Shortly after the 1980s had come to an end, a record label issued a pop-rock compilation album subtitled “all the music that matters from a decade that didn’t”.
Likewise, there’s a saying to the effect that, in politics, there are decades in which nothing happens, and weeks, or even days, in which decades happen.
The early weeks of 2025 fall into the latter category, the catalyst for change being the second coming of Donald Trump. His policy agenda is, undoubtedly, a revolutionary one, and much of this devolves upon his distinctive personality, agenda, determination and energy.
Even in this, though, we overlook the economic at our peril.
During the Biden administration, it was said that Americans were enjoying “the greatest economy ever”. If that had been true, Mr Trump might never have got his second shot at revolution.
As it was, most of the supposed economic “growth” of the Biden years was cosmetic, the combined product of drastically understated systemic inflation and the running of enormous fiscal deficits.
Few people benefit, other than in a temporary and purely paper form, from statistically-manufactured prosperity. When large majorities of Americans told pollsters that their greatest concerns were economic hardship and anxiety, they weren’t mischief-making, or grumbling without justification. Those who resorted to the so-called “facts” of statistics to dismiss these concerns made the classic mistake of favouring appearances over substance.
On the surface, Team Trump might have seemed to be appealing to voters who wanted – as it might superficially be summarized – ‘less wokery, less censorship, less bureaucracy and a lot less immigration’.
But the underlying issues were deteriorating prosperity and worsening economic insecurity. These motivations, and their underlying causes, are visible elsewhere in the world, not least in Europe.
Hardship and anxiety, along with perceived inequality, are, after all, recognized contributors to revolution.
1. The Economic Thread
We can only understand the processes and probabilities of today and tomorrow if we grasp the economic thread that interconnects events and trends.
That thread has been described here as the arc of inevitability. Its implication is that agency (the collective ability to choose) might be far less, and visibility (the individual ability to anticipate) may be much greater, than has hitherto been supposed.
Neither agency nor visibility is an absolute. But identification of the arc of inevitability enables us to recognize a coherence in economic history that dates back at least as far as the 1960s.
The forwards projection of that arc enables us to anticipate future events that might seem counter-intuitive to anyone who does not share this basis of perception.
Whilst we cannot state that some kind of economic or social “collapse” is inevitable, we can say that two of the biggest looming shocks to the system are the failure of money and the failure of technology. The sheer scale of interconnectedness between the monetary and the technological suggests that these failures might be simultaneous (or near-simultaneous) events.
It’s important to emphasise that neither of these projections, nor the underlying arc of inevitability itself, has been arrived at through some great intuitive leap of the imagination. Rather, these findings follow from a painstaking process of step-by-step analysis.
You will understand, I hope, if I use this 300th article at Surplus Energy Economics to reflect on a process of cause and effect that leads to the inevitability of both of monetary and technological shocks to the system.
2. Classical Economics Orthodoxy
The classical economics orthodoxy has always claimed that the economy can be explained entirely in terms of money. Since money is an artefact under our control, the inference of the money-only interpretation is that our economic future is wholly, or at least very largely, in our own hands.
This involves the specific claim that money-based processes can circumvent all material limits. The critical tool here is pricing. If anything is in short supply, a rise in its price will encourage production, discourage demand, promote substitution and incentivize innovation.
These were the terms in which the economics establishment endeavoured to dismiss the findings set out in The Limits to Growth. What was actually happening, when LtG was published back in 1972, was that the new science of systems theory was challenging the old orthodoxy of money determination.
It is no coincidence that it was Kenneth E. Boulding – co-founder of general systems theory – who famously said that “[a]nyone who believes exponential growth can go on forever in a finite world is either a madman or an economist”.
Back in the 1970s, contemporary concerns about resource finality were shaped by the crisis triggered by the petroleum export embargo introduced by OAPEC – the Organization of Arab Petroleum Exporting Countries – in October 1973. This plunged the World in general, and the West in particular, into a decade of painful stagflation (economic stagnation and runaway inflation).
