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 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.