at the point of sale. It’s simply the price at
which a person is willing to pay for something, signifying how much cash or credit is
exchanged in the transaction. But what’s not measured by demand is the individual’s
accessibility to breathable air, clean water, nutritious food, adequate shelter, or meaningful
security, love, belonging and inclusion. Subjective expressions of need, beauty, volunteer
labor, loss of commons or health and safety risks are simply not involved in the transmission
of demand through the cash register, barcode scanner or wireless purchase.

A similar structure for market equilibrium is applied in banking and finance. Just as the
supply-demand formula in microeconomics is based on a functional connection between
producers and consumers, the supply-demand ledger is used in macroeconomics to express a
similar type of relationship between lenders and borrowers. Here, the equilibrium between the
money supply and the demand for money is adjusted through an interest rate, which
represents the price that is charged for money.

Once again, this represents a certain kind of transactional balance within the marketplace, but
does not reflect the broader relationship between the ecology and its population. When all
that’s expressed in the standard supply-demand equation is the price of a particular
commodity or good, or an interest rate which signifies the price of money, neither resource
preservation and replenishment rates nor specific measures of the human need for this
resource are accounted. Nor does the supply-demand equation convey the underlying costs of
social harm or environmental damage that may be incurred.

This disequilibrium in value has also led to deep political biases in how the supply-demand
model should be applied in society. On one hand, classical and neo-classical economists say
that ‘supply creates its own demand’. They promote strong policies for investment and
production through individual initiative and limited government intervention in the economy,
while rationalizing endless resource extraction, production, growth and waste. In using
supply-demand for their scale of balance, these analysts rarely question why the exponential
values in the economy are so disjointed from the biological growth rates which occur in the
natural world.

On the other hand, Keynesian economists say that boosting wages and purchasing power
generates demand. They promote policies of shared investment and production through
intervention by a government in its economy, while ignoring the destructive competition
which this creates between available resources and the needs of a population for these
resources. Here, Keynesians are little different than classical economists: both schools assume
that meeting human needs is dependent on extractive production, expanding population,
continuous demand, increasing personal income, rising consumption and the unintended but
inevitable byproducts of manufactured pollution and disposable waste.

Neither choice is correct because the basic theory of market equilibrium ignores
environmental and social costs, deeply misinterpreting the dynamic link between ecological
support systems and the people who depend on them. This vital connection is seen simply as a
‘supply chain’ through which a quantity of something demanded by consumers or borrowers
is delivered to them based on the quantity that firms or banks can supply. Neither the classical
or Keynesian approaches to supply and demand reflect the constraints to the productive
capacity of Earth’s resource base or the maximum size of a population which can be
maintained indefinitely within that environment.

Our economic proxies for environmental balance are directly to blame for these fateful
miscalculations. As a subsystem of a larger ecosystem, the supply-demand model does little to
equalize the natural sources of productive input with the natural sinks of consumed output or
waste, leading to massive market failure. Under the illusion of supply-demand equilibrium,
human population is now using the basic resources of food, water, energy and minerals faster
than Nature can replenish them to meet the needs of its people. To reverse this critical
overshoot, we’ll have to transform our epistemology, our ideologies, our institutions and
rules, as well as our methods of accounting.

All of this requires a clearer understanding of the interactions between the biosphere and
human society. The ecological threshold of available resources and the allocations of those
resources to meet the needs of a population are actually opposing forces which continuously
counteract one another. This dynamic principle exists between every species and its
environment: living organisms react to changes in their ecosystem and make adjustments to
survive.

Through this constant interplay between natural and physical forces, instead of supply
creating its own demand through prices or demand being dependent on income, the signaling
of need by an organism routinely triggers the creation of its own supply. These self-regulating
forces work in Nature and within the biology of the human body; they must also work in
human societies. Measuring the replenishment of renewable and non-renewable resources will
enable a society to sustain their yield relative to the offsetting needs demonstrated by the size
and growth of the human population.

These divergent forces must be given an empirical basis in socioeconomic policy beyond the
inept framework of supply-demand. Counterbalancing the needs of a population with its
resource support systems requires a major readjustment. Here’s how this might work. What’s
now included on the supply side as extraction, production and waste is redefined as the self-
organization of resources within the ecological limits of the planet for their regeneration. And
what’s now reported on the demand side as a measure of income is redefined as that of people
meeting their daily requirements through the common use of these resources.

When supply becomes an ecological value and demand becomes the value of human need,
‘build it and they will come’ is transformed into ‘demonstrate the need and it is met’. Now,
instead of a crude approximation for economic equilibrium, we have an actual measure for the
cooperative activities of people managing their resources to meet their needs — a measure
based on the level of regenerative output which their ecology can optimally ‘carry’ or sustain.

The term for this dynamic equilibrium between people and their environment, which points
the way out of our supply-demand matrix, is biocapacity. Biocapacity expresses the intrinsic
value of sustainability within an ecosystem. It is based on the thresholds of resources which
can be sustained in an environment as measured against the allocations of resources sufficient
to meet the needs of its population. Through this ecosystem value, biocapacity offers direct
indicators and guidelines to help us organize our own sufficiency through the steadily
fluctuating, self-adjusting metabolism of society as a living system.

Beyond State Capitalism: The Commons


Economy in our Lifetimes
By James Bernard Quilligan, originally published by Share The World's Resources

 September 14, 2017

In considering the essential problem of how to produce and distribute material wealth,
virtually all of the great economists in Western history have ignored the significance of
the commons—the shared resources of nature and society that people inherit, create and
utilize.

Despite sharp differences in concept and ideology, economic thinkers from Smith, Ricardo,
and Marx to Keynes, Hayek, Mises and Schumpeter largely based their assumptions on the
world’s seemingly unlimited resources and fossil fuels, their infinite potential for creating
economic growth, adequate supplies of labor for developing them, and the evolving
monoculture of state capitalism responsible for their provision and allocation. Hence, in
the Market State that has emerged, corporations and sovereign states make decisions on the
production and distribution of Earth’s common resources more or less as a unitary system—
with minimal participation from the people who depend on these commons for their
livelihood and well-being. Because our forbears did not account for the biophysical flow of
material resources from the environment through the production process and back into the
environment, the real worth of natural resources and social labor is not factored into the
economy. It is this centralized, hierarchical model that has led to the degradation and
devaluation of our commons.

Over the past seventy years especially, the macroeconomic goals of sovereign states—for
high levels and rapid growth of output, low unemployment and stable prices—have resulted
in a highly dysfunctional world. The global economy has integrated dramatically in recent
decades through financial and trade liberalization; yet the market is failing to protect natural
and social resources, the state is failing to rectify the economic system, and the global polity
is failing to manage its mounting imbalances in global resources and wealth. Without a
‘unified field theory’ of economics to explain how the commons is drastically undervalued
and why world society is amassing huge debts to the environment, the poor and future
generations, policymakers and their institutions lack the critical tools and support to address
the massive instability that is now gripping the global economy. Businesses and governments
are facing the Herculean challenge of reducing climate change and pollution while alleviating
poverty without economic growth—a task for which the Market State is neither prepared nor
designed to handle.

Meanwhile, the essential ideals of state capitalism—the rule-based systems of government


enforcement and the spontaneous, self-regulating social order of markets—are finding direct
expression in the co-governance and co-production of common goods by people in localities
across the world. Whether these commons are traditional (rivers, forests, indigenous cultures)
or emerging (energy, intellectual property, internet), communities are successfully managing
them through collaboration and collective action. This growing movement has also begun to
create social charters and commons trusts—formal instruments that define the incentives,
rights and responsibilities of stakeholders for the supervision and protection of common
resources. Ironically, by organizing to protect their commons through decentralized decision-
making, the democratic principles of freedom and equality are being realized more fully in
these resource communities than through the enterprises and policies of the Market State.

These evolving dynamics—the decommodification of common goods through co-governance


and the deterritorialization of value through co-production—are shattering the liberal
assumptions which underlie state capitalism. The emergence of this new kind of management
and valuation for the preservation of natural and social assets is posing a momentous crisis for
the Market State, imperiling the functional legitimacy of state sovereignty, national
currencies, domestic fiscal policy, international trade and finance, and the global monetary
system. Major changes are on the way. The transformation of modern political economy will
involve reconnecting with—and reformulating—a pre-analytic vision of the post-
macroeconomic global commons. Another world is coming: where common goods are capped
and protected; a portion of these resources are rented to businesses for the production and
consumption of private goods; and taxes on their use are redistributed by the state as public
goods to provide a social income for the marginalized and to repair and restore the depleted
commons.

Although people’s rights to their commons are often recognized and validated in smaller
communities, scaling these lessons to the global level will require a new dimension of popular
legitimacy and authority. The world community is rapidly evolving a sense of social
interconnectivity, shared responsibility and global citizenship, yet the sovereign rights of
people to the global commons have not been fully articulated. In declaring our planetary
rights for these commons, we shall be confronting many decisive questions:

(1) Are modern societies prepared to create a framework in which the incentives behind
production and governance are not private capital and debt-based growth, but human
solidarity, quality of life and ecological sustainability?

(2) How soon—and how peacefully—will the subsystems of the Market State integrate their
structures of value-creation and sovereign governance with the greater biophysical system of
ecological and social interdependence?

(3) Can the global public organize effectively as a third power to develop checks and balances
on the private and public sectors and establish the resource sovereignty and preservation
value needed for a commons economy?
These issues will be filtering into mainstream discussion over the next two decades. Already
the system of state capitalism is breaking down, threatening the entire planet, its institutions
and species. When this collapse can no longer be contained and a global monetary crisis
ensues, world society will have the choice of creating an economic system that follows the
universal laws of biophysics and commons preservation—or accepting a new version of 18th-
20th century mechanistic economics, obliging humanity to continue living off the common
capital of the planet under corporate feudalism and über-militaristic regimes. Our decision
will likely come down to this: global commons or global autarchy. As an economist, I don’t
pretend to speak for the conscience of humanity; but as a human being, my heart tells me that
we shall see the beginnings of a commons economy in our lifetimes. The long-forsaken global
commons are beckoning.

The World in 2018


By Paul Arbair, originally published by Paul Arbair blog

 January 9, 2018
 New Year predictions are getting more and more popular. In a world that is
growing ever more complex and confusing, we seem to be increasingly eager to
get some hints about what lies in the fog just ahead of us. Yet what we need is
probably less to get some clues about what might be coming up next than to
acquire a more acute consciousness and comprehension of the road we are
travelling.
 It’s that time of the year again. That time when you wish all the best to those around
you. That time when you pick your resolutions and try to convince yourself that this is
the year when you will finally keep them. That time also when all types of people tell
you what to expect from the next twelve months. Astrologers of course, who have read
in the stars when you can expect to get a pay rise, when you are due to meet the love
of your life, or when you have the best chances of procreating. But also a growing
array of journalists, analysts, futurists, specialists, experts, bloggers, and other
luminaries who have figured out what this year has in store for you, your job, your
industry, your investments, your country, and your world.
 Of course, all New Year predictions are not equal. Some are more worthy of serious
consideration than others. Some are based on sound data and thorough research while
others are merely exercises in fantasy and imagination. Some claim to be ‘objective’
while others don’t even bother to pretend. More importantly, some carry far more
weight than others as they have a much stronger influence on the thinking and actions
of those people whose thinking and actions actually contribute to influence the course
of events and the shape of reality.
 The World in…
 Amongst the most influential New Year predictions are of course those made by The
Economist, the news magazine of choice of the global elite. Its publication ‘The World
in’, now in its 32nd edition, is dedicated to predictions of global trends and enjoys
growing success and considerable influence, despite a rather mixed track record. A lot
of its yearly predictions tend to be quite general in nature, which limits the risk of
getting things widely wrong. Yet it also makes some quite specific calls every year,
some of which turn out to be right, while a lot of others are wide off the mark. Above
all, the army of journalists, contributors and ‘global leaders’ it mobilises for its
predictive exercise often utterly fails to foresee major imminent developments that end
up changing the world in profound and multiple ways.
 Twelve years ago the influential news magazine asked historian Niall
Fergusonto assess the overall performance of its annual predictions publication since it
first appeared back in 1986. The verdict was rather mixed, to say the least, listing a
whole series of events predicted by ‘The World in’ that did not actually happen, and,
most importantly, a whole series of world-changing developments that actually
occurred but were totally missed (e.g. the collapse of Communism in eastern Europe
in 1989, the descent of Yugoslavia into civil war) or of ‘mega-trends’ that were only
spotted late (e.g. the rise of China, the Internet revolution). Most surprising coming
from a publication called ‘The Economist’ were the repeated misses concerning global
economic and financial events. In particular, none of the financial accidents of the
1990s (i.e. the Japanese stock market crash of 1990, the 1994-95 Mexican crisis, the
Asian crisis of 1997, the Russian default crisis of 1998) was foreseen by ‘The World
in’.
 Since then, The Economist’s predictions record has not dramatically improved. Ten
years ago, ‘The World in 2008’ failed to predict any of the financial turmoil that
would define that fateful year and shake the foundations of the global economy, while
it foresaw that Hillary Clinton would be elected president of the United States. Eight
years later, ‘The World in 2016’ failed to predict Brexit and the populist wave that
engulfed the Western world, and once again foresaw that Hillary Clinton would enter
the White House…
 Such record would be rather embarrassing for pretty much anyone, yet it hasn’t
prevented ‘The Economist’ from continuing to issue its yearly predictions publication,
with growing fanfare and impact every year. In fact, the overall point of the exercise,
for The Economist, is not to be right at guessing the short-term future, but to be
effective at influencing the global agenda and the way decision makers in the Western
world and elsewhere think about it. From that point of view, ‘The World in’ has been
and continues to be a resounding success.
 Trumpism v Macronisme
 Back in 2005 Niall Ferguson found that throughout the 1990s The Economist’s annual
predictions publication “almost invariably looked forward cheerfully to another year
of higher growth, more democracy and less war – always provided that politicians
around the world embraced free trade, privatisation and market liberalisation”, and
that it could thus be read “as a classically liberal commentary on the process of
globalisation, imbued with an almost Victorian belief in the harmony between
economic freedom, political liberalism and international peace”. More than a decade
has passed since then, yet ‘The World in’ can still be read in exactly the same way, as
an announcement of all the blessings that are around the corner if ‘global leaders’ do
the right thing (i.e. what The Economist recommends) and of the risks that could
materialise if they don’t.
 For 2018, this comes in the form of ‘Trumpism v Macronisme’, i.e. the ongoing
competition between ‘open’ (i.e. good) and ‘closed’ (i.e. bad) world views, or between
the inward-looking ‘America first’ agenda of U.S. President Donald Trump and the
“new kind of pro-globalisation social contract” championed by French President
Emmanuel Macron, one that supposedly “boosts competition and entrepreneurship
while protecting workers who lose out”. Mr Macron, The Economist says, “will
emerge as a modern-day equivalent of Teddy Roosevelt, the American president most
associated with the Progressive Era”, i.e. the period of intense social and political
change in the United States at the turn of the 20th century. To do so the new champion
of Western liberals will be able to ride a wave of “synchronised global economic
growth, at last”, as “ten years after the start of the Great Recession, a sense of
widespread wellness will begin to take hold in the world economy”.
 It is somewhat ironic to see an institution of ‘Anglo-Saxon’ economic liberalism
pinning its hopes on a Frenchman – and it could actually be seen as an indication of
the intellectual disarray in which part of the Anglo-American elite has fallen now that
electorates in the UK and the U.S. don’t seem to be anymore willing to abide by its
prescriptions. However, Mr Macron will only rise up to his fans and backers’
expectations if economic growth actually strengthens in Europe and globally, as The
Economist predicts it will. Yet even The Economist acknowledges that there are very
real risks that the world may be approaching the end of the expansion cycle that
started in 2009 rather than embarking on a sustained recovery, and that the current
uptick in global growth may thus be short lived. What could derail global growth and
tip the world economy into a recession are, of course, bad policy decisions, i.e.
“central banks tightening [monetary] policy too much, too quickly”.
 The course of the year’s events will tell us what The Economist journalists and
contributors will have gotten right this time, what they will have gotten wrong and
what they will have missed – and missed something big they will probably have. What
is already clear, though, is that their predictions will influence the way decision
makers in politics, business and society conceive their agenda for 2018, and that a new
issue of ‘The World in’ will be published around the end of the year to help them
frame their thinking about 2019.
 Clearing the fog
 Overall, yearly predictions of global events and trends, whether by The Economist or
by anyone else, probably tell us more about the mindsets, ideologies, interests,
priorities or obsessions of those who make them – as well as of those to whom they
are destined – than about what is likely to happen over the next 12 months. In fact, we
all know by now that, as someone famously said, ‘it’s difficult to make predictions,
especially about the future’. Yet yearly predictions seem to be increasingly popular, as
more and more media, commentators and pundits now feel compelled to issue their
own yearly calls and forecasts. That probably has to do with the growing complexity
of the modern world, which leaves a lot of us puzzled and struggling to make sense of
what is going on around us. Faced with a relentless rise of uncertainty about pretty
much everything, we seem to be in search of some help, any help, to clear the
deepening fog that is surrounding us.
 The world was not supposed to get so confusing, of course, when almost thirty years
ago the Soviet empire crumbled and the Cold War came to an abrupt and unexpected
end. There were hopes, then, that the world would actually become simpler rather than
more complex, more united rather than more fragmented, more stable rather than more
fragile. Liberal democracy and capitalism had won, globalisation appeared to be not
only unstoppable but also desirable, and a ‘New World Order’ of rising freedom and
prosperity for all seemed to be on the cards – which some otherwise serious people
said would lead to nothing less than ‘the end of history’[i]. Instrumental to the advent
of this new era would be the ‘information superhighway’ of the Internet and associated
technologies, which would bring us into the Information age and give us “25 years of
prosperity, freedom, and a better environment for the whole world”…
 Needless to say, this is not what we got. Liberal democracy did not conquer the world,
and it now rather appears to be on the retreat or degenerating into a parody of itself –
even in places where it seemed to be solidly established. The globalisation of
capitalism, even if it arguably lifted billions out of extreme poverty, did not deliver
rising prosperity for all but rather increasing inequality, mounting social strife and
growing political discord. The Internet and digital technologies changed our world in
multiple ways – and still do – but the Information age in which they have brought us is
looking more and more like a ‘misinformation age’[ii]. A misinformation age in which
an endless deluge of data and information ends up obscuring rather than illuminating
our reality; in which it is so easy to manufacture and spread lies that it is becoming
increasingly difficult to separate fact from fiction; in which our social space and our
mental universe tends to get shrunk and impoverished rather than expanded and
enriched; in which a lot of us get increasingly confused and incapable of sustained
attention; in which our cognitive abilities get hampered rather than enhanced[iii]; in
which we are getting so much absorbed by technology that we end up being controlled
and even manipulated by it.
 Acceleration
 Overall, decades of relentless globalisation and ‘technologisation’ have ushered an
era of endless ‘social acceleration’[iv] in which time seems to flow ever faster, the
present gets irremediably shrunk, certainties get repeatedly shattered and expectations
based on past experience cannot anymore reliably inform the future, making our
relationships to each other and the world increasingly anxiogenic. At the same time,
globalisation and the rise of the ‘technosphere’ have turbocharged the ‘Great
Acceleration’[v] in human activity that is now the prime driver of change in the Earth
System and that leads to more and more ‘planetary boundaries’ to be crossed. Not a
single week now goes by without some inconvenient reminder of the multiple,
compounding environmental crises that homo sapiens is generating: climate
destabilisation, ocean acidification, species extinction, soil erosion, groundwater
depletion, toxic waste accumulation, etc. Slowly but surely, slowly but faster and
faster, we humans are destabilising the Earth System upon which our existence and
survival depends. The resulting ‘global weirding’ of our natural environment leaves
many of us confused, oscillating between denial and depression, between various
delusions of ‘techno-fixes’ that we try to pretend could both ‘save the planet’ and
make us richer and a sense of powerlessness that feeds our very post-modern forms of
social apathy, relativism and even nihilism.
 Our difficulties in understanding and making sense of our increasingly complex world
are probably compounded by the decline of the Western world’s intellectual class.
Once upon a time an array of public intellectuals would, in each and every country,
engage in critical thinking and reflection about societal issues, and propose somewhat
coherent interpretations and recommendations that would help frame the people’s
understanding of their reality. Yet the implosion of 20th century ideologies and the
accelerating pace of economic, political, societal and technological change over the
last decades has left much of the intellectual class in disarray, unable to come up with
even seemingly comprehensive narratives of what is going on and where we are
heading.
 That may be because the rise of the technosphere and increasing societal complexity
have forced many members of the intellectual class to specialise in very specific
domains and areas of human knowledge, which in turn has hampered their ability to
understand and make sense of the world as a whole. That may be because intellectuals
have been supplanted in the public debate and the ‘ideas industry’[vi] by new kinds of
thinkers, the ‘thought leaders’, who are less interested in analysing, understanding and
explaining the world than in proselytising their own worldviews, less inclined to deal
with complexity and to engage in critical thinking than to promote concepts that they
contend can ‘change the world’. That may be also because the kind of intellectual
produced by our modernity is mostly now what essayist Nassim Nicholas Taleb (of
‘black swan’ fame[vii]) calls the ‘intellectual-yet-idiot’, i.e. a paternalistic, semi-
erudite expert who “pathologizes others for doing things he doesn’t understand
without ever realizing it is his understanding that may be limited”. Whatever the
reason, the fact is that the intellectual class has largely lost its ability to help the
general public understand the world, or even get the impression that it does. This, in
turn, generates yet more confusion and distrust that hampers our ability to make sense
of what is going on.
 Hence our increasingly frantic search for hints about what may lie around the corner.
Our need to be told what is just ahead of us rises as our capacity to understand what is
going on around us diminishes. We earthlings tend to prefer certainty to knowledge
anyway, as Welsh mathematician, logician and philosopher Bertrand Russell (1872-
1970) said. Thus we find it somewhat reassuring that more and more people pretend to
have the foresight to see what’s on our way as we move forward on an increasingly
foggy road – even if deep down we know that what they do is just extrapolate from a
limitative set of current trends and past experience and to interpret their extrapolations
through their own specific subjective lenses. The best that New Year forecasters can
provide us with, in fact, are some more or less valid clues about what could be
happening in the short term. This, in itself, does little to dissipate the fog that
surrounds us, and it may even contribute to make it more dangerous as it diverts our
attention from the much more fundamental need to understand the road we are
travelling. As we accelerate along that road and our journey gets more and more
uncomfortable, what we need are probably less tips about the state of the road and of
the traffic than a map and a compass – or a navigation system, if you wish – to get to
know and comprehend which road we have taken, where it is leading us, and where
we currently stand on that path. This, in fact, is what we really need to understand and
make sense of ‘The World in 2018’. This, in fact, is what we shall discuss in the next
post(s).
 To be continued…
 [i] The End of History and the Last Man, by Francis Fukuyama, Free Press, 1992
 [ii] A Survival Guide to the Misinformation Age – Scientific Habits of Mind, by
David J. Helfand, Columbia University Press, 2016
 [iii] The Shallows: What the Internet Is Doing to Our Brains, by Nicholas G. Carr, W.
W. Norton & Company, 2010
 [iv] Social Acceleration – A New Theory of Modernity, by Hartmut Rosa, Columbia
University Press, 2013
 [v] The Great Acceleration – An Environmental History of the Anthropocene since
1945, by J. R. McNeill & Peter Engelke, Harvard University Press, 2016
 [vi] The Ideas Industry – How Pessimists, Partisans, and Plutocrats are Transforming
the Marketplace of Ideas, by Daniel Drezner, Oxford University Press, 2017
 [vii] The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas
Taleb, Random House, 2007
‘The World in 2018’ is a world full of concerns about the future, yet a world that seems
to be getting slightly more optimistic about its economic prospects. Ten years after the
onset of the financial crisis, there are hopes that the global economy may have turned
the corner and could finally be starting to pick up after years of slow growth. Are we
seeing light at the end of the tunnel – or rather getting deeper into the fog?

To make sense of ‘The World in 2018’, what we need is maybe not so much to try guessing
what might be on our way over the next 12 months than to develop a more acute
consciousness and comprehension of the road we are travelling, of where it is leading us, and
of where we currently stand on that path. This is certainly not an easy task: volatility,
uncertainty, complexity and ambiguity (‘VUCA’) reign more supreme than ever, and,
together with the ever-accelerating pace of global change, they make it increasingly difficult
to understand the world’s trajectory and situation. Some key themes of the ‘global
conversation’ can however give us a few clues about how the trajectory and situation tend to
be perceived at this particular moment in time.

In early 2018, the ‘global conversation’ seems to denote a growing sense of concern about a
whole series of ongoing events or developments and about their possible or likely
ramifications into the future. These include America’s descent into a spiral of political
insanity and retreat from global leadership, the multiple and often widening cracks in
European unity, the erosion of the international liberal order and of liberal democracy in many
places, as well as the rising or persisting geopolitical tensions in Asia, the Middle East or
Eastern Europe. These also include the relentless advance of the ‘digital revolution’, and in
particular the rapid development of artificial intelligence and the approaching prospect of
machines outsmarting humans and taking their jobs. These include, as well, the continuous
deterioration of our natural environment and our continuous failure to reverse or stop it. As
pointed out by thousands of world scientists in a ‘Warning to Humanity’ published at the end
of last year, we humans are utterly failing to take the urgent steps needed to safeguard our
imperilled biosphere, and there are rising concerns that we may actually be already well
advanced in the process of making the planet inhospitable or even uninhabitable for ourselves.

Optimism ascending

Despite these mounting and multiple concerns, though, what tends to dominate the overall
perception of the world’s trajectory and situation at this moment in time – just like at any
moment in time, in fact – is probably “the economy, stupid”… And in early 2018 the
perception of the global economy’s situation and prospects seems to denote rising optimism.
Over ten years after the onset of the global financial and economic crisis, hope is rising that
the world economy may have turned the corner, and that it could finally be starting to pick up
after years of paltry growth. Somewhat unexpectedly, economic growth indeed gathered
steam in developed as well as emerging economies in the course of 2017, and it is now widely
forecasted to further speed up this year. International organisations such as the World Bank
(WB), the International Monetary Fund (IMF), or the Organisation for Economic Cooperation
and Development (OECD) have all revised their global growth forecasts up in recent months,
after years and years of having to regularly revise them down.

This global upswing is likely to come as a relief to the populations of many countries, who
probably welcome the perspective of somewhat brighter prospects in terms of jobs,
opportunities, wages and living standards after the years of crisis and low growth. As a
consequence, economic optimism is now rising and spreading almost everywhere. It just
reached an 11-year high in the U.S., and is also going up sharply in Asia, in Europe, or in
Latin America. Optimism is surging even in the most unlikely of places, such as Japan, which
has been experiencing a near stagnant economy for over two decades, or France, which was
until recently the gloomiest nation on earth.

The brighter outlook also probably comes as a relief to many economists and policy makers
across the world, after years of head scratching about the global economy’s persistent lack of
dynamism and of concerns about a possible descent into ‘secular stagnation’ or even
outright depression. Despite repeated warnings coming from various corners, there has so far
been no repeat of the financial crash that nearly brought down the global financial and
economic system in 2008, the world economy has not fallen back into recession, and the
various doomsday scenarios envisaged in recent years have not materialised. The worst has
apparently been averted, the system has held so far, and the global economic engine seems to
be restarting at last. Unemployment is down, global trade is up, investment is up, and even
productivity seems to be improving slightly, prompting some to wonder whether secular
stagnation could be in the process of morphing into secular expansion.

This optimism is, of course, causing financial investors to rejoice and pushing world stocks
from record to record. Financial markets were arguably already levitating irrationally high
long before global growth started to accelerate in recent months, but soaring economic
enthusiasm is now sending them ever higher into euphoria territory. Market volatility is
reaching record lows, signalling that investors do not seem to fear anything anymore in what
they increasingly perceive as a “Goldilocks economy”, i.e. an economy that is neither too
‘hot’ – thus avoiding the risk of too much credit driving instability and disruptive volatility –
nor too ‘cold’ – thus avoiding the risk of too low credit creation to sustain economic growth.
An economy, in other words, which is just at the right temperature – like the third bowl of
porridge in the folk tale – and that allows a ‘market-friendly’ monetary policy to continue.

Renewed optimism seems to be progressively spreading beyond the economic realm, and
spilling over to other areas. According to various public opinion polls, confidence appears to
be growing across the world in our ability to address and solve global issues such as climate
change, poverty, inequality, or food (in)security. A group of thinkers and commentators,
which seems to be gaining in influence, even contends that humankind has in fact never had it
so good and that things are getting better all the time. According to these ‘New Optimists’,
2017 was the best year in human history, and 2018 will probably be even better as major
gains in health, education and human welfare continue to be recorded. What’s still holding us
back, they say, is just a pessimistic, “it was better before” bias, which leads us to make
misguided individual and collective choices. In other words, there is nothing inherently wrong
with the global economic system, but only with the mistakes we make and that prevent it from
working to its full extent and from bringing us into the right direction at full speed. Provided
we shift our mindset and make the right choices, our progress can accelerate and bring us into
ever more desirable territory. The New Optimists do not necessarily all agree on what that
territory should or could be, but all believe that getting there is a something that is firmly
under our own control.