This crisis played out in terms that seemed, at the time, to vindicate the ‘money-only’ theory of economics. As well as reducing demand, soaring oil prices incentivised the development of new sources of supply, most importantly in Alaska and the North Sea. By the mid-1980s, there was a structural surplus of oil supply, and this caused crude prices to plunge.
Critically, though, the economic progress of the 1980s didn’t continue into the 1990s. With hindsight, we can see that the rise and fall of oil prices was a cause-and-effect sequence triggered by policy distortion, in this instance by the OAPEC embargo. Oil use undershot its trajectory in the 1970s, and then caught up in the 1980s.
But, even here, the effect of agency – in this case wielded by OAPEC – should not be exaggerated. In 1968, 1969 and 1970, global oil consumption increased by 8.6%, 8.4% and 8.6%. Just a few more years of this kind of demand growth would have triggered an oil crisis anyway, even if geopolitics hadn’t intervened.
At no time since 1973 has oil consumption returned to its pre-‘73 trajectory. Between 1990 and 2019, the compound annual rate of increase in oil use was just 1.27%. This is slightly lower than the rate at which global population numbers increased during that period (1.32%). There has been no return to the pre-‘73 trend whereby oil consumption out-grew population numbers by a very large margin.
3. False Promise of Infinite Growth
At no time has the promise of ‘infinite exponential economic growth on a finite planet’ made sense. First, there are some commodities for which no substitute exists. Second, no amount of monetary incentive can call forth resources that do not exist in nature.
These observations are borne out by monetarily-annotated data. Since 2002, reported global real GDP has grown by 113%, or $103 trillion. Over that same period, though, debt has grown by $280tn, or 190%, in real terms, whilst we can estimate that broader liabilities – including those of the NBFI (non-bank financial intermediary or “shadow banking”) system – have increased by about $825tn, or 230%.
The customary presentation of debt as a percentage of GDP conveys the impression that these are discrete data series, but this is not the case. All of the fiat money in which these numbers are calibrated exists in the form of credit. The only reason why anyone borrows money is to spend it. Accordingly, a linkage exists between the rate of credit creation and growth in the volume of transactional monetary activity measured as GDP.
There is no gatekeeping, validation process whereby transactional activity is counted for inclusion only if material value is thereby created. On the contrary, it is commonplace for money to change hands without material value being added.
Most important of all, orthodox economics has no material point of reference, with everything valued only in terms of how much money somebody is prepared to spend on it.
On this basis, the combined output of farming and fisheries accounts for only 6% of global GDP. This implies that these industries are not particularly important, and that 94% of the world economy could continue happily, even if we entirely lost the ability to produce food.
4. Connection to Material Commodities
The thinking person must be pulled up short by this kind of nonsense. Some commodities – including energy, minerals and water, as well as food – have an importance that money alone cannot capture. As a long-ago writer put it, we obtain inescapable knowledge of the reality of the material when we bump into the furniture in infancy.
This presents us with a choice. We can accept the nostrums of classical economics, or we can seek better explanations. Logic decrees that these superior explanations must be connected to the material.
Furthermore, if we conclude that the exclusion of the material is a fatal error in the canons of orthodox economics, we need to know why that mistake was made.
5. Energy, Not Money, Drives the Economy
A few years ago, the island where I live suffered a lightning strike on the central node for the distribution of power, leaving almost all inhabitants without electricity for an extended number of days. We had only lost access to electricity, not to all forms of energy. But the effects, nevertheless, were profound. Normal life quickly came to a halt.
Under these circumstances, assistance from the mainland in the form of monetary injections could have achieved nothing, other, perhaps, than inflating the prices of the material products and services available to us. The island’s needs were material, and were met by the supply of generators, and the oil needed to power them.
One does not need this kind of experience to recognize that energy, not money, is the force that drives the economy. Energy has been the thread running through the history of the industrial age, and the outcomes of both World Wars were determined by the warring sides’ access to it.
