This piece is about the single most important aspect of our re-imagining, writes Barry Cooper. The future will not be a different kind of “business as usual”. It will be a fundamentally different world. It has been written for us by Dr Tim Morgan. His website is a world leader in discussing this topic. A topic, which is very difficult for anyone with a vested interest in the way things are now to confront. Please read it, it is very important.
How would our priorities change, and how would our conception of government be rebased, if we knew that “growth” in prosperity had gone into reverse? According to Surplus Energy Economics (SEE), that’s exactly what most Western countries have been experiencing for at least ten years, and the average British citizen has been getting poorer since 2003. Once we understand this, our conceptions of political issues cannot help but change fundamentally.
The aim here is to explain how this interpretation is arrived at, and to set out some of its implications for government.
SEE is a radically different economic and financial interpretation which is driven by the understanding that the economy is an energy system, and not (as conventional practice assumes) a financial one.
Because it identifies the drivers of prosperity (rather than simply income), this perspective is a practical one, because prosperity is linked to political choices. Nobody conversant with the energy-based interpretation was much surprised, for instance, when Donald Trump was elected to the White House, when British voters opted for “Brexit”, or when a coalition of insurgents (aka “populists”) took power in Rome.
The SEE interpretation of prosperity trends also goes a long way towards explaining the gilets jaunes protests in France, protests than can be expected in due course to be replicated elsewhere, most obviously in the Netherlands. SEE is also unpersuaded by the exuberant consensus narrative of the Chinese economy, noting the massive ramp-up of debt supporting claimed “growth”. The proprietary SEEDS model has proved a powerful tool for the interpretation of critical trends in economics, finance and government.
Right now, there are three priority issues on which SEE aims to provide insights. The first is the growing inevitability of a second financial crisis (GFC II), which will dwarf the 2008 global financial crisis (GFC), whilst differing radically from it in nature.
The second is the clear danger that the current, gradual deterioration in global prosperity could accelerate into something far more damaging, disruptive and dangerous.
But the third issue, considered here, is the undermining of political incumbencies and systems, a process resulting from the widening divergence between policy assumption and economic reality.
The energy insight
The centrality of the economy is the delivery of goods and services, literally none of which can be supplied without energy. It follows that the economy is an energy system (and not a financial one), with money acting simply as a claim on output which is itself made available only by the application of energy. Money has no intrinsic worth, and commands ‘value’ only in relation to the things for which it can be exchanged – and all of those things rely entirely on energy.
Critically, all economic output (other than the supply of energy itself) is the product of surplus energy – whenever energy is accessed, some energy is always consumed in the access process, and surplus energy is what remains after the energy cost of energy (ECoE) has been deducted from the total (or ‘gross’) amount that is accessed.
This makes ECoE a critical determinant of prosperity. The distinguishing feature of the world economy over the last two decades has been the relentless rise in ECoE. This process necessarily undermines prosperity, because it erodes the available quantity of surplus energy.
We’re already seeing this happen – Western prosperity growth has gone into reverse, and progress in emerging market (EM) economies is petering out. Global average prosperity has already turned down.
The trend in ECoE is determined by four main factors. Historically, ECoE has been pushed downwards by broadening geographical reach and increasing economies of scale. Where oil, natural gas and coal are concerned, these positive factors have been exhausted, so the dominating driver of ECoE now is depletion, a process which occurs because we have, quite naturally, accessed the most profitable (lowest ECoE) resources first, leaving costlier alternatives for later.
The fourth driver of ECoE is technology, which accelerates downwards tendencies in ECoE, and mitigates upwards movements. Technology, though, operates within the physical properties of the resource envelope, and cannot ‘overrule’ the laws of physics. This needs to be understood as a counter to some of the more glib and misleading extrapolatory assumptions about our energy future.