This optimistic outlook and this belief in human agency constitute of course an attractive
alternative to the more pessimistic and fatalistic narratives that dominated the global
conversation in recent years, and they are gaining traction partly as a reaction against those.
After all, optimism is widely thought to be leading to better health for individuals, and there
are reasons to believe that it may be conducive to healthier societies as well. Yet optimism
can only be beneficial over the long term if it is grounded in reality, otherwise it typically
ends up causing delusion and frustration. Hence, it is probably worth wondering if a new
wave of optimism is really warranted today. Is the world really turning the page on the years
of crisis, and embarking on a new cycle of expansion that could see the world
economy double in size over the next quarter century or so, as it has done on average over the
last 200 years? Is this new cycle likely to be a long-term technology-driven ride towards a
world of artificial intelligence, virtual and augmented reality, abundant clean energy,
driverless electric cars, and space tourism, as many contend or hope?

Enjoy the party while it lasts

There are actually quite some reasons to remain cautious about the seemingly brightening
global economic prospects. First because despite increasing talk of a ‘booming economy’ the
current uptick is rather modest and global growth – current and forecasted – still remains
below pre-crisis levels. Second because there have been several false economic dawns in the
past decade, and it is still early to say whether this time is going to be really different.
According to the World Bank’s recently published ‘Global Economic Prospects’, the current
upswing is broad-based but could be short-lived as “the global outlook is still subject to
substantial downside risks, including the possibility of financial stress, increased
protectionism, and rising geopolitical tensions”. Financial stress is probably the major
concern, and could result from an oil or commodity price spike, from the crash of the
bitcoin/cryptocurrency speculative craze, from excessive credit pile-up in China or elsewhere,
or more fundamentally from global liquidity drying up as the world’s main central banks
attempt to wind down their crisis-era expansionary monetary policies by raising interest rates
and shrinking their balance sheets.

Even if financial stress does not spike and stop economic growth in its tracks this year, the
current economic upswing may anyway constitute little more than a cyclical rebound in
investment, manufacturing activity and trade after the post-crisis low of 2016. According to
the World Bank, this cyclical rebound is likely to be temporary and could even peak this year,
after which underlying structural problems of weak productivity growth, low levels of
investment and workforce ageing will weigh on economic growth over the next decade. In
other words, the growth uptick we are currently experiencing could be a short respite rather
than the long-expected recovery, an interlude rather than a turning point. This is probably why
this year’s gathering of the global elite at the World Economic Forum (WEF) in Davos
(Switzerland) seems to be hesitating between popping the champagne and worrying about the
potential threats to the current outlook. ‘Enjoy the party while it lasts’ seems to be the
dominating mood in the Swiss Alps this year…

The trouble with economics

If economic uncertainty remains so prevalent, even among the world’s rich and powerful, it’s
probably because ‘economic science’ is still struggling to come to terms with what happened
in the last decade and to come up with compelling narratives of what it may mean. As is
widely known, most economists utterly failed to see the financial crisis coming, leaving the
world – and themselves – to wonder how they could ‘get it so wrong’. They also struggled to
make sense of the persistence of low growth in the years that followed the crisis, when several
key rules of the economics textbook seemed to no longer apply and the economic engine
stubbornly failed to restart despite massive stimulus efforts.
To be fair, the financial crisis of 2007-2008 and subsequent Great Recession did trigger some
soul searching and even some self-criticism in the economics profession. However, most of
the profession’s internal debate has revolved around its methods rather than its theoretical
underpinnings. Widely discussed has in particular been its increasing focus and reliance on
complex mathematical models rather than on experimental research methods.

In September 2016 American economist Paul Romer delivered a scathing critique of his
discipline, asserting that “macroeconomics has gone backwards” for over three decades and
has regressed into a math-obsessed ‘pseudoscience’, i.e. “a special type of belief field that
claims to be science” despite saying “things that are inconsistent with the facts”. The reason
of this regression, according to Romer, is that macroeconomics has failed to “recognize how
difficult it is to make reliable inferences about causality from observations on variables that
are part of a simultaneous system”, yet has managed to escape challenge by becoming “so
much more opaque” through the construction and use of ever-more complex “post-real”
models such as the real business cycle (RBC) model and subsequent ‘dynamic stochastic
general equilibrium’ (DSGE)extensions. Modern macroeconomic models, Romer says,
“attribute fluctuations in aggregate variables to imaginary causal forces that are not
influenced by the action that any person takes”, and they use “incredible identifying
assumptions to reach bewildering conclusions”. In other words, economists often resort to
making up imaginary or arbitrary inputs, assumptions or restrictions to ensure that their
models deliver the desired answers: “Assume A, assume B, … blah blah blah … and so we
have proven that P is true”.

Needless to say, Paul Romer’s harsh words infuriated a lot of his colleagues and triggered a
vivid debate on the role and limits of macroeconomic modelling, or even the role and limits of
macroeconomics itself. This debate is still ongoing, with most economists defending their
discipline and contending that macroeconomics is not perfect but nevertheless “good enough
for government work”, as recently claimed by Nobel laureate Paul Krugman. This debate,
however, has not fundamentally shifted the theoretical foundations of the discipline, i.e. how
economists conceive the way the economy works. The failure to forecast the crisis, according
to Mr Krugman, “did not come down to a lack of understanding of possible mechanisms, or of
a lack of data, but rather through a lack of attention to the right data”. And the crisis was
then “sufficiently well-handled by policy-makers that there was no irresistible pressure for
change” in economists’ views.

As British economic historian Robert Skidelsky recently pointed out, the Great Recession has
therefore produced no intellectual shift in economics similar to those that were triggered by
the Great Depression of the 1930s – which produced Keynesian economics – or by
the stagflation of the 1970s – which produced Milton Friedman’s monetarism. No new
‘general theory’ has emerged this time, and from a conceptual point of view macroeconomics
has thus remained pretty much where it was ten years ago. It is still dominated by the New
Classical and New Keynesian schools, which keep arguing about pretty much the same things
and in the same way. Neither school – “sect might be the better word”, says Mr Skidelsky –
has been challenged to re-think first principles. Consequently, the debate about the causes and
consequences of the crisis has not substantially evolved over the last decade, and theoretical
dissent has remained confined to the fringes of the economics profession.

Yet despite Mr Krugman’s assertion that macroeconomics was and is still ‘good enough’, the
crisis and its aftermath laid bare a number of flaws and blind spots in economic theory, which
still remain largely unaddressed. To build a meaningful understanding of our economic
trajectory and situation, and hence to assess whether and to what extent the apparent renewed
optimism over our economic prospects could be justified, an exploration of these flaws and
blind spots is thus required. This, in fact, is what we really need to understand and make sense
of ‘The World in 2018’. This, in fact, is what we will discuss in the third part of this series.

Mainstream economics seems to have learned little and changed nothing in the last
decade, despite the fact that the financial crisis and its aftermath laid bare a number of
important issues with its theories and models. Failure to address these issues is making
the economics discipline increasingly incapable of informing us about the trajectory and
situation of our world.

After a long period of relentless rise, global financial markets seem to have suddenly
entered volatile territory. A brutal selloff in global stocks started in early February, which
erased all of the prior gains of 2018 and wiped out trillions of dollars of ‘value’ in a matter of
days. The selloff was most spectacular in the U.S., with Wall Street experiencing one of its
worst weekly tumbles since the 2008 financial crisis – quickly followed, however, by a sharp
rebound. Financial pundits the world over are now busy discussing whether this new episode
of market volatility is already over or is likely to last, and if it might be announcing a
‘correction’ (a drop of 10% or more from a peak in market indexes), a ‘bear market’ (a drop
of 20% or more), or even a full-blown crash. The truth is that no one knows for sure at this
stage, and any prediction of how the next few weeks and months are going to play out in
global financial markets can only be guesswork at best.

What is more interesting is to observe how quick economists and policy makers around the
world have been to serve yet another round of what has become their standard discourse
whenever financial markets get suddenly restless: no worries, folks, ‘the fundamentals of the
economy are strong’… Of course, one couldn’t really expect them to say anything else right
now, since they have spent the last few months explaining that the long economic slump that
followed the 2008 financial crisis was finally over, and that the ‘recovery’ was now poised to
accelerate. As Harvard University Professor Kenneth Rogoff put it just a few weeks ago, the
global economy is well engaged in a process of ‘reversion to mean’, and “we are going to get
above average productivity growth and rising investments for several years as the economy
normalizes”. Hence, “there is no reason to suppose that the odds [of a recession] are greater
than 15% today. On the contrary: There is a very good chance that growth outperforms most
of the time the next few years”. ‘The fundamentals are strong’, you know…

The same words were used, if you remember, in 2007 and even during much of 2008, when
the world was rushing towards the worst financial crisis in 80 years, which would trigger the
worst global recession since World War II. Back then, most economists and policy makers
were slow to grasp the causes, magnitude and consequences of what was happening, and
many remained stubbornly confident about the economic outlook until the global financial
system got to the brink of a complete meltdown. Even then, some contended that the
subsequent downturn would likely be mild and short, and surely followed by a speedy return
to long-term growth trends. ‘The fundamentals are strong’, you know…

Still a dismal science


Economists, if history is any guide, have a notoriously dismal track record in terms of
foresight: not only did the vast majority of them fail to ‘predict’ the Great Financial Crisis and
the Great Recession, they also failed to foresee most of the previous financial crises and
recessions or even to recognise them until after they had begun. To be fair, it is actually very
difficult to understand an organism as complex as the economy and to forecast its evolutions
and cycles. The economy is indeed a dynamic, complex system, comprised of a multitude of
elements that evolve constantly and interact in various ways, meaning that some of its aspects
are likely to elude any interpretation that may be made at any given point in time. Yet the
economists’ answer to this difficulty has largely consisted in evacuating whole aspects of the
complex economic system from their view and in reducing their field of inquiry to a limitative
set of relatively basic components that they contend can be ‘scientifically’ described and
measured.

The desire to bring the rigor and objectivity of ‘hard sciences’ into the ‘soft’ field of
economics has underpinned the evolution of the discipline since the end of the 19th century, in
particular the development of increasingly sophisticated mathematical modelling,
of econometrics and financial econometrics. This evolution has made (macro)economics a
‘reductionist’ discipline, which ‘rules’ are not only based on questionable assumptions and
simplifications, but also – and more fundamentally – only make sense insofar as whole sets of
elements that are constitutive of the ‘economic system’ (i.e. the system by which resources
get allocated and goods and services get produced and distributed) remain ignored. A
discipline, as a consequence, which ‘progress’ has made it and is still making it increasingly
incapable of grasping and accounting for the reality it pretends to study.

This kind of criticism of economics – and of economists – is obviously not new. In fact,
economics has never ceased to be called ‘dismal’ ever since it started claiming to be a
‘science’ of sorts in the second half of the 19th century. Of course, economists typically tend
to dismiss it as unfounded and uninformed babble by unsophisticated people who fail to grasp
the ‘elegance’ of their mathematicised thinking and models. Yet there is mounting historical
evidence that these theories and models are largely detached from reality, and the last few
years in particular have shed new light on this widening disconnect. Not only because most
economists failed to see the financial and economic crisis coming, but because the years since
then have failed to reassure about their understanding of what was and is still going on.

One could have hoped that economists would have at least learned something in the last
decade, and changed something in their theories and models that could restore trust in their
ability to understand reality and where it is headed. Yet it increasingly looks like most of them
have learned little and changed nothing. As the global economy now shows signs of recovery,
many economists contend that the events and developments of the last decade have not been
‘exceptional’, as Nobel Laureate Paul Krugman recently stated, in the sense that they have not
been “clearly inconsistent with widely held views and sustained enough that they couldn’t be
written off as aberrations”. The financial crisis has merely been, in the words of Kenneth
Rogoff, “a garden variety of a systemic financial crisis”, technically “very normal compared
to other deep systemic financial crises”, and which triggered an also ‘very normal’ prolonged
economic slump. In other words, economists haven’t learned much from this episode that they
didn’t already know, and they haven’t had to change much of their views as a result. Hence,
the theories and models upon which economists base their analyses and forecasts today
haven’t fundamentally changed since 2007-2008.
Dissident voices have of course emerged in the economics profession since then, criticising
some of the key theoretical underpinnings of the New Classical–New Keynesian mainstream,
in a more or less radical way. A number of heterodox schools of economic thought have
gained in popularity and attracted some attention, proposing alternative views and models.
However, they have largely remained confined to the fringes of the discipline, and have failed
to trigger a substantial paradigm shift in the profession. That may be because these dissident
voices and schools have remained scattered, each focusing on a specific set of issues rather
than on outlining a new ‘general theory’ to make sense of economic reality in a holistic way.
That may be because the long economic slump has not morphed into a full-blown depression,
and therefore hasn’t left mainstream economists with no other choice than to revisit their
views. That may be, also, because economics is already too far advanced on its current path to
turn back, reassess some of its basic theoretical underpinnings and make changes on the scale
that would be required to somehow reconnect the discipline with the real world.

Whatever the reason, the issues with conventional economic doctrine that were laid bare by
the crisis and its aftermath remain largely ignored by mainstream macroeconomists. These
issues are many, varied and complex, and they have been widely exposed and discussed
outside of mainstream economic circles in the last decade. The most fundamental ones, which
need to be understood to make sense of where the world stands in 2018, probably consist in a
significant flaw (i.e. something that economists get plainly wrong), a major blind spot (i.e.
something that economists do not see, or only partially), and a monumental omission (i.e.
something immensely significant that economists ignore entirely).

A flaw in the model, so to speak

The most fundamental flaw in mainstream economic theory that was made plain by the crisis
probably concerns the behaviour of economic agents and its determinants. A key theoretical
underpinning of modern macroeconomics is that economic agents act rationally and in their
own self-interest, i.e. that they make choices that are guided by rationality, interpreted as the
desire to ‘maximise’ their individual utility, and that their expectations are also rational, based
on available information and past experiences. The rational choice theory and the rational
expectations hypothesis underpin the frameworks that most economists use for understanding
and modelling the economy and markets, as well as the belief of many of them in the
existence of a natural economic ‘equilibrium’ or in the natural efficiency and self-correcting
virtues of free markets.

Yet the Great Financial Crisis showed in a dramatic way that the expectations and behaviours
of market participants and economic agents could drift far away from any kind of assumed
rationality. It suddenly appeared, then, that the development of increasingly complex financial
instruments and the progressive liberalisation of financial regulation in the U.S. and across the
Western world had led to excessive, irresponsible and ‘irrational’ risk-taking across the
financial system, and in particular to the reckless piling up of risky assets on bank balance
sheets. The market had manifestly not been as efficient as it was meant to be, presumably
because the expectations and behaviours of many agents had not been as rational as they were
supposed to be. Those who had put their faith in the rationality of self-interested market
participants were thus left “in a state of shocked disbelief”, as famously declared by former
Chairman of the U.S. Federal Reserve Alan Greenspan to Congress in October 2008. “Yes, I
found a flaw”, Mr Greenspan had to admit, a “flaw in the model that I perceived is the critical
functioning structure that defines how the world works, so to speak”…
The financial crisis therefore triggered renewed interest in ‘behavioural economics’, which
addresses the limits of rationality in economic decision-making and aims to provide a broader
and more realistic appreciation of how market decisions are made and of the mechanisms that
drive economic choices. Behavioural economics studies the effects of psychological, social,
cognitive, and emotional factors on the economic decisions of individuals and institutions,
and their consequences for market prices, returns, and resource allocation. Unlike the rational
expectations hypothesis, which is a model-consistent hypothesis but has no solid empirical
foundations, behavioural economics has a well-documented and growing empirical base.

In recent years behavioural economics has gained in popularity and recognition, thanks in
particular to influential works by Daniel Kahneman[i], who was awarded the Nobel Memorial
Prize in Economic Sciences in 2002, or by Richard Thaler[ii], who won the prize in 2017. It
has gained some influence in finance and also in public policy, as shown by the establishment
by several governments of dedicated teams of behavioural scientists tasked with providing
insight into the design and implementation of their policies. However, it has yet to really
make its way into mainstream macroeconomic thinking and models, which largely continue to
assume the existence of perfectly rational agents.

A blind spot for money, debt, finance…

Besides this manifest flaw, the financial crisis also revealed that macroeconomics suffers from
a fundamental blind spot for the role of money, debt and finance in the economic system.

Conventional economic theory purports that money is economically neutral in the long run,
meaning that changes in the money supply do not fundamentally affect the ‘real’ economy
(i.e. the patterns of production, consumption, employment or trade), but only ‘nominal’
variables such as prices, wages, or exchange rates. According to this view, which is still held
by neoclassical as well as many Keynesian economists, a change in the quantity of money
may generate short-term disruptions due to the ‘money illusion’, but over time the economy
then tends to settle back to the same ‘natural’ ‘equilibrium’ and to the same long-term
trajectory as before, which are determined by the patterns and trends of production and
exchange and are independent from monetary variables. Economists therefore treat money,
as Joseph Schumpeter once said, as just “a technical device that has been adopted in order to
facilitate transactions”, which “so long as it functions normally (…) does not affect the
economic process”.

As the financial crisis and Great Recession made plain, this view is inconsistent with reality:
the quantity of money present in the system does influence the long-term patterns and trends
of the real economy. It did so before the crisis, as increasingly loose monetary policy and
‘financial conditions’ contributed to the relentless growth of global financial capital and to the
inflation of asset price bubbles that distorted long-term resource allocation and created the
conditions for the 2008 blow-up; it does so after the crisis, as even looser policy – in the form
of interest rate suppression and the flooding the global financial system with monetary
liquidity – has been needed to avert a descent into outright depression and then to avoid a
repeat of the recession. A looser policy that has had the long-term effect of ushering an era
of superabundant financial capital, re-inflating asset prices, maintaining a ‘zombie economy’
on life support and stocking up long-term underlying problems for later – or even, according
to many, making them worse.
If conventional economics misrepresents the role of money in the modern economic system, it
also remains surprisingly confused about the mechanisms through which money is created,
and in particular about the role of credit creation by commercial banks. Most
macroeconomists see banks as mere intermediaries between savers and borrowers, and credit
as a simple technical mechanism to move money from where there is an excess of savings to
where credit is needed. The credit creation mechanism, in their views, supports
the macroeconomic identity between saving and investment, but it does not affect aggregate
demand and the dynamics of the economy. Bank lending only redistributes spending power
from savers to investors, and the rate of credit creation does not fundamentally impact the
economy’s performance.

Yet, contrary to this widely held view commercial banks do not simply act, when making
loans, as intermediaries lending out to some people the money deposited with them by others,
keeping only a fraction in reserve as a precaution. They actually ‘create’ new money by
simultaneously writing in their books an asset (the loan) and a corresponding liability in the
form of a matching deposit in the borrower’s bank account. Therefore, commercial banks
create most of their own deposits themselves by extending credit to borrowers/depositors.
When creating new loans and deposits they don’t just ‘multiply up’ central bank money, they
are free to provide financing as they decide based on the profitable lending opportunities
available to them in a competitive market and on their own appreciation of the related risks.
There are of course regulatory constraints on credit creation in the form of prudential
requirements and ratios (e.g. capital or liquidity ratios), but within these limits commercial
banks can and do create money ‘out of thin air’ by just loaning it into existence, in a
transaction that involves no intermediation.

Therefore, and contrary to beliefs that remain widespread even among economists, the vast
majority of ‘money’ in the modern economy is not created by governments or central banks
but by commercial banks in the form of bank deposits, through the mechanism of lending.
This money creation mechanism has fundamental consequences for the economic system. The
first is that most money in a modern economy is created as debt, or in other words that most
modern money is, in essence, debt-based and hence extinguishable (i.e. it ceases to exist when
the debt is repaid). Expanding the money supply therefore means and requires expanding the
net amount of debt in the economy (i.e. creating more new debt than what debt is repaid).
Inversely, a reduction of the net level of debt in the economy effectively reduces bank
deposits and contracts the money supply. A second consequence is that the main purveyors of
debt-based money, that is commercial banks, have a significant influence over the shape and
performance of the economy, through both the quantity and quality of their lending. When
they increase their lending to households and businesses, the amount of credit goes up and
there is more money available in the economy. This allows for increased consumption and
investment, which in turn creates jobs and expands income and profits and also pushes up the
price of assets (e.g. stocks, bonds, houses, etc.), giving borrowers more wealth against which
they can borrow still more. In other words, credit growth boosts economic growth, in a sort of
upward spiral of prosperity.

The relation between credit growth and output growth is not 1:1, of course, because other
factors also influence economic growth, and because lending quality also matters: credit
creation can in theory have a positive multiplier effect on output if it targets the comparatively
most productive purposes, or on the contrary fail to trigger much growth if it doesn’t.
However, all other things being equal, the causality is inescapable in the short term: more
credit means more growth – at least as long as the spiral of prosperity goes up; less credit
means less growth. If credit growth slows down because banks and/or borrowers decide or
have to be more cautious, economic growth will tend to slow down as well. If the aggregate
level of credit then stops growing altogether or even contracts because banks and/or
borrowers need to reduce their risk exposure, the economy will also tend to contract.

The spiral of prosperity can then even go into full downward mode. Indeed, a net repayment
of debts (also called ‘debt deleveraging’) effectively reduces the amount of money in
circulation and hence the overall number of monetary transactions. This may push price levels
down and depreciate the market value of assets relative to the cost of the debt or borrowing
assumed to acquire them. The real value of remaining debts then goes up, which hampers the
capacity of economic agents to repay and service them while at the same time increasing the
pressure to deleverage. This may turn into a self-feeding deflationary process that some
economists call a ‘debt deflation’, i.e. a situation in which massive deleveraging leads to a
deflationary downward spiral and widespread financial distress.

In the decades prior to the financial crisis, decreasing interest rates and financial deregulation
led to a progressive relaxing of credit conditions, which fuelled accelerating credit growth
across the globe, and particularly in Western economies. A three decade-long global debt
build-up ensued, which has been dubbed a ‘debt supercycle’ by some economists. The piling
up of private debt (i.e. debt contracted by households and businesses) during that period was
unprecedented in scale – in fact, it was the largest peacetime accumulation of debt in the
world’s history.

This debt binge had two fundamental consequences for the global economy. The first is that it
contributed to fuel and accelerate output growth beyond what would otherwise have been
possible, thanks to a ‘leverage’ effect – i.e. the use of borrowed money, as opposed to equity,
to finance operations or investments, with a view to increase potential returns. The second is
that it ushered a wide-ranging process of ‘financialisation’ of the economy in the decades
prior to the 2007-2008 financial crisis. Financialisation can be defined as the process by
which financial motives, financial markets, financial actors and financial institutions take an
increasing role in the operation of an economy. It generates a pattern of accumulation in
which profit making occurs increasingly through financial channels rather than through the
production and trade of goods and services. It typically leads to an increase in the size and
importance of the financial sector relative to the overall economy, which profoundly
influences both corporate behaviour and economic policy. Eventually, it ends up making
some financial institutions ‘too big to fail’, as any such failure would have massive and
devastating rippling effects across the financial system and the wider economy.

The ‘fuel’ of the financialisation process is debt creation, or rather the mass commodification
of debt, i.e. the turning, through securitisation mechanisms, of debt contracts and debt
relations into commodities that are bought and sold for a profit by financial investors.
Financialisation is only possible, in fact, if low-cost credit and leverage massively expand,
and if their effect gets multiplied and their risks spread through mass securitisation, which is
what occurred in the decades leading to the Great Financial Crisis. However, just like pretty
much everything in human affairs the expansion of debt and its mass commodification
through securitisation are subject to the law of diminishing returns, meaning that adding more
debt – and pushing it around in the form of increasingly sophisticated asset-backed (i.e. debt-
based) securities – inevitably tends at some point to yield lower incremental per-unit returns.
Or, in other words, an ever-growing amount of debt and an ever-growing use of securitisation
are required to obtain a same level of returns.
This is what happened during the ‘debt supercycle’ that preceded the financial crisis, when the
growth of credit quickly outstripped the growth of economic output, signalling a decline of
marginal ‘debt productivity’ (i.e. the amount of output growth obtained from each new unit of
debt, or in other words the ratio of economic growth to debt growth). In fact debt productivity
has been trending down for decades, meaning either that financial institutions have
increasingly been failing to allocate credit to its most productive uses, that potential
productive uses have been rarefying overall, or a mix of both. Whatever the reason, declining
debt productivity led to a sharp acceleration of the debt build-up at the turn of the 21st
century, which as financial actors kept looking for ever-higher performance and returns
contributed to sending the securitisation frenzy into overdrive, fuelling speculative bubbles
and spreading increasing risks across the financial system. The 2007-2008 financial crisis
erupted when the U.S. housing bubble burst, triggering cascading ‘credit events’ that led to a
seizure of global credit markets. Banks suddenly reduced their lending, first to each other and
then to the rest of the economy, causing a credit crunch that quickly spread across the world
and threatened to bring down the massive global web of asset-backed/debt-based securities
after the downfall of ‘too big to fail’ investment bank Lehman Brothers.

To prevent the ensuing deleveraging process from spiralling into an uncontrollable debt
deflation, the U.S. Federal Reserve – soon followed by other central banks – slashed policy
(i.e. short-term) interest rates to almost zero and embarked on the large-scale unconventional
monetary experiment of ‘Quantitative Easing’ (QE), i.e. the purchase from the market of
massive amounts of government or corporate securities using newly created central bank
money. The objective of Zero Interest Rate policy (ZIRP) and QE was to prevent the price of
financial assets and securities from spiralling down and to support them over time, with a
view to lower long-term borrowing costs and ultimately stimulate credit-based investment and
spending. In fact, QE quickly ‘reflated’ financial assets and then propped them up during
several years, which probably helped banks and other financial institutions to repair their
balance sheets faster and more easily than would otherwise have been possible. This, in turn
probably contributed to contain the credit crunch and helped credit flows to progressively
resume across the economy. QE thus helped to prevent a bank balance sheet clean up from
morphing into a full-blown debt deflation – and hence the ‘Great Recession’ from turning into
a new ‘Great Depression’.

However, by preventing the pre-crisis stock of debt from deflating, QE also prevented the
deleveraging process that typically follows a financial crisis from running its course. It made
it possible for the overall indebtedness of non-financial economic agents in advanced
economies to remain close to the high levels reached in the run-up to the crisis or even to rise
slightly in some countries, leaving little room overall for further rapid expansion. Hence, the
growth of private debt slowed down and never returned to pre-crisis levels in advanced
economies, because lending standards to households and small businesses became more
stringent after the crisis, but also and mostly because the level of indebtedness of economic
agents was already excessive for them to re-start accumulating debt at the same rate again.
The lack of significant deleveraging led to the persistence of a massive ‘debt overhang’ that
probably acted as a major constraint on economic growth in the years since the crisis.
According to some ‘unorthodox’ economists like Pr. Steve Keen, the resulting ‘drought’ in
credit expansion has even been the main cause of the persisting dearth of economic
growth that followed the recession: too little new debt was being created because too much
old debt was still on the books…
As surprising as it may seem, all these developments largely elude conventional
macroeconomic theories and models. Most macroeconomists have traditionally paid little
attention to the role of credit in driving economic growth, and to the role of commercial banks
in driving credit growth. The reason for this is that they still fundamentally see banks as mere
intermediaries between savers and borrowers, and credit as a simple technical mechanism to
move money between those two groups. In their views, the fact that a debt on someone’s
balance sheet necessarily appears as an asset on someone else’s balance sheet means that, on
aggregate, “debt is money we owe to ourselves”, as Paul Krugman put it, and therefore the
level of debt as such does not fundamentally affect aggregate demand and economic growth –
only its distribution matters.

As a consequence, banks and the financial sector do not even appear in most mainstream
macroeconomic models. These models typically contain a small number of ‘representative
agents’, such as a household, a non-financial business and the government, but no financial
sector, which remains ‘exogenous’ to the economic system. When banks exist in the models
they usually appear as simple intermediaries transferring funds between savers and borrowers
in a general equilibrium setting. This does not correspond to the reality of modern banking, in
which banks are profit-seeking firms that make loans opportunistically and can independently
create new credit and allocate it in the economy, thus significantly influencing its shape and
trajectory. The amount of credit extended by banks, or rather the net change in the level of
debt (net credit creation) is, in fact, a crucial variable affecting the dynamics of the economy.
And, in a ‘financialised’ economy, the financial sector plays a crucial role in influencing the
shape, performance and stability (or lack thereof) – of the economic system – something that
remains poorly understood in mainstream macroeconomics.

The Great Omission

As important as this blind spot for money, debt and finance might be, it is not even the most
fundamental issue with macroeconomics. Something deeper and more significant lies beneath
the discipline’s increasing inability to account for reality, something that economists flatly
ignore.

