Foreword
It would be very hard to deny that, in economics, government and much more, ‘a lot of things have started going wrong at the same time’.
It’s equally hard to avoid the conclusion that this adverse trend of events is accelerating markedly.
Debts and quasi-debts are escalating, and the financial system looks increasingly fragile.
Politics, both domestic and international, has been degenerating into worsening conflicts over scarce and diminishing economic resources.
The only way to navigate turbulent times is to ‘know how things work’, and apply that knowledge to situations and cases.
Reflecting the urgency demanded by accelerating deterioration, this essay examines the fundamentals of economics, money and prosperity, explaining why everything is ultimately traceable to energy.
A follow-up article will look at how we can apply this knowledge to unfolding conditions.
1. Money Is an Exercisable Claim on Physical Products and Services
As so often, it was Warren Buffett who put it best – “The way I see it is that my money represents an enormous number of claim checks on society. It is like I have these little pieces of paper that I can turn into consumption” (my emphasis).
The point, of course, is that, the value of money resides only in those material things for which it can be exchanged.
Money is often described as “a medium of exchange”, “a store of value” and “a unit of account”.
But this only tells us what money is used for, not what it actually IS.
Obviously enough, no form of money has any intrinsic worth – we can’t eat fiat currency, or power our cars with cryptocurrencies or precious metals.
Money, in short, is an exercisable claim on physical products and services. Importantly, money exists both as a flow of claims exercised in the present and as a stock of claims set aside for exercise in the future, though its central claim characteristic is the same in both cases.
The principle of money as claim points towards the fatal flaw at the heart of orthodox economics. It’s never enough for us to compare money only with itself, without taking constant account of those material factors which alone imbue money with value.
We can create money at will, but we do not have a comparable ability to conjure infinite material supply out of the ether.
2. The Real Economy and the Financial Economy
This understanding points towards an absolute need to think conceptually in terms of two economies. One of these is the “real” economy of material products and services. The other is the parallel “financial” economy of money, transactions and credit.
Enormous resources are devoted to analysis of the monetary economy, but almost no effort is put into the investigation and quantification of its all-important material counterpart.
In the physical economy, energy is indispensable for making goods and services available to society. This is done by using energy to convert raw materials into products, artefacts and infrastructures.
This productive process has a thermal counterpart – whenever energy is used to convert raw materials into products, so energy is always converted from a dense to a diffuse form.
The economy is thus a productive-dissipative system, which becomes a dissipative-landfill system once certain consumption-to-resources limits are breached.
Since the economy IS an energy system, there can be no such thing as an “immaterial” economy, and neither can economic prosperity be “de-coupled” from the use of energy.
Furthermore, the critical role of energy in the environment and in the economy makes it self-evident that only a material-based interpretation of the economy can make sense of the economics of environmental issues.
3. Energy Is Never Free ~ The Energy Cost of Energy
The concepts of money as claim, energy causality, the two economies and the productive-dissipative equation need one further addition. This reflects the simple fact that energy is never “free”.
Energy cannot be put to use without energy supply infrastructures, and these, being material, cannot be created, operated, maintained or replaced without using energy.
Accordingly, “whenever energy is accessed for our use, some of this energy is always consumed in the access process, becoming unavailable for any other economic purpose”.
If, as here, we call this “consumed in access” component the Energy Cost of Energy, we arrive at the principle of ECoE.
ECoE is the difference between how much energy we produce, and how much surplus (ex-ECoE) energy is available to power the economy. If we had to use 100 units of energy (or more) to put 100 units of energy to use, the economy would not exist.
Globally, trend ECoEs have long been on a relentlessly upwards trajectory, rising from 2.0% of energy used in 1980 to 11.3% now (see Fig. 1A). Fossil fuel depletion – the natural tendency to use lowest-cost resources first, and leave costlier alternatives for later – has been the primary driver of rises in ECoEs.
As we shall see in a subsequent article, this rise in ECoEs is the root cause of every problem currently being experienced in the economy, finance, government and society.
4. There Is No Energy Technology Capable of Reducing the Energy Cost of Energy
We have, as yet, NO alternative energy resource capable of pushing system-wide ECoEs back downwards.
Renewables cannot be regarded as like-for-like successors for fossil fuels. They can’t be built, operated, maintained or replaced without the use of legacy energy from oil, natural gas and coal, which ties their own ECoEs to those of fossil fuels.