The nature of the factors driving ECoE indicates that this critical factor should be interpreted as a trend. According to SEEDS – the Surplus Energy Economics Data System – the trend ECoE of fossil fuels has risen exponentially, from 2.6% in 1990 to 4.1% in 2000, 6.7% in 2010 and 9.9% today. Since fossil fuels continue to account for four-fifths of energy supply, the trend in overall world ECoE has followed a similarly exponential path, and has now reached 8.0%, compared with 5.9% in 2010 and 3.9% in 2000.
For fossil fuels alone, trend ECoE is projected to reach 11.8% by 2025, and 13.5% by 2030. SEEDS interpretation indicates that an ECoE of 5% has been enough to put prosperity growth into reverse in highly complex Western economies, whilst less complex emerging market (EM) economies hit a similar climacteric at ECoEs of about 10%.
A world economy dependent on fossil fuels thus faces deteriorating prosperity and diminishing complexity, both of which pose grave managerial challenges because they lie wholly outside our prior experience.
Renewables – mitigation, not transformation
This interpretation – reinforced by climate change considerations – compels us to regard a transition towards renewables as a priority. It should not be assumed, however, that renewables offer an assured escape from the implications of rising ECoEs, still less that they offer a solution that is free either of pain, or of a necessity for social adaption.
There are three main cautionary factors around the ECoE capabilities of solar, wind and other renewable sources of energy.
- The first cautionary factor is “the fallacy of extrapolation”, the natural – but often mistaken – human tendency to assume that what happens in the future will be an indefinite continuation of the recent past. It’s easy to assume that, because the ECoEs of renewables have been falling over an extended period, they must carry on falling indefinitely, at a broadly similar pace. But the reality is much more likely to be that cost-reducing progress in renewables will slow when it starts to collide with the limits imposed by physics.
- Projections for cost reduction ignore the derivative nature of renewables. Building, say, a solar panel, a wind turbine or an electrical distribution system requires inputs currently only available courtesy of the use of fossil fuels. In this specialised sense, solar and wind are not so much ‘primary renewables’ as ‘secondary applications of primary fossil input’.
We may reach the point where these technologies become ‘truly renewable’, in that their inputs (such as minerals and plastics) can be supplied without help from oil, gas or coal.
But we are certainly, at present, nowhere near such a breakthrough. Until and unless this point is reached, the danger exists that the ECoE of renewables may start to rise, pushed back upwards by the rising ECoE of the fossil fuel sources on which so many of their inputs depend.
- The third critical consideration is that, even if renewables were able to stabilise ECoE at, say, 8% or so, that would not be anywhere near low enough.
Global prosperity stopped growing before ECoE hit 6%. British prosperity has been in decline ever since ECoE reached 3.6%, and an ECoE of 5% has been enough to push aggregate Western prosperity growth into reverse. As recently as the 1960s, in what we might call a “golden age” of prosperity expansion, ECoE was well below 2%. Even if renewables could stabilise ECoE at, say, 8% – and that’s an assumption which owes much more to hope than calculation – it wouldn’t be low enough to enable prosperity to stabilise, let alone start to grow again.
SEEDS projections are that overall world ECoE will reach 9% by 2025, 9.7% by 2030 and 11% by 2040. These projections are comparatively optimistic, in that progress with renewables is expected to blunt the rate of increase in trend ECoE.
But we should labour under no illusion that the downwards tendency in prosperity can be stemmed, less still reversed. Renewables can give us time to prepare and respond, but should not be counted on to take us back to a nirvana of low-cost energy.
Confronting us now, then, is a binary choice between management and denial.
The prosperity challenge to government
Until about 2000, the failure of conventional economics to understand the energy basis of economic activity didn’t matter too much, because ECoE wasn’t large enough to introduce serious distortions into its conclusions. Put another way, the exclusion of ECoE gave results which remained within accepted margins of error.
The subsequent surge in ECoEs, however, has caused the progressive invalidation of all interpretations from which it is excluded. This is why the economy increasingly looks out of control, floating on a tide of escalating debt and the perpetual injection of cheap money.