In the years that followed the crisis, the economic debate came to focus on the weakness of
the recovery and the difficulties in re-starting the growth engine. Besides the persistence of a
debt overhang and the resulting lack of rapid credit growth, other explanations given have
included the long-lasting effects of the crisis itself. Economic history indeed suggests that
deep recessions, and recessions caused by financial crises in particular, can have persistent
negative impact on growth via their negative effects on capital accumulation, on innovation
and competition dynamics, as well as on labour input (i.e. unemployment and under-
employment) and productivity (e.g. skills and knowledge deterioration). Some economists use
the term ‘hysteresis’ – borrowed from physics – to designate these long-term effects of deep
recessions, which leave persistent scars on the economic tissue and tend to shift the economy
down to a lower expansion path.

However, a number of economists then started to recognise that the ‘Great Malaise’ that
followed the Great Recession probably reflected something deeper and more fundamental
than just the effects of the crisis. Something that predated the crisis and actually contributed to
its occurrence. That something is the long-term slowdown of global economic growth, which
started long before 2008.
Output growth has indeed been trending down for decades. World economic growth in terms
of real GDP (i.e. the measured value of economic output adjusted for price changes – inflation
or deflation) has been slowing down for several decades, averaging 3% in the decade 1991-
2000 vs. 5.5% in the decade 1961-1970, 3.9% in the decade 1971-1980 and 3.2% in the
decade 1981-1990 (source: www.worldeconomics.com). A rebound to 3.7% took place in the
decade 2001-2010, which was almost entirely attributable to the catch-up growth in emerging
economies – principally China – that resulted from the globalisation process. But in advanced
economies the slowdown continued and accelerated, on aggregate as well as on a per capita
basis. Just as people and businesses in the West were piling up debt increasingly irrationally
and the financial sector was going rogue in many countries, the ‘real economy’ – i.e. the part
of the economy that is concerned with actually producing goods and services, as opposed to
the part of the economy that is concerned with buying and selling financial assets – was
slowly but steadily decelerating.

This ‘Great Deceleration’ occurred despite the fact that, for a time, the increasingly massive
recourse to debt financing of investment and consumption boosted economic growth beyond
what would otherwise have been possible. And it started long before indebtedness levels
reached the heights where they would themselves start acting as a drag on growth. It however
contributed to making the debt binge increasingly unproductive and unsustainable, despite a
continuous decrease of interest rates, as the disconnect between the mountain of obligations
that was getting relentlessly created in the financial sphere and the underlying wealth creation
occurring in the real economy was growing wider and wider. Long before 2008, the world
was getting set up for an inevitable financial blow up…

The ‘Great Deceleration’ also occurred despite the fact that what many economists – those of
the Classical type – see as major impediments to economic growth (i.e. obstacles to free
enterprise, free markets and free trade) have been significantly and consistently reduced over
the last decades. Economic policy has in fact tended to be geared towards privatisation,
deregulation, and lower taxes in most Western countries since the 1980s, and the globalisation
process has tended to reduce government size and to enhance economic freedom across
developed as well as emerging economies, making it possible to dramatically increase the
global flow of goods, services, and capital. Globally, government-imposed barriers to
entrepreneurship and business, as well as to trade between nations, are probably lower today
that at any time in human history.

What, then, caused the growth slowdown? For some economists – mostly those of the
Keynesian type – it primarily results from a long-term decline of demand in the economy, i.e.
lower consumption spending and lower investment spending in physical and human capital,
leading to a lower quantity of goods and services demanded in the aggregate. A number of
factors have been identified for explaining this demand decline, starting with population
ageing and the sharp rise of income and wealth inequality in many Western countries[iii],
which tends to reduce labour force productivity and to hamper people’s participation in the
economy as earners or consumers, while concentrating income and wealth in the hands of rich
households with lower propensities to consume. The resulting decline of aggregate demand
has led some economists to talk of a ‘Japanification’ of the West, or, more recently, of a
descent into ‘secular stagnation’, i.e. a prolonged period of slow growth induced by structural
demand deficiency.

According to former U.S. Treasury Secretary Lawrence (Larry) Summers, who revived the
secular stagnation hypothesis in 2013, the chronic demand shortfall originated long before
2007-2008, and resulted from the combination of three long-term developments: the build-up
of a ‘savings glut’ (due to high levels of saving by pre-retirement baby-boomers, rising
income and wealth concentration, the hoarding of cash by large corporations running financial
surpluses, and the increasing hoarding of reserves by governments and central banks in
several parts of the world); a dry up of investment opportunities (due to a sharp decrease in
the price of capital goods, continuous technological disruption, and slower labour force
growth); and persistently low inflation. According to Mr Summers this combination
progressively depressed aggregate demand and constrained growth in advanced economies. It
also brought the ‘natural’ or ‘neutral’ real interest rate – i.e. the real (inflation-adjusted)
interest rate that supposedly balances saving and investment at full employment – ever lower,
to the point of becoming negative in some cases, making it increasingly difficult for an
expansionary monetary policy to translate into fluctuations in price levels or to stimulate
economic growth. In fancy macroeconomics speak, at the ‘zero lower bound’ injections of
money fall into a ‘liquidity trap’ and exacerbate the chronic excess of saving over investment,
which tends to further bring down the natural interest rate and the ‘non-accelerating inflation
rate of unemployment’ (NAIRU)… Loose monetary policy however makes access to credit
ever easier, which drives investors to take greater risks in search of yield and thus raises asset
prices, leading to financial instability and often to the inflation of asset bubbles, which
eventually burst. The result, for Mr Summers, is an economy whose normal condition is one
of inadequate demand and that unless counteracting measures are adopted can only get
anywhere close to full employment when it is being propped up through asset bubbles…

Besides this ‘demand side secular stagnation’ hypothesis, a supply-side view also emerged in
recent years, which contends that the ‘Great Deceleration’ primarily results from the slowing
pace of technological change and innovation. According to some economists, advanced
economies have indeed already exhausted the ‘low-hanging fruits’ of economic growth[iv],
which started vanishing during the last forty years as innovation was slowing down and a
technological plateau was being reached. This view was famously promoted by American
economist Robert Gordon, who argued in a widely discussed book[v] that growth was on a
long-term downward trend mostly because of the diminishing returns of innovation. The so-
called ‘Third Industrial Revolution’ based on information technology (IT), Gordon said, is
fuelling a great wave of technological innovations but is failing to boost productivity on the
same scale as great innovations from the past, such as electricity or the internal combustion
engine. The last big spurt in productivity, which started in the mid-1990s and was driven by
the growth of the Internet, has fizzled since the early 2000s. The growth slowdown, in
Gordon’s view, is likely to persist and get worse, which could conceivably lead to the
overall disappearance of economic growth after 2050 or 2100. The rapid economic expansion
experienced over the past 250 years, he argues, might turn out to be a unique episode in
human history – or in other words, economic growth might in fact be a very exceptional
situation, rather than the ‘normal’ or ‘natural’ state of affairs that economists, policy makers
and most people in the West commonly assume.

Even if they do not necessarily adhere to Mr Summers’ gloomy assessment or to Mr Gordon’s


sombre prognostications, many economists and policy makers seem to have accepted that, for
a number of supply-side and demand-side reasons, ‘potential output’ growth – i.e. how
rapidly the production of goods and services can expand without increasing inflation – has
been trending down for decades in advanced economies, and even at global level since the
crisis. Yet when analysing the causes of the phenomenon, they tend to stick to what textbook
economics tells them determines an economy’s productive capacity: the supply of two factors
of production – labour and capital – and how productively they are used. The productive
capacity expands when either the supply of these factors or the productivity of their use
grows. When either supply of productivity fail to grow, then a downward pressure is exerted
on output growth.

Modern macroeconomists can in fact debate endlessly about whether output supply creates
demand or the other way around – which is probably little more than a chicken and egg
discussion – and about the set of consequences that either one or the other proposition entails,
yet they tend to agree on the fact that in any case the production of economic output and its
evolution are essentially a ‘function’ of capital and labour. Economic growth, in their view,
essentially results from the expansion of the supply of labour and capital inputs and from the
rise of the productivity of their use. Labour and capital are the only two factors of production
that determine and constrain the patterns of both productivity and scarcity. Most other inputs
into the economic process are considered as ‘exogenous’, secondary and largely immaterial to
the long-term trends of the economy.

There is a pretty significant issue with this view, though: it makes a rather poor job of
accounting for the historical reality of economic growth, which has in fact been much larger
since the dawn of the Industrial Revolution than whatever can be modelled with just labour
and capital. The economists’ response to this issue has consisted in attributing this
unexplained change in output growth after accounting for the effect of capital and labour to
something called ‘total factor productivity’ (TFP), which is supposed to represent the
economy’s long-term technological progress. This TFP cannot be observed but can only be
estimated as corresponding to the large gap between real economic growth and the output
growth estimated from capital and labour improvements alone. This gap has come to be
known as the ‘Solow residual’, after American economist Robert Solow who first theorised it
in the 1950s. Yet there are two significant problems with this theory: the first is that the
Solow residual is hardly ‘residual’ at all, since it historically constitutes by far the larger part
of economic growth, and thus attributing it to something that cannot be observed is only, as
American economist Moses Abramovitz once said, a “measure of our ignorance”; the second
is that attributing the growth of ‘total factor productivity’ to the effects of technological
progress simply does not square with contemporaneous reality.

Indeed, technological progress seems to have been accelerating over the last decades, which
have seen spectacular advances in computer-related fields, as well as in biotech, life sciences,
robotics, nanotechnologies, neuroscience, etc. In particular, the Internet has become
ubiquitous and has vastly enhanced access to information, as well as changed the way we
work, trade, shop, communicate, live and even think. Technological progress shows no sign
of abating – some tech gurus even argue that a number of new technologies (e.g. quantum
computing, artificial intelligence (AI), robotics, additive manufacturing, and synthetic or
industrial biology) are now advancing exponentially and yielding ‘accelerating returns’. Yet
those supposedly accelerating returns are not appearing in productivity and output measures:
the ‘digital revolution’ has so far failed to deliver ‘The Long Boom’ that was expected or
promised by some at the turn of the 21st century, output growth in advanced economies has
petered out rather than accelerated, and productivity growth has slowed down markedly,
which is causing a lot of head scratching among economists.

Some argue that traditional productivity and growth measures might be missing out on a lot of
the ‘value’ created in the modern, digital economy, in which the accelerating pace of
economic change makes it increasingly difficult to put a price on economic output, and
therefore that actual output, productivity and income growth might be underestimated. Others
contend that the long-awaited productivity miracle is around the corner, that it’s just a matter
of time before the various elements of the technological boom coalesce into a spiral of
exploding productivity and economic growth – and of course that we need to step up our
investments in innovation to get there faster. If the ‘Third Industrial Revolution’ already
fizzled out, then let’s just pretend a fourth one is getting underway and will do the trick…

Yet the apparent ‘paradox’ of a productivity slowdown in the midst of a tech boom might also
suggest that, as Robert Gordon and others have claimed, technological progress could actually
yield diminishing rather than accelerating economic and productive returns. In other words, in
a society that has already reaped the low-hanging fruits of technological innovation, ideas
seem to be getting harder and harder to find – or at least the ‘good’ ideas that may bring about
real productive and economic benefits, especially in economies that have moved away from
manufacturing activities and towards service based activities in which technical changes tend
to yield lower productivity gains. If that is the case, the ‘Fourth Industrial Revolution’ could
end up being even more of a disappointment than the third one…

What the ‘productivity paradox’ suggests as well, and most importantly, is that technological
progress as such may only underpin part of the ‘residual’ share of output growth that cannot
be estimated from capital and labour improvements, and therefore that other things than
labour, capital and technological change might influence the patterns of ‘total factor
productivity’. Or, in other words, that contrarily to what economists believe labour and capital
are not the sole defining factors of economic output, but that other factors are equally, or
perhaps more, important.

The most fundamental input into the economic process that economists commonly overlook
is, by a wide margin, energy. They typically tend to see energy as just a secondary input, “an
input like other inputs” as Paul Krugman puts it, which can be substituted by other inputs and
which importance to the economic process is limited to its ‘cost share’ (i.e. the level of energy
expenditures as a share of GDP, typically very high in non-industrialised economies and that
goes down sharply when embarking on a modern development path, then remaining relatively
constant over time in developed economies at between 7% and 10%). Yet once again this
view doesn’t square with reality. Far from being a secondary input, energy is a fundamental
input that is needed for all human activities, without exception. There is not a single human
activity, let alone economic activity, which can take place without energy use. In fact, capital
and labour are functionally inert without energy input. It is only through an input of energy
that they can be brought together to produce and distribute goods and services, and the
productivity of their use therefore depends to some extent upon the quantity, quality and
productivity of this energy input. As a consequence, energy should probably be considered a
fundamental ‘factor of production’ just like labour and capital.

However, mainstream economics largely ignores the central role of energy in the economic
process. This ignorance probably comes down, at least partly, to a difficulty to apprehend
what energy actually is. Energy is indeed a word with many meanings yet no universal
definition, something that is both intuitively obvious yet abstract and complex. It comes from
various sources and is used in various forms that are described and measured in different
units. Yet all forms of energy are fundamentally dimensions of the same thing: the capacity of
a physical system – be it a human or animal body, a car or a plane, a machine or a computer, a
factory, a power grid, an economy, etc. – to perform work. Obtained through food calorie
intake, this capacity enables human beings, helped by working animals, to perform a number
of physical and intellectual activities. Obtained through other sources of energy, it enables
various types of machines – and yes, that includes computers and all the devices and systems
that underpin the supposedly ‘dematerialised’ digital economy – to perform a wealth of
activities that go far beyond the capability of human or animal muscles and brains.

Energy is also what makes it possible for humans to transform matter, and hence to access,
convert and use the biological and physical material resources that are also required for goods
and services to be produced, distributed and consumed (e.g. plants or plant-based materials,
water, minerals, etc.). The ability to access and use those material resources in turn impacts
the quantity, quality and cost of accessible and usable energy resources, and therefore a
certain degree of interdependence exists between the accessibility and usability of energy and
the accessibility and usability of matter in the economic process, which can result in mutual
enablements as well as mutual constraints. A close relationship exists, for example, between
the energy and metals sectors, as significant quantities of metals are used by the energy sector
and significant quantities of energy are used for metal extraction and processing. A strong
nexus also exists between energy and water systems.

The economic process can thus, overall, be conceived as the process by which human
societies procure, transform and use energy and matter to create, distribute and consume the
goods and services that provide sustenance, security, comfort, mobility and entertainment to
human beings. Energy – understood as the capacity to perform work and to transform matter –
is thus required for any economic activity to take place, meaning that growing the economy
typically requires procuring and using increasing quantities of energy. In fact, economic
growth has historically been closely correlated with the use of ever-growing amounts of
energy. Ever since the dawn of the Industrial Revolution, all countries that have experienced
economic growth have increased their energy use at rates similar to the growth rates of their
output. A slight disconnection has occurred in the last decades in advanced economies, but
which can be largely attributed to the ‘offshoring’ of energy-intensive industries and the
concomitant switch to service activities made possible by the globalisation process,
accompanied by the increasing recourse to debt-fuelled growth. At global level, the
correlation between output and energy growth remains very strong. A growing body of
research[vi] even tends to show that, rather than a simple correlation, the relation between
energy use and output growth might be one of co-integration (meaning that the two tend to
converge over a relatively short period of time) or even of bi-directional causality, and that
energy’s contribution to economic growth goes in any case well beyond the ‘cost share’ of
primary energy that is commonly considered in conventional economics. Historically, energy
use is either the cause or the facilitator of economic growth. When properly integrated into
production functions, the production factor energy indeed accounts for most of the historical
growth that mainstream economists attribute to ‘technological progress’, and therefore the
inconvenient ‘Solow residual’ largely disappears. Energy, in fact, is ‘The Great Omission’ in
economic science.

The mechanisms by which energy underpins economic growth are multiple and complex, and
not necessarily fully understood yet. To summarise, energy’s contribution seems to be a factor
of the availability and affordability of energy, and of the efficiency of its use, but also and
probably more fundamentally of the physical properties of available energy sources, of their
‘energetic quality’ and of their ‘energetic productivity’. Energy indeed comes from many
sources, including fossil energy (oil, coal and natural gas), nuclear energy, and ‘renewable’
sources (wind, solar, biomass, geothermal and hydropower), which have vastly different
properties in terms of energy density, power density, versatility of use, fungibility, storability,
transportability, convertibility, or scalability. These different properties give them vastly
different capacity to generate economic and social value, especially when problems of scale
and resource dependency are taken into account. Energy sources also have vastly different
energetic quality (i.e. capacity to be converted into ‘useful work’ that can effectively
contribute to the economic process) and energetic productivity (measured as output energy
per unit of energy consumed in the extraction/transformation/transport and delivery process).
Physical properties, energetic quality and energetic productivity vary widely not only between
energy sources, but also across geographies and over time – and not necessarily in linear
ways.

A growing body of research[vii] shows that, ever since the Industrial Revolution, productivity
and economic growth in industrialised and emerging economies have largely been driven by
the increasing availability of cheap and high quality forms of energy inputs, by the rising
efficiency of their conversion to useful or productive work, and by the increasing availability
of ‘net energy’ or ‘surplus energy’ (i.e. energy available to do other things than finding,
extracting, processing, converting, transporting and distributing energy) obtained from highly
‘productive’ energy sources (i.e. fossil fuels, which provide over 80% of the world’s energy
use – a figure virtually unchanged over the last three decades). However, studies suggest that
in recent decades these trends might have stopped and even started to reverse. In fact, once
cheap and abundant forms of energy inputs – in particular oil, the ‘lifeblood’ of the modern
global economy – are becoming progressively scarcer, making their extraction and use more
complex, more costly and more energy intensive.

This ‘depletion’ phenomenon does not only constrain the production growth of energy inputs
and push their procurement costs up, it also induces a degradation of their energetic quality
and energetic productivity, as the best quality and most productive resources tend to get used
up first. The declining energetic quality of the world’s major energy resources (i.e. fossil
fuels) results in a weakening capacity of the energy supply to power productive work, which
might be a significant contributor to the ‘mysterious’ slowdown of productivity growth in
recent years. Meanwhile, the decline of their energetic productivity exerts a growing
constraint on the amount of ‘net energy’ that can get delivered to the economy. A rising share
of the total energy input indeed has to be dedicated to finding, harnessing, transforming and
conveying energy to meet a growing demand, while the share that can be made available for
other uses (i.e. the net to society) tends to decrease, constraining ‘discretionary’ energy
investments and consumption, and hence economic prosperity. This relative decrease of the
energetic productivity of the world’s major energy resources appears to be only partly offset
by technology-enabled efficiency gains and substitutions, and the supply of energy available
for doing other things than getting energy is thus becoming increasingly constrained over
time, which tends to erode potential economic growth at global level.

Besides these mechanisms, energy also impacts economic growth in other ways. First, the
phenomenon of depletion and its consequences do not only affect the world’s most widely
used energy resources, it also affects all non-renewable and partly-renewable natural
resources from which most material inputs into the economic process are obtained. These
resources are stock-based and therefore exhaustible, and as their use increases their
procurement tends to become more expensive and resource-intensive while their quality and
productivity tends to go down. Just as for energy resources, this process is only partly offset
by technology-enabled efficiency gains, tends to weigh on output and productivity growth as
it unfolds, and may in some cases end up making the use of some resources uneconomic (i.e.
unprofitable). Energy plays a key role in this process as the accessibility and usability of
energy and the accessibility and usability of other material resources in the economic process
are largely connected and, to some extent, interdependent. A parallel and simultaneous
depletion of energy resources and of other natural resources is therefore likely to have
compounding negative effects on economic growth.

Second, the use of energy and matter in the economic process always and inevitably generates
various types of environmental impacts, which also influence the capacity of the economic
system to expand. The extraction, transformation, transport and use of biological and physical
natural resources – including energy resources – as well as the production, distribution,
consumption and disposal of goods and services that they make possible, generate various
types of ‘waste’ or ‘pollution’, which are returned to the biophysical environment. This use of
the environment as a ‘sink’ for waste energy and matter is considered as an ‘externality’ in
mainstream economics, i.e. an element that is external to the economic system and for which
producers and consumers bear no direct costs. Yet this capacity for producers and consumers
to ‘externalise’ the environmental costs of their growing economic activity to the ecosystems
used as waste ‘sinks’ has in fact constituted a key enabler of economic expansion. Had
producers and consumers been unable to externalise these costs and forced to bear them
directly, economic growth over the last two centuries would have been significantly
constrained.

Historically, the degradation of the biophysical environment resulting from human activity is
therefore a feature of the economic growth mechanism, not a bug. The amount of waste and
pollution resulting from human activity has thus grown phenomenally over the last 200 years
or so, in sync with the relentless rise of energy and matter use and with exponential economic
growth. The use of the environment as a ‘sink’ for waste energy and matter, however, tends to
negatively impact the biophysical ecosystems from which energy or material resources are
obtained, which in turn can reduce society’s capacity to procure or use them. The costs
externalised to the environment are significant and growing or compounding over time, and
they can end up weighing on the capacity of the economic system to develop and expand, or
even to sustain itself. Beyond a certain point, the negative environmental externalities of the
economic process (including climate change resulting from the burning of fossil fuels) cannot
be ignored anymore, and social pressure grows to ‘internalise’ them, at least partly, into the
price system (e.g. through taxation, regulation, or subsidies). This is what happened over the
last few decades with the timid development of a system of environmental protection in
Western countries, which inevitably imposed some restrictions and/or costs on economic
activity and therefore constrained economic expansion (and/or incentivised the offshoring of
energy-intensive economic activity to other countries). It should therefore be no surprise that,
in the U.S., the repeal of this system of environmental protection is now one of the key
priorities of the Trump Administration to ‘Make American Growth Great Again’.

Overall, the world’s economic growth story since the Industrial Revolution is, to a large
extent, an energy story: that of the discovery and growing use of fossil fuels, i.e. sources of
energy that were far more abundant, powerful, economic, convenient and versatile than
anything humankind had been able to use until then. Fossil fuels not only provided human
societies with fantastically increased quantities of energy/capacity to perform work at low
cost, but also with energy inputs that were of much higher energetic quality and far more
energetically productive than previous energy sources. Energy inputs, also, which
environmental damages could be conveniently ‘externalised’ to the biosphere and ignored for
a long, long time.
Similarly, the global economic and productivity growth slowdown of the last decades is, by
and large, an energy story: that of a world running into the diminishing returns of the fossil
fuel bonanza. The diminishing returns of fossil fuels’ abundance, power, affordability,
convenience and versatility. The diminishing returns of fossil fuels’ energetic quality and
productivity. The diminishing returns, also, of our capacity to dump the waste and trash of our
fossil-fuelled civilisation into the biosphere. The exponential growth dynamics set in motion
by the Industrial Revolution slowed down as a result, signalling the probability of an
upcoming peak and possible reversal. Robert Gordon’s intuition that economic growth could
conceivably stop altogether during this century might thus turn out to be right, yet for reasons
other than those he had in mind.

The growth and productivity slowdown ‘mystery’ is therefore not so mysterious after all, for
those who wish to see. It results to a significant extent from biophysical factors that include
the depletion of the world’s main sources of energy and matter, which over time tend to raise
the acquisition costs, constrain the quantity and degrade the quality and productivity of the
flows of energy and natural resources that can be delivered to the economic process. These
also include the constantly increasing costs of some of the side effects of the economic
process, in particular multiple types of environmental degradation, which increasingly need to
be ‘internalised’ into the economic system. These biophysical constraints are progressively
eroding the world’s capacity to create additional wealth, and therefore constraining
productivity and output growth.

These developments totally elude mainstream economics, which ignores the biophysical
foundations of the economic process. It wasn’t always that way, though, as the 18th and
19th century founding fathers of what was then called ‘political economy’ perfectly knew that
‘land’ – as a representation of natural resources – was a fundamental factor of production, just
as labour and capital. The evacuation of the natural world from the economic equation came
later, in the 20th century, when the bonanza of energy and matter unleashed by the use of
fossil fuels blinded economists into believing that energy and natural resources were
universally available and affordable, and thus were unimportant to the patterns of productivity
and scarcity. Economists, in other words, drew erroneous conclusions from what was
fundamentally an exceptional situation. They chose to become ignorant.

Should they miraculously re-acknowledge the biophysical foundations of the economic


process, economists would then realise that their discipline in fact ought to be not just a social
science but rather a combination of social and natural sciences. That economic activity is to
some extent constrained, at global level, by inescapable physical laws that govern how energy
can be converted into useful work and transform matter. That economic growth is not a
natural state of affairs but the result of very specific conditions regarding the energetic and
material underpinnings of human activity. That economic growth and environmental
degradation are, historically, two sides of a same coin, and hence that further economic
growth is unlikely to be the appropriate answer to the compounding environmental crises that
growth has so far been generating. They would realise, also, that the transition away from
fossil energy, made inevitable both by the ongoing depletion of fossil fuel reserves and the
need to contain climate change resulting from fossil-fuelled human activity, is far and away
the biggest economic challenge we face this century, which will profoundly impact the
structure and functioning of human economies and societies in multiple ways. They would
dedicate their intellect and energy to finding sensible answers to this monumental challenge…
Needless to say, this is not happening and will not be happening. Instead, economists will
keep scratching their heads about the productivity mystery, arguing about ways to re-start or
boost the growth engine through either austerity or government deficits, and building
intellectually ‘elegant’ but reality-optional growth models…

A richer picture of the human ‘economy’

To understand and make sense of ‘The World in 2018’, we therefore need a richer picture of
the human ‘economy’ – from ancient Greek oikonomia: ‘household management’ – than what
modern economics is capable of providing. Economists are in fact too busy arguing among
themselves about the right way to look at things to realise that they’re not actually looking at
the right things.

To draw this richer picture we need to integrate the fundamental dimensions that are missing
from established economic science: the behavioural dimension, the financial dimension, and
most importantly the biophysical dimension. We also need to integrate further dimensions that
are also inadequately accounted for by economics, such as the ‘global’ dimension (i.e. the
patterns of international trade, capital flows, debt relationships, or political power at global
level, which have very different impacts on various national and local economies’ structures
and workings), and the ‘cultural’ dimension (which constrains the possibility of outlining
economic rules having universal value). Most of all, we need to somehow bring these
dimensions together in order to develop a more acute consciousness and comprehension of the
road we are travelling. This, in fact, is what we will try to do in the next instalment of this
series.

To be continued…

[i] Thinking, Fast and Slow, by Daniel Kahneman. Farrar, Straus and Giroux, October 2011

[ii] Nudge: Improving Decisions about Health, Wealth, and Happiness, by Richard H. Thaler
and Cass R. Sunstein, Yale University Press, April 2008

[iii] Capital in the Twenty-First Century, by Thomas Piketty, Harvard University Press, April
2014

[iv] The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History,
Got Sick, and Will (Eventually) Feel Better, by Tyler Cowen, Dutton, January 2011

[v] The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War,
by Robert J. Gordon, Princeton University Press, January 2016

[vi] For an overview, see: Energy and Economic Growth: Why we need a new pathway to
prosperity, by Timothy J. Foxon, Routledge, October 2017

[vii] See in particular the works of physicist and economist Robert U. Ayres (born 1932) and
systems ecologist Charles A.S. Hall (born 1943) – and their various ‘disciples’.

In the modern world, our perceptions of reality are largely shaped by economic and
financial considerations, and our policy conversations are largely built around
intellectual categories and evaluative criteria that pertain to the economics discipline.
Yet a long-term view shows that ‘The world in 2018’ is in a significantly different place
than what economists typically claim, and than what many of us want to believe.

We human beings build our perception of our personal and collective reality on a number of
objective and subjective factors, which vary significantly between individuals and societies,
as well as across time and space. However, for a majority of people in the modern world this
perception tends to be mostly based on economic and financial considerations: the way we,
individually and collectively, at any given moment in time, perceive our material and
financial situation and prospects, and our material and financial well-being (absolute and
relative), typically dominates our overall perception of our personal and collective trajectory
and situation. It also influences the way we think about the other elements that contribute to
shaping our worldview: when our perception of our material and financial conditions and
perspectives is positive, it tends to foster our individual and collective confidence and
security, which influences our views on other aspects of our lives and on our ability to address
the challenges we face; when this perception gets more negative, on the other hand, it tends to
make us insecure about our ability to deal with issues in other aspects of our individual and
collective lives, and can in some cases hamper our ability to address them successfully.

The central role of economic and financial conditions in shaping our perception of reality has
long been understood by policy makers the world over, who constantly try to influence the
way these conditions are viewed and represented in society. It has also, of course, led them to
seek advice from economists to find ways of improving material and financial well-being in
their jurisdictions. With the development of economic science over the last century,
economists have gained increasing sway over policy-making in industrialised as well as
industrialising nations, and economics has become – by far – the most politically influential
social science. This influence has only grown in recent decades as the modern economic
system was becoming more complex and economic growth was becoming more difficult to
achieve. Since the 1980s, economists have largely influenced the design of public policies in
many Western countries, pushing in particular ‘neoliberal’ reforms that have increased
reliance on market mechanisms and fostered the deregulation of financial markets, the
privatisation of parts of the public sector, the liberalisation of trade and the quest for ever-
growing economic ‘efficiency’ through faster and faster ways of producing and consuming
more and more goods and services.