From 1912, when the Royal Navy placed orders for the oil-fired QUEEN ELIZABETH-class battleships, access to oil quickly became a primary concern for the British Empire.
Imperial Japan was pushed into the Pearl Harbor gamble by an American embargo on petroleum exports, and the rapid seizure of oil fields in the Dutch East Indies proved not to be a sufficient remedy.
Starved of fuel, the Luftwaffe’s advanced fighter aircraft and skilled pilots sat impotently on the ground as the vapour trails of Allied bombers were writing the defeat of the Axis in the skies over Germany.
If, though, German and Italian forces had seized Malta, they might have supplied the Afrika Korps with resources sufficient to seize control of the oil fields of the Near East. As Winston Churchill so memorably put it, Malta was the “hinge of fate” in the European war. Had Operation PEDESTAL not succeeded in shepherding the desperately damaged tanker OHIO through to Valetta, that hinge might well have turned in the opposite direction.
In short, one doesn’t need to have been an oil sector analyst – or experienced the traumas of the 1970s, coped with electricity disruption, faced the bracing winds on a North Sea platform or visited an oil refinery – to know that the economy is, overwhelmingly, an energy rather than a monetary system.
6. Difference Between Agrarian and Industrial Societies
Why, then, has classical economics got this so wrong?
The answer lies in conditions at the time when The Wealth of Nations, the founding treatise of orthodox economics, was published in 1776. This was an agrarian society, in which virtually all of the energy used in the economy was sourced from human and animal labour. Even the small contributions from wind- and water-mills were made possible only by this labour.
Whilst the numbers of workers and animals available might increase or decrease on a yearly basis, their characteristics do not change materially even over very long periods of time. Energy, when confined to human and animal sources, was thus a constant within the agrarian society of the 1770s.
This left investment, monetarily defined, as the big variable in economic explanation. We couldn’t improve the characteristics of workers, oxen or horses, but we could increase their efficiencies by constructing infrastructure, tools and buildings.
Any investment meant going without some form of consumption. A person who chose to go without, say, some consumer luxuries in order to invest in improved agricultural equipment could benefit in the longer term from the efficiencies created by that investment.
It’s not the fault of Adam Smith that he couldn’t foresee the replacement of the agrarian society with the industrial, and, given the compelling case he made for regulation, he is owed some apology for being so often misrepresented an apostle of unregulated ‘junglenomics’.
The almost inexplicable aspect of this tale isn’t the energy-blindness of the 1770s, but the continuing insistence of economists on adhering to agrarian-era nostrums in an industrial age.
Error, though, creates opportunity. Those who do understand the economy as an energy system enjoy a decisive predictive advantage over anyone who still believes that the nostrums of the eighteenth century reign supreme in the twenty-first.
7. Energy Awareness
Energy awareness is the key that unlocks the door to economic understanding. The opening of this door sets us on a path guided by logic, observation and experience.
If we ‘look through’ the interconnected processes of credit creation and transactional activity, and then include the material cost of energy in our calculations, we discover that, between 2004 and 2024, global real material prosperity increased by only 30%, not the reported 113%. With that as our benchmark, collective efforts to break free from the straitjacket of economic deceleration take on a wholly new cohesiveness.
Economic history can also be re-framed on this same basis. During the 1970s, the Energy Costs of Energy were at a very early in stage in their initially-slow rise from the nadir of the post-war years. There was, in 1973, no great shortage of oil (though such a shortage might soon have arrived, if demand had continued to grow at annual compounding rates above 8%).
Rather, the OAPEC embargo pre-empted the economic trend, creating a sudden shortage where, otherwise, the rate of growth in the consumption of petroleum would have decelerated more gradually.
Thus understood, the economy was plunged into crisis in the 1970s, made up some lost ground in the 1980s, and then reverted to trend in the 1990s.
This wasn’t, of course, how events played out in politics. There were those who, conveniently disregarding the oil crisis, succeeded in pinning the blame for the hardships of the 1970s on “left wing” governments and over-mighty organized labour.