Financial recklessness has been a product of trying to manufacture “growth” where it no longer exists.
What applies to conventional economics itself applies equally to organisations, and most obviously to governments, which use it as the basis of their interpretations of policy.
The consequence has been to drive a wedge between policy assumptions made by governments, and underlying reality as experienced by individuals and households. Even at the best of times – which these are not – this sort of ‘perception gap’ between governing and governed has appreciable risks.
Recent experience in the United Kingdom illustrates this process. Between 2008 and 2018, GDP per capita increased by 4%, implying that the average person had become better off, albeit not by very much. Over the same period, however, SEEDS indicates that most (84%) recorded “growth” in the British economy had been the cosmetic effect of credit injection – it was a simply a process of spending borrowed money – whilst ECoE had risen markedly.
It’s a sobering thought that each £1 of economic “growth” in Britain between 2007 and 2017 was accompanied by £6 in net new debt.
For the average person, then, SEEDS calculates that prosperity has fallen, by £2,220 (9%), to £22,040 last year from £24,260 (at 2018 values) ten years previously. At the same time, indebtedness has risen markedly.
This is visible, to anyone prepared to look. It can be seen in the travails of customer-facing businesses; in worsening insecurity at work; in household debt levels; in housing problems; in government and business indebtedness; and in the millions “just about managing”. All are evidence of these processes in action.
With this understood, neither the outcome of the 2016 “Brexit” referendum nor the result of the 2017 general election was much of a surprise, since voters neither (a) reward governments which preside over deteriorating prosperity, nor (b) appreciate those who appear ignorant of their plight.
This was why SEEDS analysis saw a strong likelihood both of a “Leave” victory and of a hung Parliament, outcomes dismissed as highly improbable by conventional interpretation.
Simply put, if political leaders had understood the mechanics of prosperity as they are understood here, neither the 2016 referendum nor the 2017 election might have been triggered at all.
Much the same can be said of other political “shocks”. When Mr Trump was elected in 2016, the average American was already $3,450 (7%) poorer than he or she had been back in 2005. The rise to power of insurgent parties in Italy cannot be unrelated to a slow but relentless deterioration in personal prosperity ever since 2000.
As well as reframing interpretations of prosperity, SEEDS analysis also puts taxation in a different context, with the French experience a particularly telling example. Between 2008 and 2018, per capita prosperity in France deteriorated by €1,650 which, at 5.8%, isn’t a particularly severe fall by Western standards. Over the same period, however, taxation increased, by almost €2,000 per person. At the level of discretionary, ‘left-in-your-pocket’ prosperity, then, the average French citizen is €3,640 (32%) worse off now than he or she was back in 2008.
This makes widespread popular support for the aims of the gilets jaunes protestors extremely understandable. Though no other country has quite matched the 32% deterioration in discretionary prosperity experienced in France, the Netherlands (with a fall of 25%) comes closest, which is why SEEDS identifies Holland as one of the likeliest locales for future protests along similar lines. It is far from surprising that insurgent (aka “populist”) parties have now stripped the Dutch governing coalition of its Parliamentary majority. Britain, where discretionary prosperity has fallen by 23% since 2008, isn’t far behind the Netherlands on this metric. Much political rancour, both in Britain and abroad, can be traced to this calculation.
Looking ahead, a vital point to be considered is the destruction of pension provision. One of the little-noted side effects of the “monetary adventurism” practised since 2008 has been a collapse in rates of return on invested capital. Ultimately, this means that pensions saving no longer delivers value accretion at rates anywhere near historic norms.
According to the World Economic Forum, forward returns on American equities have fallen to 3.45% from a historic 8.6%, whilst returns on bonds have slumped from 3.6% to just 0.15%. It’s small wonder, then, that the WEF identifies a gigantic, and rapidly worsening, “global pension timebomb”. As and when this becomes known to the public – and is contrasted by them with the favourable circumstances of a tiny minority of the wealthiest – popular discontent with established politics can be expected to reach new heights.