Economists and economic experts have not lost their influence in recent years, despite the fact
that most of them failed to predict the 2007-2008 financial crisis and have since then been
struggling to make sense of it and its aftermath. On the contrary, they have probably never
had so much influence over the policy conversation than they have today. From the tech boom
to wealth and income inequality, from globalisation to the energy transition, from healthcare
to banking regulation, from welfare reform to climate change, economists are those who
largely set the terms of the debate. It does not mean, of course, that policy makers
systematically do what economists advise, nor that this advice is in any way uniform or
consistent. It means, however, that the public debate is largely organised around intellectual
categories and evaluative criteria that are those pertaining to the economics discipline.

This, of course, has serious and unfortunate implications, because economics has become
little more than a belief system that is increasingly incapable of grasping and accounting for
the reality it pretends to study – and hence increasingly unable of informing us about the
choices we face and the options we have. Since the end of the 19th century the economics
discipline – or more particularly its ‘macro’ side – has indeed evolved into a ‘reductionist’
discipline, which tends to limit its field of inquiry to a limitative set of relatively basic
components of the economic system, conveniently leaving aside other elements that have a
decisive influence over the system’s structure, functioning, and evolution. As a result, most
contemporary economic theories are essentially beliefs based on questionable assumptions
and simplifications, which only scratch the surface of how the economy works. This is why
the alleged ‘rules’ of the economic textbook are far less soundly established than what
economists contend, and why they only work in certain conditions, in certain places and in
certain times, but not in others. This is why, also, every policy maker, every political side or
pressure group, can always easily find economists to tell them exactly what they want to hear,
when they want to hear it. This is why, most importantly, the policies advocated by
economists often utterly fail to deliver their expected results and typically generate
unintended – and often damaging – consequences.

The issues with conventional economic theories and models are many, varied and complex.
They include a number of flaws and blind spots, which have been laid bare by the Great
Financial Crisis and its aftermath. Most importantly, they include the almost complete
ignorance – or rather voluntary omission – of the fundamental biophysical foundations of the
economic process. This ignorance of how the flows of energy and matter underpin economic
activity – and economic growth – results from the evacuation of the natural world from
mainstream economic thought, which occurred in the 20thcentury, when it suddenly looked
like homo sapiens had managed to conquer nature and the curse of resource scarcity had been
all but defeated.

Let there be light

To be fair, ignorance of the biophysical underpinnings of the human experience is not limited
to economics, but extends to almost all contemporary social sciences. When we reflect about
human societies or nations, how they are structured and work, how they came to be and
evolved over time, or how they interact, we typically tend to focus on various aspects of the
relationships and the balance of power between individuals and between groups (e.g. between
the commoners and the elites, the haves and the have-nots, the educated and the uneducated,
the labourers and the holders of capital, the natives and the immigrants, etc.), but we largely
leave aside the fact that these relationships are built upon flows of energy and matter that are
exchanged between these various groups, and between them and the natural environment.
Hence, when we reflect about the history and trajectory of homo sapiens, and how it evolved
from being just another primate species to the modern-day shaper of the Earth System, we
tend to focus on the causes of our ‘progress’ that are intrinsically human, leaving aside the
extraordinary help we received and keep receiving from nature.

This vision of homo sapiens as a species that controls its destiny, and of human progress as
resulting essentially from human agency (i.e. the choices that humans make and the actions
they take as a result), dominates the modern psyche and underpins contemporary
historiography. The new superstar historian Yuval Noah Harari, for instance, shot to fame a
few years ago with a much celebrated book on human history[i] contending that if we have
managed over the last couple of centuries to defeat the triple curse of famine, plague and war,
we owe it largely to human ingenuity and scientific development. For some reason, about two
hundred years ago and after centuries of economic, social, political and intellectual stagnation
or quasi stagnation, human beings found a way of getting their acts together and suddenly
embarked on a long-term path of progress. That reason is commonly referred to as the
‘enlightenment’, i.e. the fact that humans started in the 18thcentury, in Europe first and then
beyond, to replace religious dogma by reason as the primary source of authority, legitimacy,
reflection and action. This ‘Age of Enlightenment’ was preceded by and closely associated
with the scientific revolution, and was marked by an emphasis on the scientific method, hence
putting humanity on a path of intellectual and technical progress. It paved the way for the
development and spreading of modern humanist philosophy and of modern democracy,
putting humanity on a path of social and political progress. It also paved the way for
the Industrial Revolution, putting humanity on a path of economic progress and prosperity.

‘Progress’ has not stopped since then. As a result, the world’s population has grown roughly
six-fold since the mid-1800s, world output 60-fold, and world trade over 140-fold. Output has
grown much faster than population because productivity per worker has been multiplied (by
around sixteen-fold since 1890), resulting in rapidly increasing material prosperity and well-
being in industrialised and industrialising countries. There have been setbacks, of course,
including two world wars in the 20th century, but overall the course of human history in the
last two hundred years has been one of quasi-continuous technical, economic, social, and
political progress, spreading further and further across the globe. In the Western world, this
trend has largely come to be considered as both irreversible and unstoppable. A civil ‘religion
of progress’ has progressively won most of the symbolic ground formerly occupied by theistic
religions, and the vision of progress as a historical process and destiny is what has been and is
still defining our contemporary sense of ‘normality’.

When reality doesn’t seem to conform to our understanding of how the ‘arc of progress’
should bend, we consider it as ‘abnormal’ and hence in need of normalisation. That may be
the case, for instance, when material prosperity and well-being stop improving for part of the
population, when income and wealth distribution gets increasingly skewed towards a tiny
minority of already rich and wealthy, when democracy seems to be in retreat or becoming
dysfunctional, or when a Twitter-addicted reality TV buffoon takes the helm of the world’s
most powerful nation and governs it in an erratic way. In such cases, many people in the West
tend to believe that our perceived deviation from the arc of progress results from a series of
erroneous choices, and that getting back on track also depends on choices we can make.
Provided we fight and remain true to the Enlightenment ideal of using reason, science and
humanism[ii], we shall overcome! Yes we can!

Nature in general, and energy in particular, do not feature prominently in this story. They are
merely tools that enable homo sapiens to accomplish its destiny and human progress to run its
course, but they play only a supporting role. This view, however, is extraordinarily short-
sighted, and this is where our modern narrative of progress is fundamentally flawed. The
Industrial Revolution, which put us on our path of material progress, did not happen just
because humans finally saw the light and switched from believing in a God-imposed order to
believing in the power of reason. It occurred, also and maybe more importantly,
because homo sapiens found ways of accessing and using new sources of energy, which
would forever change the course of its history and its relationship with nature.

At the centre of it all…

As shown by British economic and demographic historian Tony Wrigley, among others,
energy played a central role in making the Industrial Revolution possible and successful[iii].
Pre-industrial societies only had access to very limited energy supplies: mechanical energy
coming principally from human or animal muscle, heat energy from wood, and some wind
and water power. These energy limits effectively capped the maximum attainable level of
human productivity at a low level. It is the exploitation of a new and much more powerful
source of energy in the form of coal that provided an escape route from these constraints of an
organic economy and transformed the productive power of societies. It did so by vastly
increasing individual productivity, thus delivering whole populations from poverty and setting
into motion the economic growth mechanism – a mechanism that is, essentially, energy-
based. As a result, the rate of growth of the world’s consumption of primary energy (i.e.
energy embodied in sources that can be found in nature and that has not been subjected to any
conversion or transformation process) has been closely correlated with the rate of growth of
global economic output since then. It has remained remarkably stable (2.4%/year ±0.08%
since 1850), and shows no sign of slowing down.

In his account of humankind’s history, Yuval Noah Harari rightly recognises that energy lied
at the heart of the Industrial Revolution and of the economic growth mechanism that it set in
motion. Prior to it, he says, humans could harness various types of energy (i.e. the mechanical
energy obtained from water and wind, or the heat energy produced by burning wood), but
these energy sources were only available in limited quantity, not everywhere and not all the
time, thus limiting the productive capacity of the human economy. An even bigger problem,
Harari however notes, “was that people didn’t know how to convert one type of energy into
another”, i.e. heat into movement, or vice versa. The only type of ‘machine’ capable of
converting energy was the body, which can “burn organic fuels known as food and convert
the released energy into the movement of muscles”. Human and animal bodies were the only
energy conversion devices available, and muscle power – including that of human slaves –
was thus the key to almost all human activities.

But then the use of coal changed everything: not only did it provide humans with vastly
increased supplies of cheap energy, but also with vast supplies of energy that could be
efficiently and effectively converted between different usable forms. Its burning indeed
produced heat energy, proportionally far more than wood, which could be converted into
mechanical energy – and later into electrical energy – far more efficiently and effectively than
when using wood. “At heart, the Industrial Revolution has been a revolution in energy
conversion”, Harari thus says: humans finally learned how to harness and convert energy
effectively, which made it possible to phenomenally raise their productivity. This revolution
in energy harnessing and conversion also solved the other problem that was holding back
economic growth: the scarcity of raw materials. “As humans worked out how to harness large
quantities of cheap energy, they could begin exploiting previously inaccessible deposits of
raw materials (…), or transporting raw materials from ever more distant locations”.

From these very salient observations, Harari however draws an erroneous conclusion. The
revolution in energy conversion, he says, “has demonstrated again and again that there is no
limit to the amount of energy at our disposal. Or, more precisely, that the only limit is set by
our ignorance. Every few decades we discover a new energy source, so that the sum total of
energy at our disposal just keeps growing. (…) Clearly the world does not lack energy. All we
lack is the knowledge necessary to harness and convert it to our needs. (…) During the
Industrial Revolution, we came to realise that we are actually living alongside an enormous
ocean of energy (…). All we need to do is invent better pumps”. These assertions are,
unfortunately, unfounded and misleading. Understanding why requires briefly revisiting some
of the fundamentals of what energy is, where it comes from, and what role it has been playing
in human history.

An energy primer
First, energy is, just like water, a fundamental requirement for the existence of ‘life’. Living
things are physical and chemical systems that exchange energy, as well as matter, with their
environment. This ‘metabolism’ (i.e. capacity to convert energy and exchange energy and
matter with the environment) is constitutive of life: something can only be ‘living’ if it has
one.

Second, energy cannot be created by living things to support their metabolism, but only
harnessed from their environment – meaning that the existence of life presupposes that usable
forms of energy are present in the environment and also that its development or evolution is
contingent on the capacity to use and convert these various energy forms. Humans are no
exception, and they can neither create nor destroy energy, but only harness it from the
biosphere and transform it between different states, typically from more or less condensed
energy sources into useful work on the one hand, and waste heat on the other. A corollary is
that the production of work – any work – without energy input is a physical impossibility.
Another is that any life form can only expand insofar as its access to usable energy and its
capacity to harness and convert it allows.

Third, almost all sources of usable energy present in our environment have a same origin: the
Sun. The star at the centre of the Solar System does not only provide us with heat that we can
capture and store and with sunlight that we can convert into electrical energy. It also provides
us with our food energy, which directly and indirectly (i.e. via the animals we eat) comes
from plants that grow by trapping solar energy and converting it into chemical bonds through
the process of photosynthesis. We also recover some of this photosynthetic energy by burning
plant products such as wood, which breaks the plant’s chemical bonds and releases energy as
heat and light. The Sun’s energy also warms the planet’s surface and creates transfers of heat
and pressure in weather patterns and ocean currents, which results in air currents that drive
our wind turbines. It evaporates water that falls as rain and generate the water currents and
deposits that we use to generate mechanical or electrical energy through hydropower. Finally,
it is also the source of the much more concentrated forms of energy that are known as ‘fossil
fuels’. The production of coal, oil, or natural gas indeed results from the conversion, after
millions of years of geological and chemical activity underground, of organic matter that
directly or indirectly comes from plants and hence from the solar energy they trapped through
photosynthesis. Except maybe energy that can be extracted from basic elements present in the
Earth’s crust, such as uranium and plutonium, all energy on Earth can therefore be traced back
to the Sun, which is probably why solar deities and Sun worship can be found throughout
most of recorded human history, in various forms. We human beings are, symbolically at
least, ‘children of the Sun’[iv]…

Fourth, the relation to energy and energy conversion is, deep down, what distinguishes
humans from other living things. There’s no established consensus on the question of what
makes us special and fundamentally different from other animals, and most accounts typically
focus on our mental qualities and cognitive abilities[v]. Yet a possibly much more significant
difference is the way we harness and convert energy, and the purposes for which we do it.
Animals and plants convert energy in a single way and for a single purpose: they transform
energy from sunlight and food or nutrients within themselves, inside their bodies and/or cells,
to preserve and sustain their physiological activity. Their metabolism, in other words, is
purely ‘endosomatic’ (i.e. occurring within the body). In contrast, humans have, in addition, a
second way of converting energy, called ‘exosomatic’, by which they transform
energy outside their bodies, through various tools and instruments, with the goal of
amplifying the output of useful work associated with their activities. This distinction between
‘endosomatic’ and ‘exosomatic’ energy use, introduced by American biophysicist Alfred
Lotka, helps explain why and how homo sapiens, starting as a simple ape-like creature,
became the conqueror of nature. While plants and animals, or even simple cellular organisms,
only convert ‘endosomatically’ the energy they need to ensure the preservation or spreading
of the species, humans harness energy for performing, with the help of exosomatic
instruments, a wealth of activities that go far beyond what is required for that purpose.

Exosomatic energy use and conversion is thus the foundation of all those activities that
distinguish humans from animals. This is what is figuratively represented in the famous
opening scene of Stanley Kubrick’s 2001: A Space Odyssey, when a tribe of hominids
discovers how the use of exosomatic instruments (in this case, the use of bones as weapons)
gives them power over other life forms and over their environment, setting them on a
fundamentally different course than all other species. Consequently, exosomatic energy use
and conversion is also the foundation of the production by humans of a variety of goods and
services, or in other words the foundation of the human economy. The expansion of the
human economy is therefore dependent on humans’ capacity to effectively and efficiently
convert energy ‘exosomatically’. This capacity, in turn, is dependent on human ingenuity but
also and more fundamentally on the quantitative and qualitative characteristics of the energy
that is available in the environment and that can be effectively and efficiently harnessed for
that purpose. In order to expand and improve the outputs obtained from their exosomatic
energy use, humans thus need to gain access to more and/or better forms of energy inputs.
This endless quest is the defining pattern of human history.

Rise of the exosomatic species

Human exosomatic energy use has known three ‘revolutions’ over the ages. The first was
the control of fire by early humans, which occurred before the appearance of homo
sapiens and was probably instrumental in setting in motion the evolution mechanism that led
to its arrival. Controlling and cultivating fire indeed provided a source of heating, lightning,
protection, improvement on hunting and a method for cooking food. It made it possible for
humans to expand their activities into the dark and colder hours of the evening, to better
protect themselves by intimidating other animals, and to build better tools and projectiles to
hunt their preys, thus giving them access to more food energy. It also made it possible for
them to start cooking their food, rather than eating it raw like animals, which fundamentally
changed their diet, dramatically improved the effectiveness and efficiency of their
‘endosomatic’ metabolism and accelerated the process of their physical and cognitive
evolution[vi]. Controlling fire allowed humans to become the ultimate predators, and to
progressively expand outside the tropics and disperse across the globe.

The second revolution came with the development of agriculture. Until about 12,000 years
ago, most humans were leading hunter-gatherer lifestyles, wandering around and coalescing
in small tribes. The purpose of their exosomatic energy use was largely limited to supporting
their hunting and gathering activities, with the aim of supplying the food energy needed for
their endosomatic metabolism. This all changed with the ‘Neolithic Revolution’, when many
human cultures transitioned to a lifestyle of agriculture and settlement, growing domesticated
plants and raising domesticated animals – used to produce food and perform work – instead of
gathering wild plants and hunting wild animals. This revolution made it possible to develop a
more reliable supply of food energy – and then progressively a growing ‘surplus’.
From then on, only part of a human group’s population would have to work to supply the food
energy required for the whole group, freeing up a growing capacity to perform other types of
activities as well. Because crops and animals could now be farmed to meet demand, the global
human population rocketed – from some five to ten million people 10,000 years ago to about
300 million when Jesus Christ was born about 2,000 years ago. Cities appeared and
civilisations rose in various corners of the Earth, in which people started to perform an array
of previously inexistent activities: architecture and masonry, various types of crafts, public
administration, as well as early ‘intellectual’ occupations (priests, thinkers, scribes, and even
artists or entertainers). These new activities led to the design and use of an ever-greater range
of exosomatic instruments and to their refinement or improvement over time. This triggered
the development of what we now call ‘the economy’, i.e. the production and exchange of
goods and services to satisfy a variety of human needs and wants, and the emergence of
‘money’ as a means of carrying out transactions involving a medium of exchange. However,
since human and animal bodies were the only energy conversion devices available, the
development of exosomatic instruments and the exosomatic use of energy remained
constrained by the limits of endosomatic metabolism. As a result, and following their early
rise after the Agricultural Revolution, global economic output and population numbers
stabilised and only grew slowly for several centuries, with regular setbacks caused by war,
famine and plague. A long ‘Malthusian plateau’ had been reached, during which average
living standards evolved slowly and only varied modestly between various parts of the world.
In each place, living standards were governed by the level of the subsistence wage, and thus
in large part by common human physiology.

The third and most significant revolution in human exosomatic energy use was, of course, the
Industrial Revolution. The combination of a vastly increased energy supply obtained from
accessing new energy sources (i.e. millions of years of concentrated solar energy in the form
of fossil fuels) and of new energy conversion techniques finally made it possible to lift the
secular barriers to output and population growth. New energy sources, forms and uses came
online, giving access to more materials and making possible the invention of new and
increasingly sophisticated exosomatic instruments (i.e. machines), which in turn made it
possible to access ever more energy and matter and to transform them ever more effectively
and efficiently. Exosomatic energy use skyrocketed from then on, rapidly lifting human
productivity – including in the agricultural sector. It triggered an exponential rise of both
economic output and population numbers, in Western Europe first, and then in parts of the
New World where its people became the dominant populations, underpinning what some have
called the ‘Great Divergence’ between the Western world and the rest[vii]. This exponential
rise then progressively spread to other regions of the world, and it continues to this day.

Nature’s invaluable gift

What is most significant in the Industrial Revolution, i.e. the third revolution in the history of
human exosomatic energy use, is not so much that coal supplanted renewable energy sources
such as water and wind power or biomass as the main source of exosomatic energy use, it is
that exosomatic energy use finally overtook endosomatic energy use (i.e. muscle work) as the
main energetic underpinning of the human economy. From then on, and through the use of
energy conversion devices, energy obtained from fossil fuels progressively replaced manual
labour in a growing array of activities. That includes, of course, unpaid manual labour, or in
other words the work formerly performed by slaves and serfs. Slavery and serfdom had been a
key feature of the economic and political fabric of virtually all human civilisations prior to the
advent of fossil fuels, and a major underpinning of the economic system ever since the advent
of agriculture. The Industrial Revolution made it possible to change that: from an energetic
and economic point of view, human slaves were progressively replaced by much more
powerful and efficient slaves, fossil energy slaves, which started to do much of the physical
‘work’ for us. They can be considered as ‘slaves’ in the sense that we do not have to pay these
immensely powerful, cheap and abundant workers, which we get from stores of trapped solar
energy cooked, pressurized and concentrated underground over millions of years: they come
to us as a free gift from Mother Nature. All we have to do is to get them out of the ground and
put them to work. That’s what we have been doing for over two centuries, and that’s how the
modern world came to be.

The coal-powered economic growth dynamic initiated in the 18th century picked up in the first
half of the 19th century, and then accelerated sharply in the second half, when the more
widespread adoption of new manufacturing and production technologies triggered a ‘Second
Industrial Revolution’. This Second Industrial Revolution was made possible, in particular, by
the invention and development of a phenomenal energy carrier, electricity, which quickly
replaced steam in industry, and was also widely applied to transportation and
communications. The use of electricity accelerated industrial growth beyond what would have
been possible with steam, making it possible to move towards mass production. The Second
Industrial Revolution was largely an electric revolution.

From an energetic point of view this second Industrial Revolution was essentially the
continuation of the first, as coal remained its main energy source. However, it also saw the
emergence of oil and gas, fossil fuels that are considerably more concentrated and powerful
than coal and that would come to turbocharge the world’s economic growth dynamic in the
20th century. Natural gas was first used for lightning, but at the turn of the 20th century and
with the deployment of effective gas transportation networks its use started to expand to home
heating and cooking, to manufacturing and processing, and to electricity generation. Oil, the
most powerful and versatile of fossil fuels, was also first used for lightning purposes, but
additional uses were quickly discovered. In particular, it provided the most important
lubricating agents for industrial machines and, most importantly, provided a powerful and
convenient liquid fuel that would revolutionise transportation, on land, on water and then in
the air, making it possible to move people and goods ways of magnitude faster, further and
cheaper than would have been possible without it. Petroleum and petroleum products also
became used as an important raw material for various petro-chemical products that
progressively became ubiquitous, including asphalts, plastics, soaps, detergents, solvents,
glues, paints, drugs, fertilisers, pesticides, explosives, synthetic fibbers and rubbers, or
flooring and insulating materials, among others.

In the first half of the 20th century, oil supplanted coal as the critical global energy source for
major industrial economies. Extraordinarily convenient, versatile, and affordable, immensely
available and highly concentrated, it rapidly multiplied the number of ‘energy slaves’ at the
disposal of human beings. By some estimates, one barrel of crude oil contains the energy
equivalent of over 10 years of manual labour, meaning that all the mechanical and thermal
work done using oil – which in energetic terms represents the bulk of the ‘work’ performed in
the modern world – equates to that of millions of unseen, indefatigable energy slaves[viii].
And this immense army of energy slaves is in fact the army that built the world we live in
today… More than anything else, the unprecedented energy bonanza we obtained from
burning coal, natural gas, and, most importantly, oil, made the modern economy possible and
defined the modern world’s order. This doesn’t mean, of course, that other factors did not
play a role in building that order. But it means that our world – and our historical trajectory
and ‘progress’ – would look extraordinarily different today if there had been no coal, no gas
and especially no oil in the Earth’s crust.

In the 20th century, humans also started to harness other energy sources, such as nuclear
energy (i.e. the use of nuclear fission to generate useful heat and electricity) and, more
recently, ‘modern renewables’ (wind and solar power). However, these new sources have only
added relatively small increments to the global energy mix. After a promising start in the
years following the Second World War, which largely resulted from the spill over effects of
the development of military nuclear programmes, the nuclear power industry quickly reached
a plateau when it became clear that it would never deliver ‘too cheap to meter’ electrical
energy but rather extraordinarily costly and hazardous energy. The civilian nuclear industry
never became viable without massive government subsidies, and responded to rising costs
with ever-escalating demands for government support. In addition, it generated multiple
security hazards (risks of nuclear reactor accidents and of radioactive waste disposal, and
risks of military nuclear proliferation), which in many places eroded political and popular
support for its development or even its continuation. As a result, global nuclear electricity
production has been stagnant for about twenty years, and has even decreased slightly in recent
years following the Fukushima nuclear disaster. Today, nuclear provides less than 5% of the
world’s total primary energy supply[ix], and talk of a ‘nuclear renaissance’ is fading as the
Western nuclear industry is largely bankrupt and the development of new generation reactors
(Gen IV) is running into endless technical issues, delays and cost overruns.

‘Modern’ renewables such as wind and solar, on the other hand, are now growing quickly but
still only provide a negligible share of the world’s energy supply. Wind and solar power
account for about 5.5% of global electricity production (i.e. half the share of nuclear) and only
1.6% of total final energy consumption (and that’s together with biomass and geothermal
power)[x]. The cost of solar and wind power technologies has been dropping fast in recent
years, and the world is now adding more renewable power capacity per year than it adds in
new capacity from all fossil fuels combined, yet the actual output from ‘conventional’
electricity generation continues to rise faster than that of wind and solar. Fossil fuels, overall,
generate about 65% of the world’s electricity, and represent over 80% of the world’s total
primary energy supply, a share that has virtually not changed for over four decades.

Therefore, and contrarily to what Yuval Noah Harari contends, the Industrial Revolution and
the 200 years that have passed since then have not “demonstrated again and again that there
is no limit to the amount of energy at our disposal”, or that this amount just keeps growing
and growing as we keep discovering new energy sources every few decades. Unfortunately,
they have demonstrated nothing of the sort. What they have demonstrated is that human
beings have received from Nature an extraordinary gift, in the form of immense reservoirs of
highly concentrated energy resulting from complex geological processes lasting millions of
years, that they have been building their world on the basis of that gift ever since, and that
their efforts at tapping into other energy sources on a large scale have so far been largely
inconclusive.

The energy boost

If fossil fuels in general, and oil in particular, have become and remain the master sources of
energy for the modern world, it is not – or not only – because of their relative abundance and
affordability. It is also because they have a number of attributes that make them
extraordinarily convenient, powerful and versatile: energy density (amount of energy stored
per unit volume or mass), power density[xi] (rate of energy flux obtained per unit of spatial
area used), fungibility (equivalence and interchangeability of all units), storability (capability
to be stored for considerable time without loss of usability), transportability (capability to be
moved around by multiple means with limited loss), ready availability, convenience and
versatility of use (beyond energy supply, there are over 500,000 known uses of petroleum),
and convertibility (notably into electricity). All those attributes make fossil fuels – and oil in
particular – more ‘valuable’ than all other known energy sources in economic terms, in the
sense that they have a higher capacity to help generate economic value very rapidly, in very
diverse ways and on a very large scale.

Related to these physical properties and probably even more important from an economic
point of view, fossil fuels are energy sources of exceptional energetic quality (i.e. capacity to
be converted into ‘useful work’ that can effectively contribute to the economic process) and
energetic productivity (i.e. capacity to provide usable energy in excess of the energy
consumed in the extraction/transformation/transport and delivery process). The increasing
availability of these cheap, high quality and highly productive forms of energy inputs is what
has underpinned productivity and economic growth in industrialised and emerging economies
since the Industrial Revolution. It has made possible to obtain far more useful work (also
called exergy) than would have been possible with energy inputs from other sources, thus
boosting productivity growth in an unprecedented way. And it has also made a phenomenal
amount of ‘net energy’ available to society to do other things than finding, extracting,
processing, converting, transporting and distributing energy, making it possible to develop an
array of activities that would simply not have existed otherwise.

The physical properties, energetic quality and energetic productivity of fossil fuels have laid
down the foundations of modern economic growth and made its continuation possible over
two centuries. In fact, when integrated into production functions, the production factor
‘energy’ accounts for most of the historical economic growth since the Industrial Revolution
that mainstream economists struggle to explain, i.e. the famous and massive ‘residual’ that
they conveniently – or lazily – attribute to ‘technological progress’. Most of this residual, in
fact, probably results from increased energy use and from historical improvements in energy
conversion to physical work[xii]. Most of the economic growth we experienced since the
Industrial Revolution, in other words, was the result of a massive ‘energy boost’.

This energy boost reached its peak during the decades immediately following the Second
World War, when oil fully became the master energy resource for industrialised economies,
feeding a ‘great acceleration’ of the human imprint on the Earth System. During that period,
world energy production (on an absolute and per capita basis) grew at a breakneck speed,
cheaper and higher quality forms of energy inputs became increasingly available and got
converted into useful work ever more efficiently, and the overall amount of ‘surplus energy’
obtained from high net energy resources (i.e. energy resources with a high energy return on
investment – EROI[xiii]) shot up tremendously, making possible to expand and diversify
mass production and consumption. The combination of these phenomena turbocharged
economic activity, in terms of both diversity and intensity.

Losing thrust at high altitude

However, in advanced economies this energy boost started to wear out in the 1970s, for
several reasons. First, energy use ran into a classic phenomenon of diminishing returns: the
low-hanging fruits of economic growth had been picked first, many large-scale infrastructure
investments with a high economic multiplier effect (including electrification) had already
been made, and in many industries and sectors maximum machine speed/velocity was already
being reached. Just like the average speed of automobiles, motorbikes or planes, the average
speed of industrial machines in many sectors increased much faster until the late 1960s/early
1970s than after that. The physical and economic limits to energy-based speed-ups thus
probably played a role in the sudden slowdown in productivity growth at the turn of the
1970s. Second, increasing concerns about the atmospheric and ground pollution resulting
from fossil energy use – and from material use made possible by fossil fuels – triggered the
adoption at the beginning of the 1970s of the first set of environmental regulations in Western
countries, which established some constraints on the further expansion of energy use. Third,
oil depletion in the U.S. – until then the world’s largest producer – and a subsequent
realignment of energy geopolitics lead to a dramatic rise in the price of oil (i.e. the 1973 oil
crisis), which rapidly reverberated across the economy. This triggered a considerable
slowdown of the rate of increase of energy consumption, resulting in much slower economic
growth. The combination of economic stagnation and soaring price inflation came to be
known as ‘stagflation’, and lasted until the beginning of the 1980s, when oil prices finally
started to decrease. After a sharp growth slowdown in the 1970s, world energy use per capita
started to decline slightly in the 1980s and 1990s, an only picked up again at the beginning of
the 21st century, as a result of China’s rapid expansion and massive use of domestic coal
resources.

