I hope this provides a usefully compact synopsis of our predicament.
1 ~ GDP is not a measure of material value created in the economy
There are times when the most important facts, though straightforward in principle, are simply too big, or too unpalatable, for general recognition
This is one of those times. The Big Fact informing all of the sub-narratives of our age is that the global economy has stopped growing, and is starting to shrink.
We should swiftly dismiss all official or orthodox statistical claims to the contrary. GDP isn’t a measure of material value created in the economy, but of the transactional exchange of money in the system. Money routinely changes hands without value being added, and never more so than when most of the money in question has been conjured out of thin air as credit.
In reality, no form of money has any intrinsic worth. Obviously enough, we can’t eat fiat currencies, power our cars with cryptos, or sow our fields with precious metals. Rather, money is token, not substance – it commands value only as an exercisable claim on those physical products and services for which it can be exchanged.
This principle of money as claim leads directly to a conceptual necessity, which is that we need to think in terms of two economies, not one. The first is the “real” or physical economy of material products and services. The second is the parallel and proxy “financial” economy of money, transactions and credit.
Once this is understood, we are spared the futility of comparing money only with itself.
2 ~ The “real” economy uses energy to convert other raw materials into products, and energy is never “free”
There are two things that we need to know about the underlying “real” economy.
The first is that it operates by using energy to convert other raw materials into products, and into those artefacts and infrastructures without which no worthwhile service can be provided. Since some of these products are consumed, whilst others wear out and need to be replaced, this is a continuous process of creation, consumption, abandonment and replacement.
Second, energy is never “free”, but can only be put to use with an energy supply infrastructure. This infrastructure, which might be wells and refineries or wind turbines and grid systems, is material, meaning that it cannot be created, operated, maintained or replaced without the use of energy.
Colloquially, then, we have to “use” energy to “get” energy. Stated more formally, “whenever energy is accessed for our use, some of that energy is always consumed in the access process, and is unavailable for any other economic purpose”.
This proportionate Energy Cost of Energy is a matter, not of money, but of physics. ECoEs from all sources of primary energy have risen from 2.0% in 1980 to more than 11% today. Accompanied by a gradual degradation of the non-energy resource base, this has impaired annual rates of material expansion to a point at which the underlying physical economy inflects from growth into contraction.
3 ~ Technology is bounded by the characteristics of materials and the laws of thermodynamics
The authors of The Limits to Growth, published back in 1972, used the then-new technique of system dynamics to see this coming, and even gave us a pretty good steer on its probable timing.
None of this is palatable, of course, to a world so obsessed with “growth” that it disregards the obvious truth of Kenneth Boulding’s observation that only “a madman or an economist” could believe in the promise of infinite, exponential economic growth on a finite planet.
Over the past twenty years, material economic prosperity has increased by 25%, but huge rises in the stock of monetary claims have enabled statisticians to assert that the flow of economic activity measured as “real GDP” has more or less doubled (+96%, 2004-2024).
Our resistance to the very concept of an ending and reversal of growth has been vested in two false presumptions. One is that the material economy can be reinvigorated using monetary tools, which would be true only if the banking system could lend energy and raw materials into existence, or if central bankers could conjure them, ex nihilo, out of the ether.
The other is the supposedly “limitless” potential of human ingenuity, enacted as technology. In reality, the potential of technology, far from being limitless, is bounded by an envelope of possibility whose parameters are set by the characteristics of materials and the laws of thermodynamics.
4 ~ International trade is breaking down due to intensification of competition for scarce and dwindling resources
Since the real costs of energy-intensive necessities are rising, just as top-line prosperity inflects into contraction, the supposed “cost of living crisis” isn’t a temporary “crisis” but the emergence of a wholly predictable trend. This goes a long way towards an explanation of worsening internal political and social instability.
Washington, meanwhile, has awakened, belatedly, to the reality and consequences of material resource finality, an understanding that, we can reasonably infer, has long been grasped in Beijing and Moscow.
The breakdown of international trade – and its balkanisation into trading blocs and exclusion zones – becomes readily explicable if we once recognise the ultimate finality of the material, the impotence of the monetary and the technological, and the resultant intensification of competition for scarce and dwindling resources.
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