Implications for policymakers
These considerations – all of them related to the deterioration in prosperity and our failure to recognize and address it – create huge changes to political calculations.
A crucial factor going forward will be a decreasing tolerance of inequalities of income and wealth.
This is one reason why, for the centre-right cadres that have dominated Western government for more than three decades, the outlook is bleak. Quite apart from deteriorating prosperity (for which incumbencies are always likely to get the blame), the popular perception has become one in which “austerity” has been inflicted on “the many” as the price of rescuing a wealthy “few”.
It doesn’t help that many conservatives continue to adhere to an extreme ‘liberal’ economic philosophy whose abject failure has become obvious to almost everyone except themselves.
The discomfiture of the centre-right should not, though, be assumed to be of automatic benefit to the political Left. Whilst higher taxation of “the rich” is being made inevitable by deteriorating average prosperity, this alone will not stem an overall decline in the tax base – so any programme predicated on ‘tax and spend’ is being invalidated by events.
The rise of insurgent or “populist” movements can be linked to the deterioration in prosperity, with voters craving solutions to their hardships which don’t involve anyone (other than the wealthiest) paying more tax.
Mainstream politicians now face a clear choice. They can continue to vilify “populists”, but the danger here lies in labelling themselves unpopulist. The wiser course, surely, is to recognize a realignment towards prosperity issues.
In economics, this suggests a transition, towards pragmatism, and away from positions that are ideologically either ‘liberal’ or ‘collectivist’. Pragmatism seems to counsel advocacy of the mixed economy of private and public provision, with an enhanced ethical agenda in the private sector, and greater accountability, and the better setting of priorities, in the public sector.
For as long as these implications are neglected, the erosion of trust, not just in established parties but in systems and institutions, can be expected to continue.
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At last an article worthy of the word ‘radical’! Thank you. I had been on the verge of unsubscribing, because most material on this site is so superficial and so far from radical in the original sense of that overused word. Facts like this make all the mainstream waffle about standards of living, employment rates, the price of petrol, and similar daily news topics irrelevant, don’t they? We need to work out ways of surviving the inevitable energy crisis that you talk of here. What will be the point of Crossrail, when there is no electricity to propel the trains? Crossrail and HS2 are just examples of more of the same. They are insane, because both their construction and running demand massive amounts of energy. The government and political parties are too scared of the voters to face these problems honestly and courageously, too scared to even admit that they exist.
Thank you, much appreciated.
From my perspective, the narrative of our times has been denial and/or ignorance about economic fundamentals, and a dogged adherence to outdated precepts. This has driven a dangerous wedge between financial policy and the real economy. This caused the credit crash of 2008 (GFC I) and is setting the conditions for a monetary crash (GFC II).
I don’t know much about Crossrail, but HS2 seems an absurdity, as does the expansion of LHR.
I suppose someone should explain for the gullible why exactly this is a load of clever codswallop. It evades the elephants in the room, which are demographic change and the unevenness of this change across cultures. If every last corner of the earth, however inhospitable, is to be populated by humans, rather than by species which do not use money, then climate change, which is perennial, will present a problem. Medical progress, the agricultural revolution, industrial advances generally and revulsion at killing & destruction, have conspired to disable the age-old remedies of pestilence, famine and war. There has also historically been a tendency, or more precisely a counter-trend, for advances in technology and the prosperity they bring to be cancelled by excessive survival to puberty, the one true measure of fertility.
It is not the case that there can be a simple quantitative equation of prosperity with the use of energy. This is no more sophisticated than the belief of financial obsessives that all value can be mapped by money. In earlier centuries it was held that agricultural production alone could be a true measure of the economy, since we must eat: and that failure to be self-sufficient here would be the downfall of the kingdom. Hence the need to keep the Corn Laws and otherwise pursue mercantilism.