Oil depletion and its effects have remained a constant source of concern – and of geopolitical
tensions – since the oil crises of the 1970s. The threat of oil supply shortages was partly
alleviated in the 1980s and 1990s by the discovery and exploitation of new major oil fields in
North America (Alaska) and Europe (North Sea), but it resurfaced in the 2000s when wars
disrupted production in the Middle East, oil prices spiked, and fears of an imminent peak and
decline of global oil production (‘peak oil’) grew. These fears have since then receded, largely
as a result of the exploitation of ‘tight oil’ (also called ‘shale oil’) in North America,
using hydraulic fracturing (‘fracking’) and horizontal drilling, as well as to other
‘unconventional’ sources (oil sands, deepwater oil) and to the use of enhanced recovery
techniques in conventional oil fields. These are however temporary fixes: shale oil production
is expected to peak in just a few years time, and global oil discoveries have fallen to their
lowest point since the 1940s, prompting rising fears of a supply crunch – and possible price
spike – around 2020.

While concerns about oil depletion – and fossil fuels depletion in general – tend to mostly
focus on quantitative aspects (i.e. availability and affordability), qualitative aspects are often
overlooked. Yet they are as, or even more, significant. In fact, depletion means that it is
getting more and more difficult, costly, resource-intensive and polluting to get oil – and other
fossil fuels – out of the ground. It also means that the energetic quality (measured in terms of
exergy) and productivity (measured in terms of net energy or EROI) of what is extracted tends
to go down, resulting in a decreasing capacity to power useful and productive work, and in a
decreasing ability to provide ‘surplus energy’ to society (i.e. energy that can effectively be
used for doing other things than finding, extracting, processing, converting, transporting and
distributing energy). According to some estimates the EROI of global oil and gas has declined
by nearly 50% in the last two decades, meaning that new technology and production methods
(deep water or horizontal drilling) help to maintain production but appear insufficient to
counter the decline in the energetic productivity of conventional oil and gas. In other words,
we are now entering the age of ‘crappy oil’, or at least we are clearly heading that way…
The declining energetic quality and productivity of fossil energy resources has resulted in the
last decades in a rising energy intensity of the global energy system. According to the
International Energy Agency (IEA), the share of the world’s Total Primary Energy Supply
(TPES) used by the energy supply sector (which comprises all energy extraction, conversion,
storage, transmission, and distribution processes that deliver final energy to end users)
expanded from 24% in 1973 to 31% in 2015, while the share available for Total Final
Consumption (TFC) by other sectors of the economy went down from 76% to 69%. Overall,
the quantity of energy supplied to end-use sectors (i.e. industry, transport, residential,
services, agriculture, etc.) rose by 101% over the period, but the quantity of energy that had to
be used by the energy system to supply this energy to end users increased by 196%
(source: IEA Key World Energy Statistics 2017). Overall, a rising share of the fossil energy
we get out of the ground therefore ends up being used by the energy system itself – or in other
words the ‘energy cost of energy’ (ECOE) is rising, and the trend is accelerating. This relative
energetic productivity decline not only constrains the growth the amount of ‘net energy’ that
the global energy system can make available for use by other sectors, it also increases the
share of those sectors’ output that has to be consumed by the energy sector. As the energy
sector becomes less productive, it indeed tends to consume not only more energy but also
more materials, more labour, more services, etc. A rising share of the output of other sectors
has to be dedicated to servicing the needs of the energy sector, which ends up constraining
economic growth and eroding economic prosperity (i.e. the capacity for societies to dedicate a
rising fraction of economic output to discretionary uses).

Therefore, starting in the 1970s fossil energy progressively ceased to boost global economic
growth as it had done since the dawn of the Industrial Revolution, and most particularly
during the post-WWII period. The world’s energy-based growth engines, it suddenly
appeared, were losing thrust, exposing the global economy to growing and hazardous
turbulence while flying fast and at high altitude…

Short-term fix, long-term addiction

The rules of the economic game therefore changed fundamentally from the 1970s onwards.
Most economists and policy makers recognised it, though their disregard for – or ignorance of
– the biophysical foundations of the economic process prevented many of them from fully
understanding the causes and consequences of this change. Their focus since then, hence, has
mostly remained on finding ways of obtaining more economic growth from what they
mistakenly view as the only growth factors: capital and labour use and productivity,
underpinned by technological progress. This is what explains their wide support for the
neoliberal turn initiated in the 1970s, for the technological boom (and its accompanying
innovation mythology) that started in the 1980s, or for the globalisation of capitalism as of the
1990s. Neoliberal reforms were aimed at removing ‘obstacles’ to the ‘efficient’ functioning of
free markets (i.e. most of the regulations and safeguards built into the capitalist system during
the years of rising surplus energy and prosperity), with a view to ‘unleashing’ capital
formation and productivity. Innovations in information and communication technologies were
aimed at increasing labour productivity and developing an array of new activities.
Globalisation was aimed at boosting international trade, but most importantly at increasing the
volume of available labour while reducing its average cost for a wide array of activities, and
at removing obstacles to capital mobility. In fact, globalisation’s main raison d’êtrewas to
enable mobile capital to arbitrage labour, currencies, interest rates, regulatory burdens and
political favours by shifting between nations and assets – all this being supposed to foster
more efficient resource allocation and wealth creation.
Even if they were not necessarily conceived as such, wide-ranging neoliberal reforms,
accelerating technological change, and the globalisation process have constituted remediation
strategies in a world whose energy-based growth engines were progressively losing thrust.
Together, they have triggered an unprecedented ‘time–space compression’, i.e. a compression
of spatial and temporal barriers and distances, which for a while boosted economic growth.

The most effective remediation to the global economy’s waning energy boost, however, has
not been neoliberalism, nor the tech boom, and not even globalisation. It has been the
expansion of debt, in the U.S. first and then across the Western world and beyond. Starting in
the 1970s, debt “became the fulcrum on which the economy was levered for the next forty
years”, in the words of economic journalist and analyst Jeff Madrick[xiv]. The collapse in
1971 of the Bretton Woods international monetary system, which ended the era of fixed
exchange rates based on both gold and the U.S. dollar and ushered the era of free-floating fiat
currencies, removed obstacles to the expansion of the money supply. A few years later, a
decades-long liberalisation of financial regulation started in the U.S., which rapidly extended
to the rest of the Western world and progressively removed obstacles to the expansion of
credit. A number of regulatory constraints on the activities of banks and other financial
institutions were lifted, with a view to widen the use of financial products and markets to
mobilise and allocate resources and to manage and reduce investment costs and risks – in
order, ultimately, to boost investment and growth. This liberalisation provided financial
institutions with new and less costly ways to raise capital, but it also and most importantly
facilitated the lending and borrowing of funds, thus increasing available credit for borrowers.
As a result, corporations and households started accumulating debt on an unprecedented scale
and at an unprecedented rate, which contributed to fuel and accelerate economic growth
beyond what would otherwise have been possible. The global economy, in other words,
substituted its waning energy boost with a credit boost.

Financial liberalisation did not only result in a massive build-up of debt, it also triggered the
mass commoditisation of debt and made it the fuel of a process of ‘financialisation’ of the
economy. It indeed ushered a wave of wide-ranging financial engineering and innovation,
which fed an unprecedented growth of the financial sector and profoundly changed the
structure and functioning of Western economies. New and increasingly complex types of
asset-backed/debt-based financial instruments and products were created and introduced to
the market, in a 30-year frenzy of ‘securitisation’ deals aimed at transforming, through
financial engineering, illiquid assets or groups of assets into fungible and negotiable financial
instruments (‘securities’). This resulted in a mass commoditisation of debt and debt-based
financial instruments, ‘collaterised’ by previously low-risk assets, and in a pyramiding of risk
and speculative gains that was only made possible by a massive expansion of low-cost credit
and leverage.

This mass commoditisation and spreading of debt and debt-based financial instruments fed
the growth of money market funds, investment funds and other institutional investors, such as
pension funds and insurance companies, striving for ever-higher performance and returns. It
also fed the growth of commercial banks, progressively moving away from their traditional
lending activity, which occurs in a very competitive environment with tiny profit margins,
towards more lucrative proprietary trading and ‘derivative’ trading (i.e. trading of contracts
whose value is ‘derived’ from the performance of an underlying entity such as an asset, index,
or interest rate).
This financialisation process was most spectacular in the United States – and this is where it
was the most consequential as well, since the U.S. is the world’s largest economy and the
epicentre of the global economic and financial system. It could actually be argued that
financialisation is probably rooted in America’s particular form of capitalism, in which credit
is seen as the engine of enterprise and the fuel of the consumerist ‘American Dream’[xv], and
in which finance has for a long time triumphed over industry and made the U.S. economy, in
essence, a ‘speculation economy’[xvi]. Speculation and credit indeed form an integral part of
the fabric of American capitalism, which historically developed through a series of boom and
bust cycles that almost always ended up in a financial crisis. Financial excess was only tamed
for a few decades with the adoption of restrictive regulations during the 1930s New Deal,
which are precisely the regulations that were repealed in the 1980s and 1990s in order,
officially, to ‘unleash’ economic growth – with the return of financial instability and financial
crises as a not-so-surprising corollary

Modern financialisation has however not been confined to America. It has been a global
phenomenon and has actually been concomitant with a process of financial globalisation,
characterised by a steep increase of cross-border flows of financial capital and by a growing
integration of global financial markets. This global financialisation/financial globalisation
process has dramatically increased the size of the financial services sector in developed
economies and inflated the global stock of financial assets (i.e. the value of stocks, bonds and
all types of securities), which quadrupled in size relative to global GDP between 1980 and the
financial crisis. Also, and even more fundamentally, it significantly altered the patterns of
profit making and the distribution of corporate profits across the economy. The financial
sector came to capture a growing share of all corporate profits (e.g. around 30% in the U.S.
today, vs. around a 10% thirty years ago) and supplanted manufacturing as the biggest profit
centre in the economy. A rising share of corporate profits thus shifted from a high-
employment industry towards a relatively low-employment one, thus concentrating earnings
and, ultimately, wealth, in fewer hands.

The phenomenon was compounded by the growing financialisation of non-financial


corporations, which increased their dependence on earnings obtained through financial
channels (as opposed to operational ones), and diminished labour bargaining power in income
distribution. As a result, corporate profits have tended to decouple from economic growth and
to reflect instead the ability of companies to engage in financial engineering. Meanwhile, the
operational profitability of many non-financial corporations was increasingly being
maintained or enhanced by slashing jobs, off-shoring some and using computerisation and
high-tech machinery to replace others. The process of financialisation, therefore, led the
whole of the corporate world, well beyond the boundaries of the financial sector, towards a
high-profit, low-employment template that weighs on aggregate demand by holding back
income growth for a rising share of the population.

The financialisation process has also tended to subordinate real capital formation in the realm
of goods and services to finance, and to sap productivity growth by misallocating resources –
in particular human resources. In fact, the financial sector’s growing share of profits – much
of which arise from various forms of rent extraction rather than productive investments – has
enabled financial services firms to offer (much) higher salaries than other sectors, making it
harder for genuinely innovative firms to attract the best talents and invest in new technologies.
Industries that compete for resources with finance ended up being damaged by the financial
sector’s growth. Specifically, manufacturing sectors that are either R&D-intensive or
dependent on external finance suffer disproportionate reductions in productivity growth when
finance grows. By draining resources from the real economy, financial sector growth
therefore probably acts as a drag on real growth. The dynamic of finance growth can even be
considered as a ‘parasitic’ phenomenon, which if left unchecked can potentially ‘kill the host’,
i.e. destroy the real economy from which it extracts value[xvii]. These risks and damages are
made worse by the growing political and regulatory influence acquired by an increasingly
profitable financial sector – particularly in the U.S., where corporate funding of politics is a
central element of political life, corporate lobbying is ubiquitous, and the permeability
between government and business through ‘revolving doors’ is higher than in most other
advanced economies.

Overall, the financialisation process initiated at the turn of the 1980s ended up delivering a
sluggish economy with growing inequality, extravagant rewards for some and stagnant or
even declining incomes for the masses, and an overload of debt for all. The amount of debt
produced and pushed around by the financial sector rapidly started to exceed the real
economy’s ability to produce a large enough surplus to pay it back, becoming a drag on real
growth and making a financial breakdown inevitable. This breakdown finally occurred in
2008, and nearly brought down the global economy. It became clear, then, that the global
economy’s credit boost had only been a short-term fix to the end of the fossil energy boost,
but that it had generated a long-term and dangerous addiction to debt – an addiction that
persists to this day.

Falling into a trap

Debt has in fact continued to grow rapidly across the world since the 2008 financial crisis. Far
from being brought down significantly, global debt has continued to expand faster than the
economy, resulting in rising debt ratios in both advanced and emerging economies. According
to the Institute of International Finance (IIF), global debt rose to a record $US233 trillion in
the third quarter of 2017, representing almost 320% of global GDP. Global levels of debt held
by households, governments, financials and non-financial corporations jumped by over
$US70 trillion in the past decade, and are now much higher than before the financial crisis. In
advanced economies only the financial sector has somehow ‘deleveraged’ after the crisis, as
banks and other financial institutions cleaned up and sometimes contracted their balance
sheets through restricting credit creation and selling assets – or, more particularly,
‘offloading’ risky assets to the U.S. Federal Reserve and other central banks engaging in
‘quantitative easing’ (QE) policies. Household and non-financial corporate debt only went
down slightly in the immediate aftermath of the crisis due to debt defaults or write-offs and to
the sudden tightening of credit conditions, but this private sector deleveraging was largely
outstripped by the rapid growth of government debt, caused by the sharp increase of
expenditure required to contain the effects of the crisis, combined with a sudden drop in tax
revenues as economies fell into recession. Overall, total debt (private plus public) never really
ceased to rise in advanced economies, and private debt quickly started to grow again – even if
more slowly than before the crisis. In the U.S., virtually every class of debt – sovereign,
corporate, unsecured household/personal, auto loans and student debt – is now at record
highs, and debt levels are also rising steadily in Europe, and shooting up in Canada or
Australia.

Most importantly, global debt accumulation has since the crisis been mostly driven by
emerging economies, especially China, where a semi-public and government-backstopped
financial system has been pumping exponentially increasing amounts of credit into the
economy as part of a deliberate, state-driven stimulus programme. Formerly a low-leverage
economy growing through global labour arbitrage and thanks to the wide availability of cheap
coal, China morphed after the crisis into the fastest debt accumulator in human history, using
credit to invest relentlessly in expanding capacity in many industrial sectors as well as in
construction and infrastructure. Its total debt as a proportion of economic output has doubled
since 2008, rising to an estimated 317% at the end of 2017 (or 282% excluding financial
sector debts, compared with 158% at the end of 2008). China’s debt-fuelled over-investment,
over-capacity build-up has not only underpinned the country’s continuous expansion since the
crisis, it has also been the major engine of global growth in recent years. There are mounting
concerns, however, that China’s growing credit dependency might rapidly make its debt
trajectory unsustainable[xviii] and generate important stability risks for the global financial
system.

A decade on from the beginning of a financial crisis that was caused by an excess of debt, the
world’s economy therefore continues to be fundamentally based on fairly similar patterns of
debt-fuelled economic expansion, with few indications that this trajectory of rising leverage
may fundamentally change in the near future. On the contrary, credit creation is becoming an
ever less productive driver of growth, meaning that the world needs to accumulate more and
more debt to obtain ever less output growth. As the ‘normal’ process of debt erosion via
higher prices and incomes remains impaired by the persistence slow growth and low inflation
(‘lowflation’), indebtedness levels are rising and will continue to do so until the eruption of
the next debt crisis – a matter of when, not if.

While the global economy did not reverse its addiction to debt after the crisis, it also did not
interrupt its relentless financialisation. Legislation passed after the crisis to curtail excessive
risk taking in the financial sector only marginally affected the process. The U.S. adopted one
of the most complex pieces of legislation ever written, the Dodd–Frank Wall Street Reform
and Consumer Protection Act, which brought the most significant changes to financial
regulation in America since the regulatory reform that followed the Great Depression,
affecting almost every part of the financial services industry. However, even if it imposed
some constraints on banks’ trading operations, Dodd-Frank fell far short of re-establishing
New Deal financial safeguards and largely failed to make the financial system safer. The
banking sector got more concentrated as the ‘too big to fail’ institutions became even bigger,
to the point of representing even bigger systemic risks and becoming, according to many, ‘too
big to save’. In addition, risks piled up outside of the traditional banking sector. Banks indeed
reduced their credit creation activity in markets in which they faced more capital and
regulatory constraints, but the gaps were partly filled by the ‘shadow banking system’, which
is not subject to similar regulations. Shadow banks, including ‘fintech’ lenders, have grown
dramatically since the financial crisis, playing an increasing role in funding businesses and
individuals and becoming a vital source of capital for the private sector. The regulations and
reforms aimed at protecting American consumers and safeguarding the banking system have,
in fact, driven a rising share of the lending activity into the shadowy corners of speculative
credit.

Overall, finance’s share of the U.S. economy dropped slightly after the crisis, but its hold on
the economy continued to tighten. The process by which financial motives, financial markets,
financial actors and financial institutions take an increasing role in the operation of the
American economy continued to run its course. Private equity and hedge funds continued to
extend their grip on productive capital as they piled up assets on the cheap in the wake of the
financial crisis, and businesses in all industries continued to emulate finance, and to engage in
elaborate financial engineering to obtain growing earnings through financial channels. Capital
and profits continued to be increasingly funnelled towards those engaging in opaque, debt-
fuelled financial processes and trades. Finance and its way of thinking continued to reign
supreme and to dominate corporate culture. Bankers and other financiers’ money continued to
flood political parties and candidates, to which the financial sector remains far and away
the largest source of campaign contributions. Far from ‘draining the swamp’ in Washington,
DC, the new U.S. president filled it with former financial sector executives, who are now busy
rolling back financial regulation once again. Financialisation is alive and well in America, and
more damaging than ever[xix].

A similar phenomenon is at play, even if not as openly and extravagantly, in other advanced
economies such as the UK and the Eurozone. There too, significant changes were introduced
to the regulatory and supervisory system after the crisis to make the financial sector safer and
more responsible – and, in the case of the Eurozone, to try to fix some of the design flaws of
Europe’s monetary union. There too, financial risk has in fact been moving from traditional
banking to a rapidly growing shadow banking sector since then. There too, financialisation
has continued to run unabated overall. There too, trading money, debt, risk and associated
products has remained more profitable and continued to outpace trading goods and services
for capital accumulation. There too, commodity markets, natural resources management, and
more and more aspects of everyday life (pensions, health, education, housing) have become
increasingly exposed to financial markets and subject to financial engineering.

Financialisation, in fact, is the inevitable consequence of debt-fuelled growth and credit


dependency. Unsurprisingly, it is now spreading to emerging economies that have been
frantically piling up debt since the crisis – in particular China. In the past decade China’s
broad financial sector – including finance, insurance and real estate (FIRE) – has grown
tremendously, now representing well above 10% of GDP, and capturing a rising share of
profits. Its non-financial industries have been raking in more and more of their profits from
financial channels, while their operational profit rate has been declining. Just as happened in
the West, capital in China is flowing to the more lucrative financial sector, non-financial
industries are getting increasingly focused on obtaining profit from financial operations, the
pricing mechanism of more and more goods and services is getting exposed to financial
mechanisms and speculation, and the income distribution gap is widening as a result. Just like
other debt-fuelled economies, the Chinese economy is rapidly falling into the trap
of ‘excessive financialisation‘, and is progressively discovering the cost of letting finance take
such a central place in its economy.

Overall, the global financialisation – and financial globalisation – process has thus continued
after 2008. The global stock of financial assets has continued to grow since then, though at a
slower pace than in the run-up to the crisis. This stock was estimated at $294 trillion in
2014 by Deutsche Bank, or over 375% of world GDP, of which 3/4th was some form of debt
and less than 1/4th was equity (i.e. the value of global stock market capitalisation). The real
stock of global financial assets is however even greater, as a massive amount of assets is
created and traded in the ‘shadow’ financial sector, and is thus not accounted for. The shadow
financial sector comprises the shadow banking system (i.e. credit creation involving entities
and activities outside of the regular and regulated banking system) as well as over-the-
counter (OTC) trading systems (i.e. trading of financial assets and securities that takes place
outside of regulated exchanges, including in so-called ‘dark pools’). The size of the shadow
financial sector is not precisely known, as much of its operations goes unregistered, but it
represents a massive part of the global securities market. And there is growing evidence that
this huge shadow finance sector is massively being used through offshore financial centres
(i.e. tax havens), and therefore acts as both a recipient and mechanism of tax
avoidance/evasion and of illicit financial flows, which are growing significantly faster than
GDP.

In developed as well as in emerging economies, the resumption and continuation of debt-


fuelled growth and of the financialisation process after the 2008 financial crash has only been
possible because of the extraordinarily expansionary monetary policies enacted by the world’s
main central banks. Massive monetary stimulus, in the form of ultra-low interest rates and
quantitative easing (i.e. asset purchases by the central bank using newly-created money), is
what has maintained the global debt-based financial edifice standing after the crisis, before
maintaining it on life support and then propping it up for several years. Led by the U.S.
Federal Reserve, the world’s biggest central banks have slashed interest rates and injected an
estimated US$13 trillion or so into the global financial system since 2008. Global central bank
purchases of financial assets (including sovereign bonds, corporate bonds and stocks) reached
a peak in early 2017 at over $300 billion a month. Without this extraordinary, historically
unprecedented and sustained monetary stimulus, the global pyramid of financial assets that
underpin the global economy would have been at risk of unravelling, which could have
triggered an uncontrollable ‘debt deflation’ phenomenon and sent the world’s economy into a
downward spiral.

The flood of cheap new central bank money, however, has largely remained in the financial
sphere and has only dripped in a limited way towards the real economy. Furthermore, it has
fundamentally ‘deformed’ the global financial system by destroying price discovery and risk
pricing mechanisms and by preventing the market clearing processes from operating. In doing
so it has fundamentally undermined market discipline, caused widespread capital
misallocation and unproductive investment, inflating or re-inflating multiple and massive
asset bubbles (in bonds, stocks, real estate, as well as in luxury assets or, more recently,
cryptocurrencies) and flooding some industries (venture capital, private equity, technology,
shale oil and gas, and many others) with far more financial capital than what their current of
prospective profitability would justify in more ‘normal’ financial conditions. It has, also,
exacerbated inequality by channelling income streams and wealth gains towards owners of
financial assets.

Obviously, a lot of people in the financial services industry would deny that there could be
anything wrong with today’s asset price valuations – or with the income and wealth
distribution patterns that these valuations entail. Yet the fact remains that the price of almost
all financial asset classes is at record highs and has grown far faster that underlying economic
reality. That includes, of course, the price of stocks, which in relation to corporate earnings is
almost higher than it has ever been, and far higher than historical average. By suppressing
interest rates and flooding the financial system with liquidity, central banks have forced all
asset classes to reprice to artificially and absurdly low levels of risk, and have thus pushed
their prices ever higher, way beyond whatever intrinsic values they may be considered to
have. Central bankers have created a world awash with cheap financial capital, where in the
financial sphere too much money is chasing too few assets, which is why these assets cost
ever more and return ever less, and where in the real economy too much money is chasing too
few ‘good’ (i.e. profitable) ideas, which is why it often ends up funding some very bad (i.e.
speculative) ones.

Central banks, in fact, have palliated the financial crisis by inflating an ‘everything
bubble’[xx], or in other words a set of multiple, massive and compounding asset bubbles,
which now constitute the financial backbone of the global economy. Any assessment of the
global economic situation and prospects that does not take this fundamental foundation into
account constitutes, in essence, little more than a work of fiction. Even if these bubbles have
proved to be more persistent than what many people predicted in recent years, they will
eventually end up doing what all bubbles do. No one knows when or in what sequence they
will burst, and trying to guess is actually quite futile, but burst they will. The trigger is likely
to be central banks’ attempts to ‘normalise’ their monetary policies by raising interest rates
and shrinking their balance sheets. The global debt-based financial edifice, and the global
pyramid of trades in financial markets, have in fact become far too dependent on a continuous
flood of cheap money to hold very long if monetary policy ‘normalises’ in any meaningful
way. Cheap credit, financialisation and monetary activism have pushed the world into a trap
from which there is no easy and painless way out.

Where are we now?

Overall, and with the benefit of hindsight from the last decades, it therefore appears that the
relentless expansion of debt and financialisation process, together with the concomitant and
related processes of globalisation, liberalisation and ‘technologisation’, have constituted very
inadequate remediation strategies to the global economy’s waning fossil energy boost. They
have delivered economic growth, for sure, but growth that is weak, fragile, ephemeral, and
that comes at a significant and rising cost – i.e. in terms of debt accumulation, but also of
rising inequality, economic insecurity, financial instability, as well as social and cultural
tensions and, increasingly, invasion of privacy. They have given rise to a ‘bubble economy’,
in which GDP grows essentially as a result of debt-fuelled asset bubbles being blown, and
periodically goes up in smoke when those bubbles burst.

We are now in the tail end of what arguably constitutes the biggest bubble in economic
history, the ‘everything bubble’ that has been blown in response to the Great Financial Crisis.
This ‘everything bubble’ concerns all asset classes, and its effects directly or indirectly extend
to the whole of the global economy. There is no single activity, sector, firm, household or
public body in advanced economies – as well as in most emerging economies – whose current
economic and financial situation is not either determined, underpinned or heavily influenced
by the ‘everything bubble’, and not a single of them will remain unaffected when the bubble
pops. To some extent, it could be argued that it’s the global economic and financial system
itself that has now become the bubble. Most of us fail to understand or acknowledge it,
probably because the bubble is so massive and so extended this time that it is paradoxically
more difficult to recognise than more circumscribed and classic asset bubbles. Probably, as
well, because our collective intoxication with technology and with the promises of a techno
future is increasingly blinding us to the reality of the economic system we’re living in.
Probably, also, because the consequences of our global economy being predicated on the
existence and perpetuation of an all-encompassing financial bubble are too uncomfortable to
contemplate. Yet we are inevitably approaching the unavoidable denouement of our bubble
cycle, and the slight economic recovery about which we have been rejoicing of late might
now be bringing us there faster as it puts pressure on central banks to tighten monetary
policies more rapidly and decisively, thus getting us closer to the point where the bubble
edifice starts to unravel.

Debt accumulation and financialisation, globalisation, liberalisation and ‘technologisation’


have thus largely failed, over the last four decades, to adequately compensate the global
economy’s waning fossil energy boost. They have nevertheless lifted economic growth
enough to continuously push up the use of fossil fuels and of other natural resources, as well
as the environmental damage resulting from this use. Half of all oil burned by the human race
has been burned since the collapse of the Soviet Union, and almost one-third of all human
emissions of greenhouse gases occurred in the last twenty years. After remaining flat during
the 2014-16 period, these emissions started to rise again in 2017 as economic growth was
picking up. CO2 concentrations in the atmosphere have been rising increasingly fast over the
last decades, destabilising the planet’s climate system and setting in motion a climate change
dynamic that we only partly understand, that we cannot control, and that we already know we
will be unable to fully mitigate. And if climate change is probably the major threat facing
humanity, it is also just one of the symptoms of the destabilisation of the Earth system that is
occurring and accelerating as a result of homo sapiens’ relentless activity. Every year we
consistently increase our use of non-renewable resources, thus drawing down our reserves,
degrading our environment and crowding out other life forms ever faster. Earth Overshoot
Day (EOD), i.e. the date on which humanity’s resource consumption for the year exceeds the
planet’s capacity to regenerate those resources that year, now falls in early August, vs. the end
of December at the beginning of the 1970s. Our demand for renewable natural resources and
the services they provide is now equivalent to that of more than 1.5 Earths, and is on track to
require the resources of two planets well before mid-century. All this, it needs to be
remembered, is only occurring because of the burning of fossil fuels and the energy and
material input into human activity that it makes possible. Scaling back our use of fossil fuels
as quickly as possible, and eradicating it before the end of the 21st century, has now become
the only way for humans to avoid terminal environmental catastrophe.

Ever since the dawn of its history, the road that our exosomatic species has been travelling has
thus consisted in a continuous search for more and/or better forms of energy inputs, with a
view to expand and improve the outputs obtained from using our exosomatic instruments –
from the rudimentary tools used by our hominid ancestors to today’s robotic machinery and
quantum supercomputers. Over the last two centuries we have been able to leverage energy
inputs on an unprecedented scale, obtained from energy sources that are incomparably more
abundant, powerful, economic, convenient and versatile than anything we had been able to
use until then, and than anything we have discovered since then. The energy boost we
received from fossil fuels is the foundation upon which the modern world was built. It
provided the essential basis for the development and growth of the modern human economy,
but also for the advancement of human ‘progress’ in all its dimensions. In fact, contemporary
human progress has fundamentally been a fossil-fuelled process. Yet we have now reached
the point when our fossil energy boost is waning, and when the bill for our fossil energy binge
– and all the growth and progress it has made possible – is coming due.