Wind and solar power have lesser specific densities than carbon fuels, although difficulties with portability and difficulty of storage, rather than simple intermittency and low energy-mass density, are the critical drawbacks with renewable energy systems.
Neither is it at all clear than any form of electricity is suited to take over the economic ‘heavy lifting’ currently undertaken by fossil fuels. This suggests limits to the potential usefulness of nuclear fusion, even if this technology were ever to become commercially feasible.
The markets, for the most part, understand these limitations. No ‘Global Solar Trust’ or ‘Gulf Wind Inc.’ has taken over the role hitherto played by John D. Rockefeller’s Standard Oil, and the fabled “Seven Sisters” of the petroleum industry. Investors recognize that no great profits are to be made in forms of energy which always and everywhere rely on subsidy.
Markets are, though, gravely conflicted on this issue,. Investors are enthusiastic about the downstream technological users of forms of energy which, by their own admission, cannot be supplied in a commercially viable way.
This is in stark contrast to the energy awareness of an earlier era, when investors who put money into car manufacturers put even more money into oil.
5. The Rates of Resource Depletion Are Exceeding Advances in Extractive Capabilities
The practical application of these principles will be addressed in a subsequent article, but we can conclude here with an overview of how the evolution of energy has been affecting economic trends and behaviours.
Three factors determine the supply of material prosperity to society. One of these is the overall supply of energy, and a second is the ECoE deduction determining the availability of surplus (ex-ECoE) energy to the system (see Fig. 1B).
This surplus energy is directly analogous to material economic prosperity.
The third factor is the condition of the non-energy resource base, which includes minerals, non-metallic mining products and biomass. As the qualities of these resources deplete over time, so the technologies used in raw material conversion improve, albeit gradually.
The trend of this conversion ratio can be measured by comparing the quantity of material economic output with the amount of energy required to produce it.
Available evidence suggests that all three of these variables have been trending negatively. The relentless rise in ECoEs has been creating conditions in which further increases in aggregate energy supply are becoming problematic.
Conversion ratios are on a gradually declining trajectory, meaning that rates of resource depletion are exceeding advances in extractive and processing technologies (see Fig. 1C).
Figure 1. Click on the image to enlarge.
6. Financial Stimulus and Technological Innovation Cannot Transcend Energy Physics
We do not have ECoE data going as far back as the start of the Industrial Revolution, but we can reasonably infer that ECoEs fell for much of the industrial age – energy-accessing technologies advanced, and the economics of the supply system benefitted both from widening geographic reach and from rising economies of scale.
Only later, with the benefits of reach and scale exhausted, did depletion take over as the primary driver of ECoEs. This has pushed overall, all-sources ECoEs relentlessly upwards, a trend that we are powerless to contain, let alone to reverse.
By the mid-1990s, rising ECoEs had created an economic phenomenon known at the time as “secular stagnation”. Our attempts to counter this trend by flooding the economy with debt (“credit adventurism”) led directly to the global financial crisis of 2008-09. This in turn led on to the “monetary adventurism” of QE, ZIRP and NIRP.
None of these choices were made in the absence of policy constraints. Because, in the 1990s, we couldn’t simply acknowledge the ending of growth, we had to opt for credit stimulus.
Latterly, the sheer scale of debts and quasi-debts more or less compelled the adoption of monetary expansionism during the GFC. Policymakers have found themselves tied to an arc of inevitability in which prior decisions create the conditions that constrain subsequent choices
The postulated saviours of the ‘business as usual’ of prosperity growth are monetary stimulus and technological innovation. But neither can free us from the consequences of a maturing and deteriorating fossil fuel energy system.
The ‘claim’ nature of money makes it clear that we cannot re-invigorate the material with the monetary. The potential scope of technology, far from being infinite, is bounded by limits set by the laws of physics in general, and by the laws of thermodynamics in particular.
It doesn’t, of course, suit anyone to concede that economic growth has been an unprecedented – but also a time-limited – phenomenon, made possible by the harnessing of fossil fuel energy.
But assurances to the contrary are increasingly failing to convince the voting public, whilst finance has become dependent on inflating the next bubble before the previous one bursts.
It is no exaggeration to state that we have entered an era of extreme and worsening uncertainty and instability.
We can only navigate this turbulence if we recognise that every economic and related trend is ultimately traceable to energy.
By the same author:
Putting It Together ~ Part Two:
The Fight for Shrinking Resources