As Georges Bataille pointed out, the problem is not scarcity (here presumed to be an emerging scarcity of energy) but surplus. What can be done with the excess? Pay monks to spend their lives in prayer? Spend generations building great cathedrals like Notre Dame de Paris? (Rather than rebuilding it in five years.) Wanton destruction of one’s possessions in a show of “sovereignty” as in potlatch? Sacrifice of the first-born? Or invest the surplus in the likes of energy-saving devices? This last solution, which is capitalism, is only provisional, since eventually it only increases the surplus. The contemporary solution, taken inadvertently, is to mindlessly replace the animal world by billions of humans.
Does the author seriously believe that those in positions of power are going to take heart, follow his logic and change their ways to the radical extent implied? Or is this not yet another diagnosis of the type “where we are in history and where, alas, we are headed” without the foggiest notion of how a remedy might be implemented?
My remedy: Strangle consumer advertising (to change the dynamics of the culture). Introduce serious democracy as the superior form of reasoned government. Create inter-professional checks to coax people into using their consciences and judgement at the microlevel. Develop a better understanding of money as a mathematical means of mapping the human world. This includes there being more clearly discrete kinds of money which are not exchangeable.
“Does the author seriously believe that those in positions of power are going to take heart, follow his logic and change their ways to the radical extent implied?”
No, I don’t expect current incumbencies to wake up to the issues. But let me put a question – when the public, already convinced that “austerity” was a way of paying for the rescue of “the rich”, then find out that there will be no pensions for the vast majority, do you think that those in positions of power now will still be in power?
Far from writing ‘codswallop’, as you suggest, Paul, Dr Morgan is one of the most lucid – and, thank god, resolutely apolitical – commentators on economics around.
To take one of your complaints, the most imperative task at present IS precisely to see just where we are, without the obfuscations of redundant ideologies, wishful thinking, and economic theories appropriate to the early Industrial Age and the decades of viably-priced energy growth.
Dr Morgan offers precisely this, and I for one find his thesis most persuasive, explaining much that is has occurred over the last two decades.
This will give us a clearer idea of the problems and crises coming up – indeed, already upon us. And which may indeed sweep away all the established political parties – Left or Right and leave the central bankers quite nakedly exposed.
Personally, I find this tremendously helpful in orientating myself to face them at the micro level, and we may hope that some measure of improved perception of the true state of this rackety old ship, Britannia, filters through to those who make some claim to govern us. Hope, but not, I’m afraid, trust…….
Hello Tim,
Thank you for your excellent article.
I’ve always thought that the point of politicians was to tell us the lies we want to hear to tell us that they will do what we want them to do. A large part of the public seem completely disinterested in spending much time actually establishing if it’s true or doable.
We want them to spend more on the NHS for example, they’re bad if they don’t. We’re not interested in how much value we get from that expenditure or whether it’s sustainable in the long-term. Lots of people want more spending of other peoples money on the NHS but vote for politicians that are unlikely to make them pay more.
We want to be told that happy motoring can go on for ever as long as we convert to electric vehicles. Facts about where the resources to make the cars or upgrade the power supply grid or cover the intermittency of renewables are someone else’s problem. In fact even suggesting that there may be problems get’s you labelled.
We want to work for forty years and be financed and cared for in leisurely retirement for forty years, because it’s our entitlement.
We want to enjoy our western lifestyle but tell developing countries that they can’t because it’ll destroy the environment.
We want stag nights in Prague and hen nights in New York and weekends away in Spain while at the same time as having a go at the nasty airline industry for polluting the planet.
The notion that the surplus energy from burning dense carbon based fuels for the last few centuries may have been a one shot opportunity that is passing is not acceptable. Our renewable future must be the same as our carbon past, nothing else is acceptable.