‘The World in 2018’, hence, is a world that has been unable to find adequate substitutes to the
long-term economic boost it received from exploiting fossil energy, and that has merely
managed to substitute genuine economic growth with debt accumulation and financial
manipulation. It is a world that has been deceiving itself through financial leverage about the
essence of its economic growth and progress, and that is still very much in denial about the
scale of the consequences of the energy and resources binge this growth and progress have
entailed. It is a world that has now left itself just a few decades to stop using the energy
sources that underpin its modern economy and even modern civilization – or that risks seeing
this modern economy crashing down and modern civilization burn itself to the ground. All
this, of course, is not exactly how economists and policy makers typically talk about the state
of the world or of the economy. It is also not exactly what dominates most people’s
perceptions of their economic and financial conditions, which remain largely based on
shorter-term considerations. Yet it is nevertheless the reality of our world – a reality that
increasingly influences and shapes the course of events around us, and that will increasingly
impose itself to all of us over the coming years. A reality, as well, that determines or at least
significantly constrains the economic, social and political prospects and options we now have.
We will start looking at these prospects and options in more details in the next instalment of
this series.

To be continued…

[i] Sapiens – A Brief History of Humankind, by Yuval Noah Harari, Harper Collins, February
2015

[ii] Enlightenment Now: The Case for Reason, Science, Humanism, and Progress, by Steven
Pinker, Viking Books, February 2018

[iii] Energy and the English Industrial Revolution, by Sir Edward Anthony Wrigley,
Cambridge University Press, September 2010

[iv] Children of the Sun: A History of Humanity’s Unappeasable Appetite For Energy, by
Alfred W. Crosby, W. W. Norton & Company, January 2006

[v] The Gap: The Science of What Separates Us from Other Animals, by Thomas Suddendorf,
Basic Books, November 2013

[vi] Catching Fire: How Cooking Made Us Human, by Richard Wrangham, Profile books,
September 2009

[vii] The Great Divergence: China, Europe, and the Making of the Modern World Economy,
by Kenneth Pomeranz, Princeton University Press, 2000

[viii] State of the World 2015: Confronting Hidden Threats to Sustainability, by The
Worldwatch Institute, Island Press, April 2015

[ix] Key world energy statistics, International Energy Agency, 2017 edition

[x] Renewables Global Status Report, REN21, 2017 edition

[xi] Power Density: A Key to Understanding Energy Sources and Uses, by Vaclav Smil, MIT
Press, May 2015

[xii] The Economic Growth Engine: How Energy and Work Drive Material Prosperity, by
Robert Ayres and Benjamin Warr, Edward Elgar Publishing, December 2009

[xiii] Energy Return on Investment: A Unifying Principle for Biology, Economics, and
Sustainability, by Charles A.S. Hall, January 2017

[xiv] Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present,
by Jeff Madrick, Vintage, June 2012
[xv] The Engine of Enterprise: Credit in America, by Rowena Olegario, Harvard University
Press, February 2016

[xvi] The Speculation Economy: How Finance Triumphed Over Industry, by Lawrence E
Mitchell, Berrett-Koehler Publishers, Inc., November 2008

[xvii] Killing the Host: How Financial Parasites and Debt Destroy the Global Economy, by
Michael Hudson, ISLET, August 2015

[xviii] China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End
of the Chinese Miracle, by Dinny McMahon, Houghton Mifflin Harcourt, March 2018

[xix] Makers and Takers: The Rise of Finance and the Fall of American Business, by Rana
Foroohar, Crown Business, May 2016

[xx] The Everything Bubble: The Endgame For Central Bank Policy, by Graham Summers,
CreateSpace Independent Publishing Platform, October 2017

http://www.resilience.org/stories/2018-03-28/the-world-in-2018-part-four/

Energy and Authoritarianism


By Richard Heinberg, originally published by Post Carbon Institute

 September 26, 2017

Could declining world energy result in a turn toward authoritarianism by governments around
the world? As we will see, there is no simple answer that applies to all countries. However,
pursuing the question leads us on an illuminating journey through the labyrinth of relations
between energy, economics, and politics.

The International Energy Agency and the Energy Information Administration (part of the U.S.
Department of Energy) anticipate an increase in world energy supplies lasting at least until the
end of this century. However, these agencies essentially just match supply forecasts to
anticipated demand, which they extrapolate from past economic growth and energy usage
trends. Independent analysts have been questioning this approach for years, and warn that a
decline in world energy supplies—mostly resulting from depletion of fossil fuels—may be
fairly imminent, possibly set to commence within the next decade.

Even before the onset of decline in gross world energy production we are probably already
beginning to see a fall in per capita energy, and also net energy—energy that is actually useful
to society, after subtracting the energy that is used in energy-producing activities (the building
of solar panels, the drilling of oil wells, and so on). The ratio of energy returned on energy
invested (EROEI) for fossil energy production has tended to fall as high-quality deposits of
oil, coal, and natural gas are depleted, and as society relies more on unconventional oil and
gas that require more energy for extraction, and on coal that is more deeply buried or that is of
lower energy content. Further, renewable energy sources, especially if paired with needed
energy storage technologies, tend to have a lower (some say much lower) EROEI than fossil
fuels offered during the glory days of world economic growth after World War II. And
renewables require energy up front for their manufacture, producing a net energy benefit only
later on.

The quantities and qualities of energy available to any society have impacts that ripple
through its economy, and hence every aspect of daily life. As Lynn White, Marvin Harris, and
other anthropologists have shown, the political and social institutions of every society are
determined—in broad strokes, though certainly not in the details—by what Harris called its
infrastructure, or its ways of obtaining energy, food, and materials. Abundant, easily
transported and stored energy from fossil fuels made industrial expansion possible during the
twentieth century, and especially after World War II. This period of turbo-charged economic
growth had repercussions in fields as diverse as manufacturing, farming, transportation, and
even music (via the electrification of live performance as well as the flourishing of the
recording industry). That’s right: your favorite rock band is an epiphenomenon of fossil fuels.

Further, as archaeologist Joseph Tainter has pointed out, societies often use complexity (an
increase in the variety of tools and institutions) as a means of solving problems. But
complexity carries energy costs, and the deployment of complexity as a problem-solving
strategy is subject to diminishing returns. Tainter argues that this is a comprehensive
explanation for the historic collapse of civilizations—one that has obvious implications for
our own society: clearly, if its energy supplies are compromised, its capacity to successfully
deploy complexity to solve problems will be impaired.

All of which suggests that if and when energy sources decline, industrial societies will face
systemic challenges on a scale far beyond anything seen in recent decades. In this essay, I
propose to examine just one area of impact—the realm of politics and governance.
Specifically, I address the question of whether (and which) societies will have a high
probability of turning toward authoritarian forms of government in response to energy
challenges. However, as we will see, energy decline is far from being the only possible driver
of authoritarian political change.

The Anthropology and History of Authoritarianism and Democracy

It is often asserted that democracy began in ancient Greece. While there is some truth to the
statement, it is also misleading. Many pre-agricultural societies tended to be highly
egalitarian, with most or all members contributing to significant decisions. Animal-herding
societies were an exception: they tended to be patriarchal (men made most decisions), and,
among men, elders and those with more property (women, children, and captives were treated
as chattel) held sway. (Herders, whose social relations reflect the harshness of their
environment, typically live in places unfit for farming, such as deserts.) A good example of
democracy completely independent of the Greek tradition is the Iroquois confederacy of the
American northeast, whose inclusive decision-making system incorporated checks and
balances; it served as an inspiration for colonists seeking to design a democratic government
for themselves as they threw off the yoke of British rule.
Early agricultural societies were often rigidly authoritarian. Marvin Harris explained this
development in infrastructural terms: stored grain surpluses required management and
distribution authority, as did irrigation systems. But the appropriation of so much power by an
individual or family required further justification; hence new sky-god religions emerged,
valorizing kings and pharaohs as wielders of divine power. Greece, however, differed from
Egypt and other “hydraulic” civilizations (i.e., ones based on huge irrigation systems): it
enjoyed enough rainfall so that irrigation wasn’t required. Farmers could grow diverse crops
independently, without relying on state controls over water and grain. Hence it was in Athens
that democracy emerged (or re-emerged) as a political system—imperfect though it may have
been (Attica’s total population was likely between 150,000 and 250,000, but free citizens
numbered only 20,000 to 30,000: women, slaves, and foreigners could not participate in the
public process of making decisions).

Prior to the fossil fuel era, Europe enjoyed a significant injection of wealth from its sail-based
pillaging of much of the rest of the world. Merchants, as a social class, began to jostle against
the aristocracy and clergy, previous holders of political power. Wealth and abundant energy
supported the development of science and philosophy, which—when combined with newer
technologies like the printing press—helped usher in the age of reason. The autocratic
rationale for rule, “because God granted me divine power,” no longer seemed reasonable. In
Britain, the monarchy began reluctantly to cede some of its authority to parliament during the
mid-seventeenth century; then, a little over a century later, thirteen of Britain’s colonies in
North America rebelled and formed a federated republic. Revolution in France further stoked
demands throughout Europe and elsewhere—by philosophers and commoners alike—for
wider distribution of political power.

In modern times, industrial expansion based on abundant energy from fossil fuels has led to
urbanization and to the employment of much of the population in factory, sales, and
managerial positions. This detachment of people from land has in turn produced greater
geographic and social mobility, as well as opportunities to organize collective demands for
power sharing (via trade unions and political organizations of all kinds), including women’s
suffrage. Democracy has spread to more and more nations—always kept at least partly in
check by centralized economic and military power. Meanwhile, an ever-greater mobility of
capital, goods, information, and people has also led to the geographic expansion of polities—
nations of larger size, alliances between nations, trade blocs, and an intergovernmental
organization offering membership to all countries (the United Nations).

Now, in all likelihood, comes an era of declining and reversing economic growth, as well as
reduced mobility. Existing forms of government will be challenged. Ultimately, larger
political units may tend to break up into smaller ones, and many democracies may be
vulnerable to authoritarian takeover. But the risks will vary significantly by country, based on
geography and local history.

How Nations Succumb to Authoritarian Takeover

Before exploring those risks, it may be helpful to review the four main ways in which
democracies have changed into authoritarian regimes in recent history.

1. Election of a dictator. Mussolini initially came to power in Italy through election, as


did Hitler in Germany, Ferdinand Marcos in the Philippines, and “Papa Doc” Duvalier
in Haiti. Why do people elect authoritarians? Typically, they do so because they feel
threatened—by a foreign or domestic enemy, or by hard times—and want a strong
man to take charge. Usually the elected authoritarian-in-waiting only assumes
dictatorial power later, without asking the consent of the electorate. For example: in a
recent essay, Ugo Bardi recounts how declining exports of British coal to Italy after
World War I led to an energy famine, which in turn resulted in riots, shifting political
alliances, and the rise of Mussolini and the Fascists.

The following brief representative picture of how an authoritarian leader can take total power
following election is from journalist Tim Rogers, recounting Nicaraguan leader Daniel
Ortega’s ascendancy:

“When Daniel Ortega was elected president in 2006 with a twiggy 38 percent victory,
Nicaragua had a constitutional ban on consecutive reelection as a safeguard against
dictatorship. . . . Eleven years later, Ortega is starting his third consecutive term as president
after rewriting the constitution, banning opposition parties, and consolidating all branches of
government under his personal control. Ortega orchestrated his power grab by polarizing the
country, dividing the opposition, attacking congress, demonizing the press, forbidding protest,
demanding personal loyalty from all government workers, and turning all his public
appearances into campaign rallies for his core base of supporters. He institutionalized his cult
of personality and normalized . . . threats of violence and chaos. . . .”
2. Military coup. The list of military dictatorships in recent decades is long. Clayton
Thyne and Jonathan Powell maintain a coup dataset, according to which there were
457 coup attempts worldwide from 1950 to 2010, most by military factions. Of these,
about half were successful. The reason military putsches are so common is not hard to
discern: the taking of power by armed force is likely to be most often—and most
successfully—attempted by those who are already professionalized wielders of
weaponry.
3. Foreign interference or foreign support for a coup. If a powerful nation wishes to
exert near-total control over a weaker country, one of the most effective ways to do so
is to install a puppet dictator who can then be bribed and threatened. This is a strategy
the United States has deployed often, beginning early in the twentieth century with its
support for dictators in Central and South America. Also, in the early 1950s, the U.S.
supported Shah Pahlevi over Iran’s elected President Mohammad Mossadegh, leading
to decades of dictatorship there. However, the U.S. is far from the only country to
have ruled other nations by remote control: Britain, France, and Russia/USSR did the
same in one instance or another.
4. Revolution. Most revolutions are fought against authoritarian regimes or foreign
rulers. On rare occasions, however, the people—typically a rambunctious faction of
the people—attempt to overthrow an elected government in favor of a would-be
dictator. Such revolutions are usually more accurately described as civil wars. Coups
in which an elected leader is overthrown in favor of an authoritarian with the help of
foreign influence can be stage-managed to appear as revolutions (this happened in the
case of Mossadegh in Iran). More frequently, however, revolutions that are widely
intended to result in democratic reforms eventually result in the coalescing or
emergence of an authoritarian regime (for example, in France at the end of the 18th
century, in Russia in 1917, in China in 1949, in Cuba in 1959, and in Cambodia in
1963).

Risk Factors for Authoritarian Takeover

Economic decline led by energy decline probably won’t automatically result in despotism,
just as industrialism and economic expansion didn’t everywhere lead to democracy. What are
the circumstances that are likely to push nations to adopt more authoritarian governments?

Below are some notable risk factors (this is not an exhaustive list). From here on, I will
occasionally refer to the Democracy Index (compiled by the UK-based Economist
Intelligence Unit), which seeks to measure the state of democracy in 167 countries based on
60 indicators.

 Economic decline or instability. Periods of high joblessness, disappearing savings, and


declining incomes can lead to widespread dissatisfaction with government, offering an
opening for demagogues, military coups, revolutions, or foreign takeovers.
 Weak democratic institutions with a short history. Democracy is a habit that needs
reinforcement. It also needs institutions—parties and election machinery (polling
places, fair counting of ballots, etc.). If those institutions have shallow roots, it is
easier for them to be undermined or corrupted.
 Dysfunctional media. Democracy only functions if the public is well informed with
regard to issues and the actions of government. Media organizations can become
weak, dominated by special interests, polarized, or suppressed by government. Their
ownership can be consolidated by a few companies with similar political interests. In
our current age of electronic information, media are vulnerable to outright propaganda,
“fake news” (i.e., reporting characterized by ideologically spun, inaccurate, or even
wholly invented stories), and the clever use of social media (bots and trolls).
 High and growing levels of economic inequality. Some of the early observers of
democracies, including Toqueville, noted that procedural democracy (equality before
the law, universal voting rights, the right to express oneself in the political sphere) can
be undermined by the power of wealth. Rich people can buy influence in ways both
obvious and subtle. This is why healthy democracy is often correlated with
progressive taxation and the availability of government-run social programs for those
who are unemployed, retired, or sick.
 Simmering resentments among social/racial/religious/ethnic groups, offering fodder
for scapegoating. In hard times, demagogues can play upon such resentments to gain
support and take power.
 Deep political polarization. Polarization drains people’s attention from areas of shared
interest and potential cooperation, and focuses it instead on points of disagreement. As
each party demonizes the other, former political extremists may find their way into the
mainstream. Polarization can offer an opening for a demagogue who promises to
trounce the opposition party once and for all, if given dictatorial powers.
 Weak financial systems heavily dependent on debt. As economic historians have
shown, heavy reliance on debt always results in an eventual financial crash. See
“economic decline” above.
 Special vulnerability to foreign influence or takeover. If a country is militarily weak
but has a strategically significant geographic location (for example, along the route of
an important oil or gas pipeline), or if the country happens to possess strategically
important resources (minerals or fossil fuels), more powerful nations are likely to have
a keen interest in keeping that country controllable.
 A powerful military with a history of domestic intervention. If social chaos ensues for
whatever reason, the military is likely to step in; and when it does it is more inclined
to install a dictator than to restore or build a democratic system. That’s because the
military itself, in virtually every nation, has an authoritarian internal structure. (The
Iroquois insisted that peace chiefs be different from war chiefs—an idea borrowed by
the framers of the U.S. Constitution, which specifies that no acting military leader may
assume the presidency).
 Special vulnerability to climate change or other environmental disasters. People don’t
inevitably turn to strong leaders after natural disaster. Over the short term, they tend
instead to band together. Old grievances tend to be temporarily forgotten, and
distinctions between rich and poor are at least somewhat erased. However, over the
longer term, ecological disruption can lead to scapegoating and either revolution or a
turn toward strong men who promise to restore order. For example, the Syrian civil
war, which began in 2011, was preceded by a long and devastating regional drought
linked to climate change; refugees from the countryside flooded cities, straining
infrastructure already burdened by the influx of some 1.5 million refugees from the
Iraq War. These refugees provided recruits for the Free Syrian Army, which rebelled
against the authoritarian Assad regime.
 High population growth rate. Nations with high fertility rates typically find it difficult
to overcome poverty, absent a robust resource-exporting economy. Indeed, of the ten
nations that currently have the highest population growth rates (Lebanon, Zimbabwe,
South Sudan, Jordan, Qatar, Malawi, Niger, Burundi, Uganda, and Libya), seven have
fully authoritarian regimes according to the Democracy Index, while three have
“hybrid” governments; only two (Qatar and Lebanon) have a per-capita GDP higher
than the world average. As world energy declines, countries with fast-growing
populations will probably see higher-than-typical per-capita decline rates in energy
usage, likely leading to economic and social instability.

Most of the above might be considered generic risk factors, in that they apply to all societies
even without taking energy decline into account. Other risk factors are more directly related to
potential energy supply problems:

 A high dependency on food imports. History has shown (for example, in Egypt in
2011) that food shortages can rapidly lead to social unrest and ultimately to revolution
or authoritarian takeover. High food import dependency is therefore a point of
vulnerability in societies given the likelihood that energy decline will also entail a
decline in mobility, including the movement of food and other necessary goods.
 Government’s budget tied to fossil fuel export revenues. If a government derives most
of its revenues from fossil fuel exports, it will eventually face a declining revenue
stream. Even Saudi Arabia, which has been a top oil exporter for decades, recognizes
this (it is an authoritarian monarchy; several other major oil exporters are likewise
classified as authoritarian regimes by the Democracy Index). Norway has sought to
prepare for the inevitable by saving its oil export revenues in a permanent investment
fund; currently that nation enjoys the highest rating of any country on the Democracy
Index, and its citizens also rank high in terms of per capita income and self-reported
happiness.
 High per capita energy usage. Countries that have high per capita rates of energy
usage have further to fall as energy becomes harder to produce. Countries with low
rates of per capita usage typically already have ways of meeting basic needs relatively
simply and directly—with a higher percentage of the total population engaged in food
production, and a more robust informal economy.
 High dependency on energy imports. If heavy dependence on revenue from fossil fuel
exports can constitute a vulnerability for democracies, heavy dependence on imports
can as well. Even though the U.S. was a major oil producer throughout the twentieth
century, by 1970 it was increasingly dependent on imported crude; hence it faced
economic hardship due to the 1970s Arab oil embargo.

There is something missing from these lists that is hard to define but nevertheless crucial to
our present discussion. Perhaps Pankaj Mishra captures it best in his recent, difficult book,
The Age of Anger. There he describes how, from its beginnings in the eighteenth century,
modern capitalist, urban, industrial life disrupted previous patterns of settled existence. People
lost their connections with land and tribe, and traditional livelihoods, and hence some
essential aspects of their identity. In return, economic liberalism promised mobility, comfort,
and intellectual and moral advancement. Instead many experienced anonymity and alienation,
and the result was widespread resentment. This in turn led to decades of revolution and
terrorism in Europe throughout the nineteenth century, with many prominent assassinations
(U.S. President McKinley, French President Marie François Sadi Carnot, Bavarian Prime
Minister Kurt Eisner, Russian Czar Alexander II, Serbian King Aleksandar Obrenović,
Spanish Prime Minister Juan Prim, and many others) as well as bombings and other violent
events.

Today urbanization, commercialization, and technological disruption are proceeding at a


faster pace than ever and reaching billions in formerly rural nations in East and South Asia,
the Middle East, and Africa. Millions of young people are being educated for life as
consumers and workers, yet are finding the promises of “development” ringing hollow.
Unemployment rates among young males are often very high in these nations, and young men
educated for urban industrial life are being attracted to militant fundamentalism. The rise of
militant fundamentalism, along with high rates of immigration from fast-urbanizing countries,
generates fear in the first-wave industrialized countries—a fear that leads to a rise in
“traditionalism” and a turn toward authoritarian leaders who promise to suppress terrorism
and reduce immigration. In effect, for both the young Islamist radical and the older Trump
voter, tribalism is a powerful motivator. We will return to this subject later as we consider
ways to counter or mitigate risks to democracy.

Typically, a surplus of unemployed young males also increases the likelihood of war. During
wartime, the combatants gain a sharper sense of meaning and purpose. Democracy seldom
flourishes during war, though it can persist and blossom anew afterward.

Clearly, nations are in widely varying circumstances, with different areas and degrees of
vulnerability to energy decline; and they are thus likely to react differently to the ensuing
economic stresses. Full “democracies” according to the Democracy Index (Norway, Canada,
New Zealand, etc.) are probably best situated to respond in ways that preserve democratic
institutions and traditions. Nations currently listed by the Democracy Index as “flawed
democracies” (United States, Philippines, Indonesia, etc.) are probably most at risk of shifting
further toward authoritarianism via election. Countries that are currently “hybrid states”
(Turkey, Venezuela, Pakistan, etc.) or “authoritarian” (Russia, Egypt, China, etc.) are more
likely to experience revolutions or coups.

Countering the Risks to Democracy

How could nations in the “democracy” or “flawed democracy” categories resist a tendency to
slide toward authoritarianism? It stands to reason that, if risk factors are present, reducing
vulnerability would entail countering those factors as much as possible:

 Build and support independent media. Governments and leaders should resist the
temptation to favor media outlets that simply parrot their own talking points, or that
disparage current leaders’ enemies. Maintain full press freedoms, including legal
protections for journalists.
 Work to limit climate change and other ecological drivers of human misery. This
includes not only efforts to adapt to higher sea levels, but also to reform agricultural
practices (carbon farming) and dramatically reduce carbon emissions in transportation
and manufacturing.
 Work to reduce extreme political polarization. Avoid wedge issues. Nations with more
than two major parties sometimes fare better at avoiding polarization.
 Support and strengthen democratic institutions. Prioritize fair elections (universal
voting rights, public financing of campaigns, limits to campaign contributions, plenty
of accessible polling stations that are open a sufficient number of hours, transparent
methods of ballot counting).
 Promote tolerance. For a nation, ethnic, religious, and cultural homogeneity can be an
asset in avoiding political unrest during hard times. But many nations are ethnically,
religiously, and culturally diverse, and any effort to reduce that diversity would
necessarily entail human rights violations. Nations with diverse populations must
simply make the best of the situation, celebrating and honoring their diversity and
protecting minorities.
 Discourage inequality. Most nations already counter economic inequality through
progressive taxation and social welfare programs. But economic stresses from energy
decline will require more creative thinking and experimentation, including
encouraging worker-owned cooperatives and discouraging shareholder-owned
corporations; implementing high inheritance taxes with no loopholes; and finding
ways to reduce the role of debt in society.
 Minimize power of military and intelligence agencies. Keep the military separate from
governance institutions. Keep the military budget within modest bounds. Don’t over-
glamorize the military. And don’t permit “black ops” or domestic surveillance.
 Build low-energy infrastructure, habits, informal economy. This implies a change of
direction for most nations, which tend to be hooked on large-scale infrastructure
projects (highways, airports) that lock in energy dependency. Promote low-energy
ways of providing for basic human needs, such as solar hot water heaters and cookers,
walking, and bicycling.
 Promote population stabilization. Support family planning and elevate the social
status of women.
 Build local food production capacity. Support small farmers, local food, and
agriculture that minimizes dependence on fossil fuel inputs.
 Stabilize the financial system. Reduce reliance on debt in every way possible,
shrinking the size of the financial system relative to the “real” economy of goods and
services.
 Decentralize both the economy and the political system. Encourage distributed energy,
local currencies, and local food. Allow city and regional governments to make all
decisions except those that require national or international deliberation.
 Avoid being the target of foreign political meddling. Maintain vigilance with regard to
electronic and propaganda warfare. Don’t take on big international loans.

These recommendations are far easier to spell out than to carry out. And at least two of them
are seemingly at odds with each other: a nation that keeps its military and defense budgets at
minimum levels might be more likely to be the target of foreign meddling or intervention.
Further, while most democracies are making at least some efforts along some of these lines, in
many cases they are being overwhelmed by trends toward increasing polarization of politics
and media, and increasing economic inequality.

Further, most of the above recommendations fall within the bounds of modern liberal norms
and discourse. But, as we have seen, the entire project of industrial and social “progress,” as
framed within the liberal economic tradition, has produced whole classes of casualties and
rebels. The endemic risks to urban, capitalist, industrial societies stemming from the
resentment and alienation described by Mishra—that lead increasingly to terrorism, religious
fundamentalism, and authoritarianism—are inherently difficult to track or counter. To defuse
this deep, amorphous threat to democratic values and institutions, perhaps something more is
needed beyond the mere strengthening of media and democratic institutions—something that
ties people back to the land and gives them both a “tribal” identity and a larger sense of
purpose. A new religion might fit the need, but it is difficult to summon one at will. If
advocates of democracy and cultural pluralism continue to fail to fill this void, authoritarians
of various stripes will certainly seek to do so.

Are Dictatorships or Democracies Better at Responding to Energy-Economy Decline?

In the contemporary world, democracy is widely (though not universally) prized over
authoritarian forms of government. This is certainly understandable: authoritarianism leads to
the regimentation of thought and behavior, and often to the subjection of large segments of
the population to psychological and/or physical violence. But are democracies inherently
superior to authoritarian regimes in dealing with crises such as energy decline, climate
change, resource depletion, overpopulation, and financial instability?

To adapt proactively to environmental limits and impending scarcity, governments may have
to do some unpopular things. Restrictions on consumption (such as rationing) may be
required, along with the encouraging of smaller families. Such policies cannot help but rankle,
following decades of rising economic expectations. Economic redistribution could help
reduce the stress of scarcity for a majority of the populace, but many will still resent the new
conditions. Elected leaders may find it difficult to maintain sufficient popular support for such
policies. Could authoritarian regimes fare better? A few historic examples come to mind.

During the early 1990s, Cuba saw a sharp decline in energy supply due to a cutoff of low-cost
oil imports from the now-defunct Soviet Union. At the time, Cuba’s food system was highly
centralized and dependent on oil-fueled farm machinery and food transport. Cuban leaders
responded to the crisis by decentralizing food production, reducing fuel inputs, and
encouraging urban gardening. The result was a rapid and thorough restructuring of the
nation’s food system that averted widespread famine. It is unclear whether such measures
would have been feasible outside a command-and-control authoritarian political context.
Both China and Iran managed to substantially reduce their nations’ high birth rates—China
(beginning in the 1970s) via its compulsory one-child policy, and Iran (starting in the 1980s)
through vigorous but voluntary family planning efforts. Both nations formulated and managed
these programs via top-down, centralized, and authoritarian methods.

These examples might suggest that authoritarian regimes are inherently more resilient than
democracies. However, there are instances where authoritarian regimes have instead proven
brittle. For example, when Soviet Union failed to deal with economic decline in the 1980s the
government collapsed, as did the nation’s economy. In contrast, some democracies (such as
the U.S. during the Great Depression and Britain in the 1930s and ’40s) have persisted during
privation, though somewhat authoritarian temporary measures were instituted, including
greater control of the media by government.

Many authoritarian regimes are poorly situated to help the populace weather economic crisis
simply because their leaders are too obsessed with self-enrichment, self-aggrandizement, and
self-protection. It could be argued that if a society is already impoverished due to the
incompetence of its authoritarian leadership, its people will have fewer expectations to be
dashed, and their standard of living will not have as far to fall before hitting subsistence level.
But this is faint encouragement. There must be some better recommendation for today’s
nations than “crash your economy and suppress your people’s aspirations now, so that they
won’t be disappointed later.”

* * *

The relationship between energy, the economy, and politics is messy and complicated. There
is not a simple 1:1 correlation between energy growth and economic growth: the Great
Depression occurred in the United States despite the presence of abundant energy resources.
Similarly, there will probably not be a strict correlation between energy decline and economic
contraction.

One important wild card is the role of debt: it enables us to consume now while promising to
pay later. Debt can therefore push consumption forward in time and (for a while, at least)
make up for declining energy productivity. It would appear that the “fracking” boom of the
past decade, which probably delayed the world oil production peak by about a decade,
depended on the power of debt. But when debt defaults cascade, an economy may decline
much faster than would otherwise be the case (default-led financial crashes have occurred
repeatedly in modern history). And debt defaults can cripple the financial and thus the
economic system of a nation with plenty of energy resources (as happened in the U.S. in the
1930s).