The cyclical recovery of the 1980s seemed to vindicate these claims. When the collectivist USSR collapsed at the end of the 1980s, this was proclaimed as some kind of ‘final victory’ for the orthodoxy of neoliberal economics.
This had two serious implications for what happened next. First, the economic deceleration of the 1990s seemed baffling to anyone who had placed triumphalist faith in the ‘victory’ of neoliberalism. With the USSR and Comecon gone, China tilting away from hard-line collectivism, the role of the state rolled back across the West and the power of organized labour broken, growth should have accelerated, not slowed, in the 1990s.
The second consequence was the mistaken assumption that more deregulated liberalism could re-energize the economy. On this presupposition, the ‘fix’ for “secular stagnation” was assumed to reside in making it ever-easier and ever-cheaper for households and businesses to borrow.
Critically, this put us on a trajectory that, even with the benefits of hindsight, looks largely inescapable. The “credit adventurism” of the 1990s led directly to the global financial crisis, and this in turn led to the subsequent resort to the “monetary adventurism” of QE, ZIRP and NIRP.
These stratagems, in turn, point unequivocally, towards a “GFC II” sequel to the events of 2008-09.
8. Energy and Material Economic Prosperity
This is where we need to stand back and look at situations from the perspective of the fundamental.
Material economic prosperity took off when the discovery of how to convert heat into work enabled us to access the vast reserves of energy contained in coal, oil and natural gas.
As we extended the geographic reach of the energy industries, as economies of scale were captured, and as the technologies of energy use advanced incrementally, the ECoEs of fossil fuels adopted a downwards trajectory. These were to hit their nadir in the quarter-century after 1945.
Latterly, with the potential benefits of reach and scale maximised, depletion has taken over as the primary driver of ECoEs, pushing these up from 2.0% in 1980, and 4.2% in 2000, to a projected 11.0% this year.
The wholly objective observer could, at this point, give us a solidly rational description of our economic past, present and future. Prosperity soared during roughly 150 years of rising energy use and falling ECoEs. More recently, the impetus initially imparted to the economy by the harnessing of fossil fuel energy has been fading out, a process most readily captured in the trend of ECoEs. Acceptance, and constructive planning, might be the rational responses to this objectively-calibrated statement of reality.
But rationality has had remarkably little input to contemporary choices. Governments routinely promise the benefits of “growth” even where delivering such benefits has become demonstrably impossible.
The economics orthodoxy which continues to inform the choices made by those in authority promises us two means of escaping from the adverse implications of the arc of inevitability. One of these is monetary innovation, and the other is technological advance.
In reality, of course, money, which commands value only as an exercisable “claim” on the material, cannot drive the arc of the material. The potentialities of technology are governed by the laws of physics, and no amount of human ingenuity can abolish those laws.
Accordingly, it requires no great leap of the imagination to foresee that money and technology will fail in proportion to the hope – and money – invested in them.
9. Failures of Money and Technology
These failures are already unfolding. Debts and quasi-debts are expanding at super-heated rates, thereby creating a body or stock of monetary “claims” that cannot possibly be ‘honoured for value’ by an inflecting material economy.
With energy companies slashing, rather than expanding, their forward investment plans, technological hopes are already in retreat over transition to renewable forms of energy.
Perhaps the last word should be left to the analyst who, reflecting on the $189bn invested in research and development by Apple over the past decade, told the BBC that “[a]ll we have to show for that is the HomePod and $3,500 ski goggles”.
This is not intended here as any reflection on Apple in particular. It’s a reference, rather, to a law of diminishing returns already writ large in the invalidation of the preferred capital-intensive business model for the development of artificial intelligence.
It didn’t need the advent and instant popularity of DeepSeek to tell the materially-aware observer that this business model couldn’t conceivably deliver sufficient returns on the vast investment of energy and raw materials that this model required.
The failures of money and technology are likely to come as even bigger shocks to the system than the revolution now unfolding in Washington. These are shocks that, to the energy-conscious observer, are already hard-wired into the arc.