Look at Germany, they wanted to get rid of carbon free nuclear power in order to feel good about going green but retaining their manufacturing economy was non-negotiable. They though that spending massively increasing the solar and wind production was the answer. They discovered that sometimes it gets dark and the wind doesn’t blow. The cost of power went up and , I think 7 of the 10 biggest carbon emitters in all Europe are now German coal fired power stations.
There may be problems ahead.
People will criticize me and say, “Well what’s your solution then.” I find that if you say to someone that their plan may not work they tend to respond by asking what your solution is, not by considering that there may not be an “acceptable” solution.
My point is to say that it may not be possible for the future to look like the past. My point is to say that rather than seeking to make the future look like the past we may need to accept that it won’t and to decide what we keep and what we let go.
I’ve been watching the recent environmental demonstrations and in general I agree with their analysis of our situation. We are pretty stuffed. The notion that we are going to do anything to turn that round in time, if there event is time left, is unbelievable to me.
Well put. Essentially, a long history of growth has habituated us to the assumption that growth must be perpetual, and nobody in authority is prepared to confront the alternative.
Those unpersuaded by the surplus energy interpretation cannot find an alternative explanation for why we’ve had to unleash tidal-waves of cheap debt and cheap liquidity, just to keep the show on the road.
So, as you say, the public are offered sops. Just one example is the notion that EVs can replace I/C cars, without regard for where the electricity for this is supposed to come from, or what its climate change effects would be.
QUOTE “No, I don’t expect current incumbencies to wake up to the issues. But let me put a question – when the public, already convinced that “austerity” was a way of paying for the rescue of “the rich”, then find out that there will be no pensions for the vast majority, do you think that those in positions of power now will still be in power?”
No, they will be enjoying their pensions, and it is their offspring that will be in power. Not least due to parties, conspiracies against the public and the rule of reason. There is NO need for parties, although they may be permitted a subsidiary role. See http://www.fuzzydemocracy.eu.
Of course, if you measure prosperity in air miles, the reasoning that the low-hanging fruit is gone and we need a mathematical formula to calculate access to the high-hanging variety does have a certain bizarre logic. This is Marxist thinking. There will (certainly) be a populist revolt due to the dearth of hen parties. Yet one Bush was amazed that people in Iraq should, in the wake of his invasion, prefer religious values over consumerism. Not that I’m defending these or those values. Just saying that deterministic thinking is flawed.
Anyway, you failed to address the core of my intervention and attacked an aside.
On the rhetorical line “We want”: Not Me.
More later maybe.
Excellent article Tim, and absolutely correct in many ways. My friend, Gerry Brady, at: http://boomfinanceandeconomics.com/#/ He has a radical view on our global economic condition that complements your analysis: This presentation is worth a visit:
https://lab.avestix.com/wp-content/uploads/sites/2/2019/04/Gerry-Brady-Revolution-in-Property-Finance.pdf?utm_campaign=Event%20Attendees&utm_source=hs_email&utm_medium=email&utm_content=71875944&_hsenc=p2ANqtz-99VR0QslLpER0mkUX6cIXxryOjT16DJDy8FZylQGo8z3B7joNc4u-n9_FYGYi-KI27QiCLOcyZ1RZ8R4C6YcA3KhZHiGPScK7l9VOXc7va3zKGue4&_hsmi=71875944
Sorry it’s so complex! Anyway, I would value your assessment: [email protected]
Thanks, Peter, I will look into that.
Look at charts from 2008/9. Copper, oil, S&P, wood, exports etc
Look at debt/gdp ratios for the last 30 years
Look at politics..
Look at China debt creation for the past 10 years
Seems surplus energy is exchanged by surplus ‘money creation’.
Because, we’re out of luck, and we try to fool ourselves in the game of infinite growth. Political correctness as far as monetizatiom goes, until they monetize the kitchen sink and its there, suddenly, for all to see…
Critical mass in 3, 2, 1…