As we have seen, dictatorships can sometimes adapt well to scarcity. We can only hope that,
if scarcity does indeed lie in our immediate future, authoritarian leaders will minimize rather
than add to their people’s suffering. Similarly, we should hope that everyone in democracies
has access to information that helps them make collective choices that lead to successful
adaptation to inevitable, impending scarcity. Unfortunately, flawed democracies may be
particularly vulnerable when energy supplies decline. Given their political polarization and
saturation with “fake news,” they are more likely to succumb to demagogues who promise to
return the nation to a condition of abundance if granted extraordinary powers.
It is highly likely that, as events unfold, the causal criticality of energy decline will be hidden
from the view of most observers, whose attention will be fixed instead on shocking but
comparatively superficial and secondary political and social events. A more widespread
understanding of the role of energy in society, and of the likely limits to future energy
supplies, could be extremely beneficial in helping the general populace adapt to scarcity and
avoid needless scapegoating and violence. Perhaps this essay can help in some small way to
deepen that understanding.

GDP, Jobs, and Fossil Largesse


By Nate Hagens, D.J. White, originally published by Resilience.org

 November 30, 2017

Working drafts copyright ©2010-2017 NJ Hagens & DJ White, EarthTrust

Ecological economist Nate Hagens and earth-advocate DJ White (of Earthtrust.org) are
collaborating on a synthesis paradigm to inform and engage on the converging crises
of “peak everything”, with a working project title Bottleneck Foundation. The “remedial
reality” part of the paradigm has been taught by Nate for the last 3 years as an honors’
college course at the University of Minnesota, “Reality 101 – A Survey of the Human
Predicament’ . The essay below is an excerpt of what is becoming a large (~1,000 pages)
body of work, with an objective to be an educational platform for college students worldwide.
When finished, it will be paired with a next-phase set of materials – code name R201 – on
how to use this knowledge to more effectively achieve change in the human world.
First, some review of relevant points
from earlier in semester:

BASIC

1. Fossil carbon compounds are incredibly energy dense, as their formation and
processing was done by geologic forces over deep time. One barrel of oil contains
about 1700 kWh of work potential.46 Compared to an average human work day where
0.6kWh is generated, one barrel of oil, currently costing under than $50 to global
citizens, contains about 10.5 years of human labor equivalence (4.5 years after
conversion losses).47
2. As such, these ‘fossil slaves’ are thousands of times cheaper than human labor.
Applying large amounts of these ‘workers’ to tasks humans used to do manually or
with animals has generated a gargantuan invisible labor force subsidizing humanity –
building the scale and complexity of our industry, complexity, population, wages,
profits, etc.
3. GDP – what nations aspire to – is a measure of finished goods and services generated
in an economy. It is strongly correlated with energy use, and given that almost 90% of
our primary energy use is fossil fuels, with their combustion.48 ‘Burning stuff’
(measuring how much primary energy is consumed) is a reasonable first
approximation for GDP globally.
4. Outside of nuclear and hydro, ~99.5% of ‘labor’ in human economies is done by oil,
coal and natural gas (measured by joules of output). Due to this cheap embodied
labor residing in fossil carbon compounds, the average human being in 2016 enjoys
14x the goods and services as the average human being in the year 1800. (the average
American=> 49x).
5. Regionally and nationally this relationship can decouple if the ‘heavy lifting’ of
industrialization is done elsewhere, and the goods (and embodied energy) imported.
(e.g. China). The relationship between global energy use (which is ~87% fossil fuel
based) and GDP remains tightly linked.49

ADVANCED

6. The common political mantra that higher GDP creates social benefits by lifting all
boats has become suspect since the 2008 recession and ‘recovery.’ For the first time
in the history of the USA, we now have more bartenders and waitresses than
manufacturing jobs.50 In order to maximize dollar profits, it often makes more sense
for corporations to mechanize and hire ‘fossil slaves’ than to hire ‘real workers.’ Real
income peaked in the USA around 1970 for the bottom 50% of wage earners.51
7. GDP only measures the ‘goods’ and doesn’t measure the ‘bads’ (externalities, social
malaise, extinctions, pollution). Actually, natural disasters like oil spills and
hurricanes are ostensibly great for GDP** because we have to build and burn more
stuff to replace the damaged areas. (**Note, only to a point – once a country – e.g.
Haiti or the Philippines – cannot afford to replace what was lost, then natural
disasters become a sharp negative to GDP as infrastructure underpinning future GDP
is lost and can’t be rebuilt)
8. On an ‘empty planet,’ pursuing GDP in order to gainfully employ people (and
distribute money so they could buy needs and wants) seemed to make sense. However,
on an ecologically full planet pursuing GDP with no other long-term plan is using up
precious natural capital stocks just to maintain momentum and provide people brain-
pleasing neurotransmitters.
9. There are numerous alternative measures to GDP that incorporate well-being and
happiness and subtract environmental ills. But it won’t be easy to switch objectives
from GDP to e.g. G.P.I. (Genuine Progress or Happiness) because the present
creditors will expect to be paid back in real GDP ($) rather than happiness
certificates. Still, over time, strict metrics of success based on consumption alone are
likely to change.
10. There will likely be a growing disparity between ‘jobs’ (occupations that provide
income and contribute to the global human heat engine) and ‘work’ (those tasks that
need to be accomplished by individuals and society to procure and maintain basic
needs). However, at 2016 USA wage rates, moving from $20 per barrel (the long-run
average cost for oil), to $150 per barrel, the army of energy slaves declines from
22,000 per barrel to under 3,000 – meaning the economy shrinks and therefore much
more work needs to be accomplished via efficiency improvements, real humans, or
making do with less.
11. Our institutions and financial systems are based on expectations of continued GDP
growth perpetually into the future. Current OECD (2015) forecasts are for more than
a tripling of the physical size of the world economy by 2050. No serious government
or institution entity forecasts the end of growth this century (at least not publicly).

Okay. Let’s unpack all of this a bit.

Often in the news today, you’ll hear people talking about job growth and job creation like it’s
a good thing. Everybody wants a good job, right? The more jobs we have to do, the better off
we are!

Yet if you kick open an anthill or a beehive, the insects will not be grateful for the sudden
boost in job creation, and they will effectively utilize the cross-species language of biting and
stinging to inform you of this opinion. From this we may infer that insects don’t understand
economics

Alternately, it could it be that ants – having honed their behaviors for 130 million years and
having attained a total biomass we have only recently (and temporarily) matched – might be
in tune with some deep realities about jobs, energy, and the embodied cost of building
complexity.
Since this is Reality 101, let’s ask some basic questions. What ARE jobs, really? How do they
relate to energy and wealth? How do we keep track of whether we’re richer or poorer? We all
kinda feel like we know. And (as a general rule) whenever “we kinda feel that we know” is the
case, we should probably take a closer look.

To do so, we’ll first need to add a few things to our story about ants. We need to revisit our
invisible energy slaves, discover what “freaks out” capuchin monkeys, and think about what
wealth actually is.

Energy Slaves again

As you recall – and as we’ll discuss in greater detail as the course goes on – every American
has over 250 invisible energy slaves working 24/7 for them. (52 That is, the labor equivalent
of 250 human workers, 24/7, every day of the year, mostly derived from burning fossil carbon
and hydrocarbons (60 barrel of oil equivalents of oil, coal and natural gas, X 4.5 years of
human labor energy output in each). Every American thus has a veritable army of invisible
servants, which is why even those below the official poverty line live, for the most part, lives
far more comfortable and lavish with respect to energy and stuff than kings and queens of old
(but obviously not as high in social status). Being long dead and pulled from the ground – and
thus a bit zombie-esque – these energy slaves don’t complain, don’t sleep, and don’t need to
be fed. However, as we are increasingly learning, they do inhale, exhale, and leave behind
waste. Since they’re invisible, we don’t think about these fossil helpers any more than we
think about nitrogen (which happens to be 78% of what we breathe in, but hey, it’s just
“there”, so why think about it?) Same with our 250 energy helpers. The extent we think about
them is when we fill up at the pump or pay our electric bill – and then only as an outlay of our
limited dollars.

We use the “slave” metaphor because it’s really a very good one, despite its pejorative label.
Energy slaves do exactly the sort of things that human slaves and domestic animals previously
did: things that fulfilled their masters’ needs and whims. And they do them faster. And
cheaper. Indeed, it probably wasn’t a big coincidence that the world (and the USA) got around
to freeing most of its human slaves only once industrialization started offering cheaper carbon
labor replacements.

The things we value are created with a combination of human and energy-slave work
combined with natural capital (minerals and ores, soils and forests, etc.). There are huge
amounts of embedded energy in the creation and operation of something like an iPad and the
infrastructure which makes it work. When we tap our screen to view a kittycat picture, the
image is pulled from a furiously spinning hard drive which may be halfway around the planet,
propelled by some fossil slaves, and routed through data centers which are likewise fueled.
The internet uses over a tenth of the world’s electricity – that’s a lot of energy slaves.53 The
infrastructure itself has taken decades to build, and requires constantly increasing energy to
maintain. But we don’t think much about that either.

So the internet is infrastructure we have invested energy in, just like a built anthill has been
invested in with ant labor. If the internet (or an anthill) was destroyed and needed to be
rebuilt, that situation would certainly create jobs. But it would also require a lot of energy,
raw materials and work. Ants don’t have energy slaves, so they don’t want more work to do.
They are dealing with finite energy inputs in their ecosystem. If more energy (ant-labor) is
devoted to rebuilding the anthill, less energy is then left to care for the larvae, forage for food,
and defend the hive.

Energy slaves don’t care either way about job creation. (Being zombies and all). But why do
we?

Everybody wants a good job.

Remember this, because it’ll come up again and again in Reality101: evolution works with
what it’s got. It’s a stepwise process, and each step is based on what was available in the step
before. This is true both for biological and social evolution. That’s why there are no animals
on the Serengeti with wheels: there’s no viable path to evolve wheels from feet, because even
if there was a way of designing animals that had wheels, there are no viable intermediate
stages. Hold that thought…

Now in times past, a human’s career, their societal function, was largely about their own
individual labor and skills. A blacksmith worked with metal. A cooper made barrels. A
shoemaker made shoes. Others made furniture, cloth, or other valuable commodities. Farmers
created food. Preachers preached. Others did simpler labor like digging ditches or cutting
down trees. The relative value of their labor was roughly set by how much other humans
valued the end product of such labor, so a skilled blacksmith might be able to trade his
services for more status and better accommodations than a ditch digger. Thus, it became an
integral part of human culture that the products of some work were considered more valuable
than others. It became a mark of social status and pride to have such a career. Hold that
thought too, we’ll be coming right back to it.

Cue the Screaming Monkeys.

“Equal Pay for Equal Work” is currently the slogan for those opposed to sexual
discrimination, which is usually characterized by women getting paid less than men. And it’s
a sentiment which has deep roots in the ape and even simian mind.

If you give capuchin monkeys the “job” of doing a nonsense task in exchange for a reward,
they will happily do it all day long as long as they keep getting a reward – cucumber slices.
But if a capuchin sees the monkey in the next cage get a (better tasting so higher value) grape
while it still gets a cucumber slice, it’ll go ape, throwing the cucumber slice in the face of the
experimenter in a rage. It gets the same cucumber slice it has been happy to work for before,
but it no longer wants it, because it no longer feels fair in comparison to its cage mate’s effort
and reward. Instead, it wants the experimenter and the other monkey to be punished for this
inequity (we watched this video of Frans deWaals experiment in class).54

Think for a moment how central this monkey reaction is to the human world around you.
We’ll come back to it later in the course, and will refer to the term “capuchin fairness”
because a similar mechanism turns out to be behind a great deal of human behavior. We’re
outraged at the notion of somebody getting more reward than we do for doing the same thing.
Indeed, many large-scale human institutions now stress perceived fairness of process over
quality of end results. (A prominent example might be the US Congress). Moreover, this
monkey-business also reiterates the concept of relative wealth being more important to a
monkey mind (and a human mind, it turns out) than absolute wealth, which is kind of nuts,
but that’s monkeys for you.
It turns out that our brains are simultaneously trying to optimize two different, and somewhat
incompatible pursuits, both of which have deep evolutionary roots in our social species. One
is energy gathering and wealth creation: obtaining food, procuring clothing and shelter –
basically optimal foraging theory applied to the human biological organism. The other is
equitable social distribution and transparency of process. A tribe of hunter-gatherers needed
to cooperate as a mini super-organism to get food and defend territory and stand together
against competitors. But within the tribe, an individual’s success depended on it getting a
reasonable share of what the tribe had. We’re descended from tribe-members who insisted on
at least their fair share, as is every living capuchin, so it’s not surprising it’s such a strong
feeling. But when both of these instincts are operating simultaneously, in an era where our
species happened upon a buried treasure of fossil pixie dust, some interesting practices
emerged…

Ok. Ants. Monkeys. Energy Slaves. So where did “jobs” come from?

A funny thing happened on the way to the Anthropocene. To an ever-increasing degree over
the last two centuries, wealth has been created more by fossil slaves than by human labor,
significantly more – and it’s at its all-time peak about now. (you’ll have the information to
derive this yourself by the end of this course).

If you don’t believe that, try hiring a bunch of people to push you and your SUV around
hundreds of miles per week with their own muscles and see what it costs you, and then see
how little it costs you to buy the same work in a tank of gasoline. In fact, the vast majority of
the tasks and stuff that used to be done by human labor is now done by fossil slaves and the
infrastructure they have enabled. The slaves have also made shipping nearly free, so any
actual human labor we need can also be hired in the cheapest places on earth (under
essentially slave labor conditions), and shipped to us by planes, trains, ships and trucks for
next to nothing. So rather than buying furniture from local artisans, we make local firms
compete with furniture made halfway across the world which is cheaply shipped to a local
store. To a good first approximation, the USA doesn’t make anything anymore (well,
movies…).

We have amassed a huge amount of wealth, even if much of it is dumb stuff like plastic toys
and salad shooters and things that quickly break. There are so many things we think we want,
so we get them. We eat salads with fresh veggies which may be grown 5000 miles away and
air-flown to our stores by energy slaves running the planes, refrigerators, trucks, and stores.
The average dinner travels over 1400 miles to get to your plate in USA.55

We increasingly buy disposable everything – used once and tossed away. Most everything is
short-life these days; when your authors were young if you bought a fan, you expected it to
last 20+ years. Now if it lasts 2-3 before you toss it, that’s about par for the course. Planned
obsolescence exists because it’s “good for GDP.” A new dishwasher now lasts 6-8 years when
it used to last 12-16, because they now have integrated cheaper electronics that fail. Our GDP
has become tethered to rapid product-replacement cycles keyed to our short attention spans
and our enjoyment at buying new things. This creates “jobs” for car salesmen, advertising
executives, etc., but has tilted the scales in favor of “useless GDP” rather than real societal
utility. We know how to make things with high quality that last, but due to time bias and the
financialization of the human experience, such an objective is relatively unimportant in our
current culture. Many people get a new phone every 18 months with their cell plan, and
perfectly functional ones wind up in the landfills.
But how should we distribute the largesse of the energy slaves? Does everyone get equal
shares? Do we take the total number of dollars (which is the way we count such things)
created by energy-slave work and divide them equally among the population?

Heavens no. We haven’t yet even acknowledged that the energy slaves are responsible.

Rather, with a bit of help from opportunism, social evolution co-opted the pre-existing “work
for pay” concept into an uneven distribution system that “felt” fair.

These days there are a lot of jobs in the USA, which keep us very busy not making much of
anything of long term value. We do advertising, hairstyling, consulting, writing, and a lot of
supervising of the things our fossil slaves do. We don’t care all that much what we’re doing as
long as we feel we’re getting paid at least as well for the same task as the other capuchins –
er… people – around us, and that with our compensation we can buy things that give us
pleasing brain-reward experiences. These days in this culture, a “good job” is defined by how
much it pays, not by what it accomplishes. Many people would consider it an optimum
situation, a great job, to sit in a room for 40 hours per week and make $100,000 per year, just
pulling a lever the way a capuchin does for a cucumber slice. You know they would (would
you? Think about it. Now think about how that compares to the career you’re currently
planning).

And that’s where the perceived equality is: the equality of inconvenience. The 40-hour work
week is a social threshold of inconvenience endured, which is now what we keep primary
social track of rather than the productive output of a person’s activity. In 1930 John Maynard
Keynes predicted that wealth would increase 600% in the next century (which is only 15 years
away) and because of this wealth, people would only need to work 15 hours per week.56 He
was right about our wealth increase, but paradoxically, we are working longer hours than
ever! Because socially, everyone who isn’t a criminal is supposed to have a job and endure
roughly equivalent inconvenience. Any segment of society which went to a 15-hour work
week would be treated as mooching freeloaders, and be pelted by cucumber slices and worse.

In a society in which we’re all basically idle royalty being catered to by fossil slaves, why do
we place such a value on “jobs”? Well, partly because it’s how the allocation mechanism
evolved, but there also exists considerable resentment against those who don’t work. Think of
the vitriol with which people talk about “freeloaders” on society who don’t work a 40-hour
week and who take food stamps. The fact is, that most of us are freeloaders when it comes
down to it, but if we endure 40 hours of inconvenience per week, we meet the social criteria
of having earned our banana pellets even if what we’re doing is stupid and useless, and
realized to be stupid and useless. Indeed, a job that’s stupid and useless but pays a lot is
highly prized.

So “jobs” per se aren’t intrinsically useful at all, which is why ants don’t want more of them.
They’re mostly a co-opted, socially-evolved mechanism for wealth distribution and are very
little about societal wealth creation. And they function to keep us busy and distract us from
huge wealth disparity. We’re too busy making sure our co-workers don’t get grapes to do
something as radical as call out and lynch the bankers. Keeping a population distracted may
well be necessary to hold a modern nation together.

And since most of our wealth comes from invisible, mute slaves we don’t even think about, it
isn’t clear to us that what we’re actually doing in current economies is distributing the wealth
they create. That means we can now have wild disparities in pay, as long as it “feels like”
others are doing something qualitatively different. The amount paid to a wall street vice
president is hugely greater than that paid to a college professor, which in turn is greater than
that paid to an environmental campaigner. This has pretty much nothing to do with the
relative worth of each function to society, and everything to do with how well-connected such
jobs are to the flow of energy-slave-created wealth. Yet if higher pay is received by someone
in another “tribe” who we don’t directly interact with, we don’t feel the urge to scream and
throw our paycheck. We just wish we had a “better” job.

If we reflect on the possibility that we have en-masse simply accepted the premise that the job
is somehow paid what it’s worth, we arrive at some disturbing conclusions. Is a teacher,
farmer, or fireman really of less value to society than a real-estate flipper? The amounts paid
for jobs have been allowed to float freely, detached from actual societal value as the degree of
political connectedness of those with such jobs varies. The vast majority of our wealth comes
from primary natural capital in tandem with fossil slaves and from the fruit of empire; jobs are
mostly an ad-hoc mechanism for distributing this wealth unequally in a way which effectively
conveys the illusion of egalitarian process.

For now, are most of us just idle princes and princesses in a fossil-slave kingdom, none of us
really at huge risk, and mostly doing things which have little net value? And what happens
when our fossil slaves grow wings and fly away into the atmosphere? What will the princes
and princesses do then.

That’s just Gross.

This leads us to the story of how we keep track of our wealth and productivity and success.
How DO we keep track of that collective wealth anyways?

Well for real wealth, mostly we don’t. The value of a healthy ecosystem, clean air, seas full of
fish, fresh drinkable water… love, joy, happiness and fulfillment… all these things our market
system considers to be of essentially zero value. Armadillos, dolphins, hummingbirds,
rainforests… you get the idea

But our economists have a metric called “gross domestic product” GDP which is what our
society uses to roughly keep track of our ‘success’. It represents the dollar value of all finished
goods and services produced in a time period (typically, a year) within a nation’s borders.
Since that other stuff- you know, the natural world- doesn’t consist of finished goods and
services, it isn’t counted (now if you kill the hummingbirds and make them into ornaments for
hats, or turn armadillos into ashtrays, they then can be added to GDP because they’re now
products which are “finished”!).

The fact that parts of the environment which have been “finished” are considered more
valuable than parts which are “unfinished” is one way in which GDP sets a fairly screwy
default value in our current world. It’s a tacit societal value system: anything without a
transacted money value isn’t part of GDP. So a nation which chops down all its trees to sell to
another country for firewood has a better GDP than one which leaves its trees standing. It’s a
funny way to figure wealth, but it’s what we’ve got. And oh, by the way, we’re betting
everything on it.
GDP is based on money transaction (money is, roughly speaking, a claim on future energy),
and since most current wealth is created by our fossil energy slaves, GDP is directly tied to
the energy burned by society. Indeed, it has recently been shown that GDP is tied to fossil fuel
energy, and thus CO2, in a way which may be described very simply by treating human
society as essentially a giant heat engine. In other words, a very simple model which treats
human civilization as an essentially mindless consumptive system – a thermodynamic amoeba
in search of energy – suffices to match the GDP with the quantity of energy burned.

And over the last 100 years, our burning of energy, and thus our world GDP, has gone
through the roof. The number of dollars representing the wealth created from the burning has
also increased, and exponentially so in the last 50 years, and since the 2008 crisis, even faster.

It may be reasonable to reflect that during this same period, sometimes called The Great
Acceleration, the planet has been largely laid to waste, a mass extinction has accelerated, the
seas have been depopulated of most fish, and the systems which sustain large complex life on
earth have been progressively compromised. Yet we continue to grow the scale of the heat
engine to accomplish the primary objective of the modern human economy: to maximize
dollars and jobs.

Bear in mind that what we’re doing – if we get right down to it – is converting trillions of
watts of fossil-slave energy into a few watts of pleasing stimulation inside our brains.
(alternately: tiny amounts of brain-reward chemicals) And the side-effect of this process is all
around us. Mountains of waste, acidified oceans, altered climates, pollution, mass extinctions,
and mischief. Here we use “mischief” as the general term for things humans do en-route to
pleasing themselves, which may include building racetracks, using disposable diapers, making
wastebaskets out of elephant feet, overbuilding fishing fleets, throwing out our electronics
every two years to replace them with new ones, etc. It doesn’t “feel like” waste at the time.
But if you ask someone in 200 years what percent of fossil magic was wasted, they will likely
say “all of it,” because not much useful fossil fuel (or anything previously built with it) will
likely remain.

The ubiquity of fossil slavery during our lifetimes has caused us to conflate wants and needs.
Most of what we “feel like” we need these days is nothing we evolved to need. Consumerism
is driven largely by social competitiveness. Most capuchins – er…, people – find it more
important to have a bigger house than their neighbors, than to have an even bigger house in a
neighborhood where it’s the smallest one. Relative wealth – it’s not just for monkeys (we and
the monkeys like fairness, but it feels more fair if we’ve got stuff at least as good as the
people we interact with).

And this signaling of status is important socially and sexually. A lot of the things we feel we
need are just for show.

And do you remember the “hedonic ratchet” effect from earlier discussions on bias, heuristics,
fallacies and delusion? To get the same mental stimulation we got yesterday, we require the
expectations of ever-increasing reward. That means more money and more energy slaves. Or
at least the expectation of same.

Happiness is not correlated with wealth beyond having the basics of life covered. Most of the
things which actually make us happy, joyful, and fulfilled are in our virtual mental worlds,
and not in the physical world at all. A Filipino may have only a small percent of the number
of energy slaves as an American, but be every bit as happy, and surveys have shown that to be
true.57 It’s quite possible to be “poor” and happy. Equally, it’s quite possible to be rich and
miserable. Our brains are even primed for it, seemingly.

So where does this leave us?

Well, you already know that our amoeba-like heat-engine of an economy is wrecking the
earth, acidifying the seas, melting the polar caps, causing what could become the greatest
mass extinction in 65 million years, and throwing our future into doubt.

But at least we have our good ol’ energy slaves to continue creating GDP. Right?

Well…

Thing is, the energy slaves will soon be going away forever. In the last 30 years we’ve burned
a third of all fossil energy that has been used since it was discovered thousands of years ago.58
Since your authors have been alive, humans have used more energy than in the entire 300,000
year history of homo sapiens.59 We are just now passing through the all-time peak of liquid
hydrocarbon availability, which is the chief driver of our economies due to its special
attributes.

Each year, basically from now on, most of us will have fewer fossil energy slaves marching
behind us. You’d think this wouldn’t make much difference, right? Since they’re invisible
anyhow? But in fact it’ll make a great deal of difference, because we’re heading back into
times – either gradually or suddenly, but inexorably – in which human labor makes up an
increasing percentage of the total energy we have available. One day human (and perhaps
animal) labor will again be the majority of the work done in human societies – just like it is in
an anthill.

And this will happen in the context of a more used-up natural world. Rather than being able to
catch dinner by throwing a hook in the nearby ocean, the nearest healthy schools of fish may
be ten thousand miles away in Antarctica, and hard to get to without dirt-cheap energy slaves
to make giant refrigerated ships to pursue and move them around for us. The copper mines
will be mostly used up. The inorganic phosphate deposits we used to make fertilizer, mostly
gone. And so on.

Or rather than “gone,” let’s use the more accurate term energetically remote. That is, there
will still be loads of “stuff” underground, but it won’t be the very pure ores of yesteryear. It’ll
be stuff that requires digging up a huge amount of rock for a tiny amount of whatever we’re
after. Because (remember the Easter candy story) we always use the best stuff first. Yet we’ll
be going after worse and worse ore with fewer and fewer slaves. And the heavy breathing of
the fossil slaves will have pulled our seas and climate back towards conditions in which they
were born – a hellish primordial world of toxicity.

This all raises the question – or at least should – of whether it might not be a good idea to set
the fossil slaves free and let them rest, since they’re going away soon anyhow and when they
do we will really need a livable planet. They don’t need jobs, and we don’t need dollars for
happiness. Yet this flies in the face of capuchin entitlement and evolved mechanisms for brain
reward, which – in effect – take our current societal arrangements for granted. As our fossil
slaves eventually retire – childless –we might have to rediscover the difference between jobs
and work, just like the ants.

On GDP, Stone Heads and Babies

“Can you think of any problem in any area of human endeavor on any scale, from
microscopic to global, whose long-term solution is in any demonstrable way aided, assisted,
or advanced by further increases in population, locally, nationally, or globally?” Al Bartlett

So other than using up non-renewable resources and degrading the natural world, what other
consequences can there be when maximizing GDP is our plan for the future?

Well, for one thing, it can lead us to really screwy societal choices.

For instance in the infamous Easter island culture, there was an organizing belief in belief that
all food, resources, and other good things came from their dead ancestors, and that the way to
make your dead ancestors happy was to build giant statues for them. This was actually not
that different an organizing concept from GDP, in that both exhibit a near-hallucinatory level
of disconnect from physical reality and ecology.

As ecological changes on Easter island worsened due to rats cutting into food supplies, it
“made sense” to vastly ramp up the production of giant stone statues, making them ever-
bigger (and hence presumably more pleasing to the dead ancestors… “too big to fail”,
perhaps…). This was a colossal undertaking for a stone-age people using human muscle
power, and required a lot of wood for rollers and leverage. So they cut the trees down, which
caused erosion to begin washing away their productive farmland.

The worse things got, the harder they worked making stone giants. The final generation of
stone giants never left the quarries – they were too big to move. As a part of this process,
eventually the last large tree was cut down, which made sense based on their organizing
beliefs, but was in retrospect not a good plan. It not only meant their fertile soil washed away,
but meant they could no longer make boats to go fishing. So they starved, fought, and suffered
a lot as their populations crashed.

For the Easter Islanders, erecting these stone monuments was an example of “jobs”
masquerading as “work” – basically tasks done for social-obligation reasons that did not
provide actual biological or group-fitness benefits. (do you think there may be modern-day
equivalents?)

Today it’s easy to joke about these islanders and their “giant stone heads” as a high point in
the history of human doofus-ness. Yet our adherence to GDP is a similarly skewed metric,
equally detached from the realities of ecology, from human happiness, and from the potential
for future generations with decent life quality. On a much larger scale, we too are eroding
farm land (which these days is largely a dead medium used to hold the seeds in place and
receive industrially-produced fertilizer and pesticides), destroying the ability to get fish (by
wiping out fisheries), and, because of our numbers, mucking things up to a degree the Easter
Islanders never reached.

We’ve already mentioned that – due to being blind to the energy slaves who do nearly
everything for us – we now tend to conflate “jobs” with “work”, where “jobs” are just a social
distribution mechanism for energy-slave largesse – an entitlement entwined with social status
– and “work” is what is necessary to temporarily improves an individual, tribe, nation, or
species’ circumstances.

We’ve also noted that we have folded “planned obsolescence” into most built consumer
devices, so they break more quickly and require replacement, tuning their life-cycle to human
whims and brain rewards rather than to real utility. Mostly we don’t really even want or
expect gadgets to last as long as they used to; as long as we can afford it, we want the newer,
cooler, stuff. And advertising helps keep our culture primed for it.

The fact is, we have designed a social system that requires growth. Money –really a claim on
future energy and resources – comes into existence irrespective of whether such future energy
and resources will be available. Each year we need growth in a
household/city/state/nation/world to service and pay off monetary loans that were created
previously. No serious government or institutional body has plans for anything other than
continued growth into the future. Growth requires resource access and affordability but starts
first with population.

So, right as our energy slaves are about to start going away forever, leaving 7-10 billion
humans without the things they have come to take for granted, our nations have decided the
answer is to make more babies! Yep, to raise GDP you need more demand for toys, diapers,
teachers, etc… more jobs, because more jobs means more transactions which means more
GDP! More GDP means “growth” so growth is good! China has just reversed its 1-child
policy, which prevented massive starvations and slowed the horrendous assault on China’s
environment.60 Many other nations, such as Japan, Germany, and Sweden, are now offering
bonuses for getting pregnant. In Denmark advertising firms are encouraging couples to have
more babies for the good of the economy via sexy commercials.61

Paradoxically, as traditional drivers of GDP growth – development of virgin land, credit


expansion, low cost fossil fuels, and groundbreaking innovation- wane in their impact, there
may be renewed incentives proposed not to shrink our population as ecology would advise,
but instead to grow it! Currently we are having (as a species) over 120 million babies per
year.62 This works out to over 335,000 human babies born every day – compared to a total
extant population of all the other Great Apes (bonobos, chimpanzees and gorillas) of about
~200,000!63 Since ‘demand” is considered a quasi-magical force in current economic theory,
babies are considered to be good for business (yet children brought into the world now for
GDP reasons will face some real challenges in their lives. Nate and DJ decided not to do that
for a host of reasons).

China is building massive empty cities now.64 No kidding. Cities with nobody in them, ready
to be moved into by the bonus babies to grow GDP. That’s edging perilously close to building
giant stone heads.

When you get right down to Reality101 and the intermediate human future, this is actually
worse than building giant stone heads, because stone heads don’t suffer, reproduce, or require
further degradation of the ecology to provide for. In many real ways, the world and human
species would be far better off if we immediately moved from GDP to “giant stone heads” as
a metric for success (and say, doesn’t that imply to you that we might even do better than
giant stone heads, if we put our minds to it?).

GDP sets a money value on everything in the natural world and in human experience, and the
most important things are currently valued at or near “zero.” Yet as we’ve seen, GDP is
currently tied to the work of fossil slaves, who will be gradually flying away. There’s no way,
even in principle, for “growth” such as we’ve recently seen to continue indefinitely, and
considerable data points to it ending quite soon. GDP will begin a long decline because it’s
tied to finite realities in the physical world.

The good news, of course, is that GDP is an insane metric for success, just as “giant stone
heads” was (though to give the Easter islanders their just due, at the time they had no
evidence their belief was nuts, while in 2016 we have demonstrable proof that the conclusions
of neoclassical economics are refuted by basic science). If we decide that we value happiness,
quality of life, and a healthy planet with uncounted thousands of human generations left, we
could in principle jettison GDP and do things differently.

It won’t be easy, only necessary. It’ll be easier to fail than succeed, for the societal inertia of a
raging amoeba hungry for growth is a hard thing to change. Nothing much depends upon it
other than the human destiny and the fate of complex life on the planet.

Learn to see the giant stone heads around you, and think about them.
The Global Predicament from Perspective of the Human Superorganism

1. 1. Wide Boundary View of the Global Predicament Nathan John Hagens Cal-Berkeley
Feb 26, 2018
2. 2. Energy underpins everything We’re taking (much)more than our share Our brains
think we’re still living on the savannah LENSES OF REALITY 1 2 3
3. 3. Human society functions akin to a Superorganism 1. Intro 2. Energy basics 3.
Human Behavior 4. GDP and access to power 5. Conclusions/implications 6. What to
do
4. 4. A time of paradox **12 Year plateau in conventional oil production and price is
still only ~$60 ** US “oil” production just hit all time high **For majority of people
in developed world, growth (in income after expenses) ended a decade ago, yet stock
markets are at all time highs. **Widespread recognition of human caused climate
change, massive investments into renewable energy but globally CO2 increasing at
highest rate in history **Everyone is somewhat worried but no one talks about the real
issues on TV or in public.
5. 5. A time of myth ** Demand for oil will dry up in next 20 years due to self-driving
Uber taxis ** We will begin manned space colonies by 2030 (Musk) ** The global
economy will be growing at 20% per year by 2060 (World Bank chief economist) **
We will grow economies, mitigate climate change, AND solve global poverty and
inequality using solar, wind and smart grid tech. (IPCC and others) ** Humans will be
extinct from climate change by 2025 (Guy McPherson)
6. 6. Virtual World
7. 7. > Virtual World Physical World Our minds create orders of magnitude more
possibilities than can manifest in physical world
8. 8. > Virtual World Physical World P.S. scientifically trained minds are still
susceptible to this but less so
9. 9. All of the research, facts, science, opinions, etc.
10. 10. Points to current situation presents the perfect story for human brains to ignore or
avoid: abstract, threatening, complex, distant, no immediate answers, our tribes don’t
agree, etc.
11. 11. “Let’s be realistic and start working!” (SOME/A LOT OF DISSONANCE)
12. 12. A time for (urgent, relevant) Questions **What should we be doing to meet the
challenges of the future? ****In order to arrive at the appropriate answers: our first
and critical task is to be asking the right question(s).
13. 13. first…..some energy and economy basics 1. Energy underpins natural systems and
human economies
14. 14. 1a. Energy underpins natural systems
15. 15. Trophic cascade 1 300 90,000 27,000,000 1,000 Tons Three hundred trout are
needed to support one man for a year. The trout, in turn, must consume 90,000 frogs,
that must consume 27 million grasshoppers that live off of 1,000 tons of grass. -- G.
Tyler Miller, Jr., American Chemist (1971)
16. 16. 1b. Energy underpins human systems ~Irrespective of technology, every single
good and service in our economic system first requires an energy input
17. 17. WORLD GDP Economic growth is highly correlated with ‘more primary energy’
added to human systems
18. 18. Tad Patzek 2017
19. 19. ….some energy and economy basics 1. Energy underpins natural systems and
human economies 2. Fossil sunlight underpins modern economies
20. 20. 150 Horse 1/8 Horse 1 Horse45 Horse 1 barrel of oil  5,700,000 BTU 1,760
kWh converted to work 700kWh 1 human  0.6kWh/day of work 700/0.6=1167days
 4.5 YEARS OF HUMAN WORK
21. 21. Average human laborer Average wages of $57 per day
22. 22. How many man-days of work can you get on the average global daily wage of
$57? Average human 1
23. 23. How many man-days of work can you get on the average global daily wage of
$57? Average human Average American 1 0.2
24. 24. How many man-days of work can you get on the average global daily wage of
$57? Oil at $80 per barrel Average human Average American 5,912 1 0.2
25. 25. How many man-days of work can you get on the average global daily wage of
$57? Oil at $80 per barrel Average human Average American 5,912 1 0.2 Oil at $20
per barrel 21,679
26. 26. ….some energy and economy basics 1. Energy underpins natural systems and
human economies 2. Fossil energy underpins modern economies 3. Industrialization is
the result of massive inputs of low cost fossil labor
27. 27. Industrialization Applying large amounts of fossil energy to processes humans
used to do manually, Made processes ‘energy inefficient’ but increased returns to
human effort/time dramatically
28. 28. 180x 400x The ‘Trade’ resulted in massively higher benefits to most humans
29. 29. WAGES PROFITS PEOPLEGOODS
30. 30. Reference: http://nautil.us/issue/1/what-makes-you-so-special/gasoline-and-
fertility At over 210,000 kcal per day, the average person in USA (or KSA) has the
metabolic equivalent of a 30+ ton animal
31. 31. The Unwinding of the “Trade”
32. 32. First, some energy and economy basics 1. Energy underpins natural systems and
human economies 2. Fossil sunlight underpins modern economies 3. Industrialization
is the result of massive inputs of low cost fossil labor 4. Cobb Douglas –the greatest
flaw in economic theory
33. 33. Energy matters vastly more than other economic inputs The Cobb Douglas
function used to explain growth treats labor and capital as the (only) 2 relevant inputs.
Energy is ignored.
34. 34. Energy does all the work needed to combine other inputs -it cannot be substituted
other than with other types of energy
35. 35. Standard circular economy model
36. 36. SOURCE SINK
37. 37. SOURCE SINK We don’t pay for the creation of nor the pollution from the most
valuable input to our economies ~only the cost of extraction The biggest Flaw in
Economic Theory
38. 38. …some energy and economy basics 1. Energy underpins natural systems and
human economies 2. Fossil sunlight underpins modern economies 3. Industrialization
and low cost fossil labor 4. Cobb Douglas –the greatest flaw in economic theory 5.
Money has no biophysical backing –but is merely a marker for real capital
39. 39. The majority of money in the modern economy is created by commercial banks
making loans. Money creation in practice differs from some popular misconceptions
— banks do not act simply as intermediaries, lending out deposits that savers place
with them, and nor do they ‘multiply up’ central bank money to create new loans and
deposits Whenever a bank makes a loan, it simultaneously creates a matching deposit
in the borrower’s bank account, thereby creating new money. The reality of how
money is created today differs from the description found in economics textbooks.
40. 40. The majority of money in the modern economy is created by commercial banks
making loans. Money creation in practice differs from some popular misconceptions
— banks do not act simply as intermediaries, lending out deposits that savers place
with them, and nor do they ‘multiply up’ central bank money to create new loans and
deposits” Whenever a bank makes a loan, it simultaneously creates a matching deposit
in the borrower’s bank account, thereby creating new money. The reality of how
money is created today differs from the description found in economics textbooks.
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14
q102.pdf “Money Creation in the Modern Economy” -Bank of England
41. 41. Banks do not loan money, they create it Money is created from thin air. Since 1971
there has not been a single currency in the world with a link to physical resources
42. 42. Debt productivity – or how much GDP we get for an additional $ of new debt, is in
decline globally Source: Federal reserve, Citibank research Source: Peoples Bank of
China, Citibank research
43. 43. ? We don’t think of it this way – but when we take on debt – as a nation, as a
company or as an individual, the debt someday has to be paid back with energy.
44. 44. Our society views the world solely through a Money lens Money Non-renewables
Renewables
45. 45. …some energy and economy basics 1. Energy underpins natural systems and
human economies 2. Fossil sunlight underpins modern economies 3. Industrialization
and low cost fossil labor 4. Cobb Douglas –the greatest flaw in economic theory 5.
Money has no biophysical backing –but merely a marker for real capital 6.
Technology is mostly a vector for increasing primary energy use
46. 46. Human Labor Replacement New resource Conversions Resource/Energy
Efficiency New Energy Tech Most technology is a vector for more primary energy
demand There are two general types of technology. Type 1 finds ways to use energy
more efficiently or finds new energy sources. Type 2 tech increases demand for
energy via doing tasks humans used to do manually (or inventing new tasks).
Currently Type 2 dominates human technology inventions, and increases total global
demand for energy. T1 T2
47. 47. Source: On Global Electricity Usage of Communication Technology: Trends to
2030 Anders Andrea et al 2017 Even ‘digital’ consumption requires energy 13%
currently and increasing rapidly * Actual
48. 48. …some energy and economy basics 1. Energy underpins natural systems and
human economies 2. Fossil sunlight underpins modern economies 3. Industrialization
and low cost fossil labor 4. Cobb Douglas –the greatest flaw in economic theory 5.
Money has no biophysical backing –but merely a marker for real capital 6.
Technology is mostly a vector for increasing primary energy use 7. We’ve used a large
% of our fossil stocks – there is plenty left but it will be more costly, which means
lower benefits to society
49. 49. Low scenario Base scenario High scenario Souce: S.H. Mohr et al. / Fuel 141
(2015) 120–135
50. 50. Low entropy natural resources- there is a HUGE difference between: PRICE
COST VALUE
51. 51. Modern Human Culture Functions as a Superorganism 1.Energy and Maximum
Power Principle 2. Human Behavior 3. GDP and access to power 4.
Conclusions/implications
52. 52. Energy seeking in nature Organisms and ecosystems in nature self-organize so as
to better access an energy gradient (e.g. branches and leaves to maximize surface area
exposed to sun)
53. 53. Maximum Entropy Production Principle
54. 54. Modern Human Culture Functions as a Superorganism 1. Energy and Maximum
Power Principle 2.Human Behavior 3. GDP and access to power 4.
Conclusions/implications
55. 55. Our minds can look forward but our feelings come from what worked in the past
56. 56. “Ultrasociality” Humans – like ants bees and termites are an extremely social
species
57. 57. The Origins of Surplus
58. 58. Sexual selection & relative fitness – yup –humans are animals too!
59. 59. IS BIGGER BETTER? • Would you prefer a 4,000 sq ft house in a neighborhood
of 6,000 sq ft houses? • Or would you prefer a 3,000 sq ft house in a neighborhood of
2,000 sq ft houses? Prof Robert Frank – “Money and Happiness: Rank of Income, Not
Income, Affects Life Satisfaction”
60. 60. Jones Jones
61. 61. The ‘wanting’ feels stronger in our brains than the ‘having’
62. 62. Check list Agenda of the Gene Preference Checklist Temperature: 10 F___ 65 F ✓
110 F ___ Wealth: prefer to be poor ___ prefer to be rich ✓ # of children wanted: zero
___ greater than zero ✓ Prefer: newspaper__ dial up___ dsl___ broadband ✓ Prefer to
be: miserable ___ comfortable ✓ Need to be in town in 2 hours: drive car✓ walk__
Prefer to: win wars ✓ lose wars___ Care more about how your life is in: 2018 ✓ or
2028___ Prefer to be viewed as: more✓ or less __ successful than ones neighbor
63. 63. Human animals seek physical homeostasis, almost all of which requires energy
Most psychological needs in our culture still require more energy, but don’t have to
64. 64. Time Care/attention As biological animals we heavily weight the present over the
future
65. 65. Time Care/attention We want brain services, and we want them today, not next
week, next year or next decade In thermodynamic terms ‘power’ is energy used per
unit time. The brain is similar…
66. 66. Modern Human Culture Functions as a Superorganism 1. Energy and Maximum
Power Principle 2. Human Behavior 3.GDP and access to power 4.
Conclusions/implications
67. 67. ENERGY Up until the 1970s we continued our physical world expansion, adding
vertical land productivity (fossil carbon) to previous horizontal productivity (farming).
We ran into 2 energy crises in 1970s. Energy and resource led productivity
68. 68. ENERGY To keep access to energy growing, we went to 1) debt as a way of
pulling resources forward in time and 2) globalization as a way of accessing cheaper
areas of production and more cooperation. Hit a wall in 2008 Debt and trade
productivity
69. 69. ENERGY Since 2008, central banks and governments responded with
“temporary” too big to fail guarantees, QE, artificially low interest rates, balance sheet
expansion, to maintain populations access to energy/services Central bank and
government guarantee era
70. 70. ENERGY Rule changes (e.g. Italy making prostitution and cocaine sales part of
GDP), new tax and benefit schemes, and numerous other ‘abstractions’ allow us to
continue growing the energy spigot. But for how long? ? Orwellian productivity?
71. 71. STRAW = ENERGY AND NATURAL RESOURCES SIZE Major influences on
the size of the straw (E): 1) Low cost of energy C 2) Energy technology T1 3)
Consumer tech T2 4) Cheap/free credit M 5) Government rules G 6) Population/Nodes
(P) C STRAW-(Cross section view) G T M G C M E T2 Circa 1990 N T2 P T2
72. 72. C T1 Organic growth of global energy spigot was based on cheap energy and e.g.
power plant efficiency. These factors are now smaller than they used to be
73. 73. M G T2 Increasingly we are growing the energy spigot by money creation, rule
changes, and novelty devices requiring energy (but generating GDP)
74. 74. “Push” “Pull”
75. 75. No debt With access to debt Cheap access to credit changed the shape of global oil
production
76. 76. The things we are doing to expand the size of our ‘energy straw’ are less and less
sustainable Major influences on the size of the straw (E): 1) Low cost of energy C 2)
Better technology T 3) Complexity Nodes N 4) Cheap/free credit M 5) Government
rules G 6) Population (P) EC STRAW-(Cross section view) G T2 M G C M E T1
Circa 1990 Circa 2020 N N P P
77. 77. Time GlobalEnergyConsumption 1900 1950 2000 The outputs of the
Superorganism are energy based – the inputs increasingly are non-caloric
78. 78. The net result of 7.6 billion humans each individually pursuing an internal optimal
foraging theory energy-marker algorithm, cooperating and assembling into groups,
corporations and nations is an energy hungry superoganism, planetwide
79. 79. Our species is defacto functioning as a “Superorganism”
80. 80. This has three main inferences
81. 81. We assume bigger/larger= more able to grasp, envision and plan for complex
events A single human cell A kidney A person A small group of colleagues A large
group (e.g. Congress) A nation of humans A world of 8 billion
82. 82. LOW HIGH LOW VERY HIGH VERY LOW EXTREMELY LOW A single
human cell A kidney A person A small group of dedicated humans A nation of
humans A world of 8 billion
83. 83. (aka the larger the group of people, the less able it is to depart from ‘gene agenda’)
1. Behaviorally, global human society functions using simple tropisms, (akin to an
simple amoeba).
84. 84. I.E. There is no one driving the bus Thinking doesn’t happen outside individual
brains.
85. 85. 2. Physically, global human society is functioning as an energy dissipating
structure Every single good or service consumed by global economic system
originated with a small fire burning somewhere on planet
86. 86. Downstream of the Superorganism…
87. 87. Modern Human Culture Functions as a Superorganism 1. Energy and Maximum
Power Principle 2. Human Behavior 3. GDP and access to power 4.Synthesis 5.
Conclusions and implications
88. 88. The main implications of “Superorganomics”
89. 89. 1. The human Amoeba (superorganism) IS the invisible hand
90. 90. 2. As a global culture, humans are no longer maximizing surplus, but surplus
‘value’ (digital representations of surplus)
91. 91. Global GDP from O A.D. Source Angus Maddisson, IIER calculations Long Term
– Growth was not the norm 3. Economic theory wasn’t chosen because it was
true/valid – it was the easiest emergent path for the superorganism/dissipative
structure Long Term Economic Growth 0-2000 C.E. ?
92. 92. Money Non-renewables Renewables
93. 93. Money Non-renewables Renewables ALL KEY DECISIONMAKERS IN OUR
WORLD ARE EXPECTING THE BLACK LINE (BECAUSE OF FLAWED COBB-
DOUGLAS) 3b. There is no credible institution or government body or corporation
globally that is specifically planning for an end to growth despite growth being over
for 80%+ of OECD people.
94. 94. 3c. Politically, our system is not broken, but working perfectly. Moving away from
the rich feeding grounds of fossil productivity is not in the job description of high
ranking humans.
95. 95. 4a. As long as human cultures maximize GDP, efficiency and better technology
will merely build a larger global heat engine.
96. 96. 4b. Growing renewables (in the current culture maximizing GDP) will likely just
build a bigger aggregate heat engine
97. 97. Fossil ‘magic’ increasingly went more towards productivity, than wages Chart:
Emmanuel Saez, published in Forbes.
98. 98. Increasing substitution of human labor for mechanical (under current trends) will
impoverish higher % of humans
99. 99. Sidebar  Humans and machines –from the vantage of the Superorganism 1. Most
technology is just leading to a higher global demand for primary energy – when
primary energy begins to decline, technology will have to do much more (or we’ll
have to do with less) 2. As robots increasingly become cheaper than human workers –
we’ll have to reconsider the relationship between ‘jobs’ and ‘work’ and…what to do
with all those who were replaced by robots? If enough people drop back to poverty
levels, who will buy the tech products? 3. There is a difference between being
technologically possible, and technologically affordable and scalable 4. Most modern
time saving tech devices give us more time to play games and waste time 5.
Technology (esp smart phones, internet, social media etc) are shortening our attention
spans, making our citizens less capable of complex, long term tasks.
100. 100. 5. The mass extinction and impacts on biogeochemistry are downstream
effects of humans voting for more access to brain (energy) services. Hansen testimony
to congress Kyoto Protocol Paris Agreement World Meteorological Conf. on climate
Copenhagen Accord UN Framework on Climate
101. 101. 6. The main way we are accessing energy today is via the credit markets.
Sources: BEA, Federal Reserve
102. 102. 6b. As long as we can increase credit, we’ll continue to grow. When we
can’t we won’t.
103. 103. What do we do when we’ve kicked the can as far as it will go, and is now
blocking the road?
104. 104. 7. We will keep growing until we run out of ‘food’
105. 105. 7b. Then we will respond to the Great Simplification… • • •
106. 106. We can have a very large economy (like now) with decent amount of
renewables,
107. 107. The Great Simplification (one scenario) 0 10 20 30 40 50 60 Global GDP
1800-2050 (in trillion 1990$) Renewables Fossil fuels Nuclear • • •
108. 108. Or a smaller economy powered in good part by renewables….
109. 109. But not a larger economy powered by renewables
110. 110. Modern Human Culture Functions as a Superorganism 1. Energy and
Maximum Power Principle 2. Human Behavior 3. GDP and access to power 4.
Synthesis 5.(speculative) Conclusions and implications
111. 111. + OIL We combine technology with energy and resources Into dollars
(and Euros, Yen…) …and dollars into feelings + impact THIS IS MODERN
ECONOMICS… Repeat, but bigger
112. 112. 1. SOURCE 2. SINK The Situation
113. 113. 1. SOURCE 2. SINK The Narrative
114. 114. The Biophysical Gauntlet $150 $20 $120 $40 $50 $60 $70 $90 $80 $70 ?
115. 115. Higher energy costs in coming decades will make energy intensive
activities unprofitable
116. 116. Lowest quintiles of incomes in almost all OECD countries have been hit
by significantly declining incomes. Source: Census.gov
117. 117. Income development 2002-2014, U.S. census data (www.census.gov),
graphic IIER For 80%+ of people (in USA/Europe) growth is already over ..yet all
governments continue to plan for growth…
118. 118. What’s happening seems like somebody’s fault…
119. 119. Viewed from perspective of superorganism we are all complicit but no
one is to blame What’s happening is largely because fossil helpers are asking for pay
raises at a time when Amoeba is larger, and hungrier
120. 120. Good news: our physical needs require energy. Most psychological needs
do not. After the superorganism shrinks there will be new models of how humans
receive our ‘brain services’. But we have to understand who we are first.
121. 121. Smil, 2017
122. 122. Iier graph on www.energyandstuff.org
123. 123. ? THE CARBON PULSE We are ~here The economic inputs to the worst
climate models are delusional. Fossil fuels will quit before we fire them. But will that
suffice? And will the cure, unprepared for, be worse?
124. 124. 1) Energy is what we have to budget and spend. Money is just a marker
for real capital/wealth. 2) The primary drivers of growth – cheap energy and available
credit are waning. We’ve already hit social limits to growth. 3) We don’t face a
resource scarcity situation but one of declining ‘resource contribution’. Costlier energy
inputs reduce benefits to economies. There isn’t a real energy shortage but rather a
longage of expectations. 4) Our evolved behavior drivers make it difficult to act/plan
ahead other than in crisis. 5) Global market based human society is functioning like a
dissipative structure – and will continue to do - until it cannot. 6) We need to – as best
as we can – use intelligent foresight and be aware of the reasons why a lower
consumption, more local and regional future is on the horizon. 7) The good news is we
only need a fraction of all this material stuff to be happy and healthy Brief Summary
125. 125. The Challenge of the 21st century: Given this backdrop, what do we do??
126. 126. We need to plan for ‘B’ but are getting social signals that ‘A’ will
continue 0 10 20 30 40 50 60 Global GDP 1800-2050 (in trillion 1990$) Renewables
Fossil fuels Nuclear • • • A B
127. 127. The Probability Distribution of the Future
128. 128. What is NOT likely to happen: 1.Growing the economy AND mitigating
climate change/6th mass extinction 2.Growing the economy by REPLACING fossil
fuels with renewables 3.Humans en masse choosing to leave fossil sunlight in the
ground 4. Governments embracing limits to growth BEFORE limits to growth are well
past
129. 129. Quite simply: we need a completely different conversation What to do –
as a world/species?
130. 130. What to do – as a species? It starts with education and better questions:
~What is our goal? ~What are the stakes? ~How can we use the remaining oil and gas
towards best purposes so 200 years from now our descendants don’t look back and say
‘it was ALL wasted’. ~Does knowing who we are, where we came from, what we are
doing, what we need/want, what is possible, matter? (I’m hopeful that it does) ~ Begin
a movement that is larger than ones own life, attached the future
131. 131. The future, dude…
132. 132. What to do – as a nation/institution? ~Educate people on ecology and
natural resources at young age ~Consider taxing resources instead of labor ~Start
pilots of residences without baseload and lower consumption lifestyles ~Direct
resources to support science and unbiased journalism/media ~Redefine poverty and
provide safety nets for lower tranches of society ~Consider a “Anti-rebound effect
Pool” where profits from new tech and efficiency aren’t fed back to the Amoeba but to
more sustainable infrastructure ~Break large groups working on better futures into
smaller subsets. E.g. take 500 people working on an issue and divide funding into
~100 groups of 5.
133. 133. What to do – as a University/College? ~Educate and train students in
subjects and skills that will be needed in a source/sink constrained future ~Direct
science and technology towards providing basic human needs (problem is there isn’t
funding for this – yet – in most schools) ~Build new interdisciplinary collaborative
capacity ~Retiring professors consider a pro-future Capstone project during their last 3
years at University ~We do need detailed expertise and continued specialization, but
perhaps the academy can stop rewarding hyperspecialization associated with such
reductionism. ~Make your school needed and relevant – because much of our
University system is a product of ‘surplus’ which is going away. ~Be bold and take
risks. A highly-educated, disciplined mind is a terrible thing to waste.
134. 134. What to do – as individuals? ~Use logic, reason and think for yourself,
and avoid the consensus trance ~Become ‘woke’ to the huge advantage you have in
life, because you understand these things: you’re one of the (unfortunately) very few
~Try to accept you can’t shift things too much before the energy/economy reality
becomes more apparent to others ~Don’t step out of society - live a normal life,
advance in a job you like in todays world, but know it will likely change at some point
~Be a ‘sleeper’ leader/anchor for the future / be ready to engage when the world needs
your knowledge The simplest changes….
135. 135. What to do – as individuals? From an energy/economy perspective
~Simplify first and beat the rush ~Don’t become overly reliant on energy intensive
activities ~help to re-localize/re-regionalize supply chains ~learn a physical skill ~help
to design technology that provides basic human services as opposed to short term
dopamine ~Contribute to massive list of societal transition projects and campaigns
tackling pieces of the challenge
136. 136. What to do – as individuals? From an brain/behavior perspective ~Get to
know your brain (this may be uncomfortable) ~Be happy with absolute wealth instead
of relative ~Consider a ‘paleo behavior’ diet. E.g. Take electricity, technology breaks
– reset your brain in nature ~Choose your tribe wisely ~Relax, smile, laugh and enjoy
life ~Be kind to yourself
137. 137. What to do – as individuals? A conversation with yourself ~Who am I
during these times? ~What do I stand for? ~The time is not to minimize my impact,
but to maximize it ~My species is not evil. We are complex creatures capable of great
things: both terrible and wonderful ~I am part of a ‘Superorganism’. And I Am Not
138. 138. We live in very special times. The world is not yet fully broken. We are
each part of an energy hungry global Amoeba. And We Are Not…. What is our
species capable of?
139. 139. Additional slides
140. 140. In 2008: $70 Trillion of global GDP required 65 Trillion KG of extracted
minerals, energy and materials. 1 $ GDP ~ 1KG of extracted NRR The World
economy is as material as ever : Source: The building blocks of economic complexity,
Hidalgo et al. PNAS, 2009
141. 141. @1.58 GB of data a month and 19 kW/GB = 384 kWh/year. A fridge =
322 kWh/a
142. 142. Global internet of things expected to have 30-50 billion unique devices by
2020 Microchip manufacturing requires 6 orders of magnitude more energy than that
of cars or wires
143. 143. Sources: OECD, BP, WB, accessed 10/02/17; Andrae, A. S. G. and Edler,
T., On Global Electricity Usage of Communication Technology: Trends to 2030,
2015, Tad Patzek Three Growth Scenarios for internet connected devices
144. 144. 1750 1990 2020 2050
145. 145. In USA, the cost to extract oil has increased ~350% since 1999. Oil prices
have doubled
146. 146. 10 core myths 1.Energy is just another commodity 2.Growth is forever 3.
Follow the money 4.Drilling holes is sustainable 5.Technology will solve it 6. The
sink is unlimited 7.We are rational and self-interested 8.The invisible hand has a plan
9.Money and stuff is what makes us happy 10. It’s too late, we’re screwed