Why is Economic Growth so Popular?

I’m at AGU meeting folks and basically being swamped by it, and Dan is literally on safari in Uganda. Fortunately Ugo Bardi has been blogging up a storm and has kindly allowed republication of some of his pieces. We’ll start here. Ugo, of course, retains copyright. That’s the good news…


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When the new Italian Prime Minister, Mr. Mario Monti, gave his acceptance speech to the Senate, a few days ago, he used 28 times the term “growth” and not even once terms such as “natural resources” or “energy”. He is not alone in neglecting the physical basis of the world’s economy: the chorus of economic pundits everywhere in the world is all revolving around this magic world, “growth”.  But why? What is that makes this single parameter so special and so beloved?

growth

During the past few years, the financial system gave to the world a clear signal when the prices of all natural commodities spiked up to levels never seen before. If prices are high, then there is a supply problem. Since most of the commodities we use are non-renewable – crude oil, for instance – it is at least reasonable to suppose that we have a depletion problem. Yet, the reaction of leaders, decision makers, and economic pundits of all kinds was – and still is – to ignore the physical basis of the economic system and promote economic growth as the solution to all our problems; the more, the better. But, if depletion is the real problem, it should be obvious that growth can only make it worse. After all, if we grow we consume more resources and that will accelerate depletion. So, why are our leaders so fixated on growth? Can’t they understand that it is a colossal mistake? Are they stupid or what?

Things are not so simple, as usual. One of the most common mistakes that we can make in life is to assume that people who don’t agree with our ideas are stupid. No, there holds the rule that for everything that exists, there is a reason. So, there has to be a reason why growth is touted as the universal cure for all problems. And, if we go in depth into the matter, we may find the reason in the fact that people (leaders as well as everybody else) tend to privilege short term gains to long term ones. Let me try to explain.

world standard runLet’s start with observing that the world’s economy is an immense, multiple-path reaction driven by the thermodynamic potentials of the natural resources it uses. Mainly, these resources are non-renewable fossil fuels that we burn in order to power the whole system. We have good models that describe the process; the earliest ones go back to the 1970s with the first version of “The Limits to Growth” study. These models are based on the method known as “system dynamics” and consider highly aggregated stocks of resources (that is, averaged over many different kinds). Already in 1972, the models showed that the gradual depletion of high grade ores and the increase of persistent pollution would cause the economy to stop growing and then decline; most likely during the first decades of the 21st century. Later studies of the same kind generated similar results. The present crisis seems to vindicate these predictions.

So, these models tell us that depletion and pollution are at the root of the problems we have, but they tell us little about the financial turmoil that we are seeing. They don’t contain a stock called “money” and they make no attempt to describe how the crisis will affect different regions of the world and different social categories. Given the nature of the problem, that is the only possible choice to make modelling manageable, but it is also a limitation. The models can’t tell us, for instance, how policy makers should act in order to avoid the bankruptcy of entire states. However, the models can be understood in the context of the forces that move the system. The fact that the world’s economic system is complex doesn’t mean that it doesn’t follow the laws of physics. On the contrary, it is by looking at these laws that we can gain insight on what’s happening and how we could act on the system.

There are good reasons based in thermodynamics that cause economies to consume resources at the fastest possible rate and at the highest possible efficiency (see this paper by Arto Annila and Stanley Salthe). So, the industrial system will try to exploit first the resources which provide the largest return. For energy producing resources (such as crude oil) the return can be measured in terms of energy return for energy invested (EROEI). Actually, decisions within the system are taken not in terms of energy but in terms of monetary profit, but the two concepts can be considered to coincide as a first approximation. Now, what happens as non-renewable resources are consumed is that the EROEI of what is left dwindles and the system becomes less efficient; that is, profits go down. The economy tends to shrink while the system tries to concentrate the flow of resources where they can be processed at the highest degree of efficiency and provide the highest profits; something that usually is related to economies of scale. In practice, the contraction of the economy is not the same everywhere: peripheral sections of the system, both in geographical and social terms, cannot process resources with sufficient efficiency; they tend to be cut off from the resource flow, shrink, and eventually disappear. An economic system facing a reduction in the inflow of natural resources is like a man dying of cold: extremities are the first to freeze and die off.

Then, what’s the role of the financial system – aka, simply “money”? Money is not a physical entity, it is not a natural resource. It has, however, a fundamental role in the system as a catalyst. In a chemical reaction, a catalyst doesn’t change the chemical potentials that drive the reaction, but it can speed it up and change the preferred pathway of the reactants. For the economic system, money doesn’t change the availability of resources or their energy yield but it can direct the flow of natural resources to the areas where they are exploited faster and most efficiently. This allocation of the flow usually generates more money and, therefore, we have a typical positive (or “enhancing”) feedback. As a result, all the effects described before go faster. Depletion can be can be temporarily masked although, usually, at the expense of more pollution. Then, we may see the abrupt collapse of entire regions as it may be the case of Spain, Italy, Greece and others. This effect can spread to other regions as the depletion of non renewable resources continues and the cost of pollution increases.

We can’t go against thermodynamics, but we could at least avoid some of the most unpleasant effects that come from attempting to overcome the limits to the natural resources. This point was examined already in 1972 by the authors of the first “Limits to Growth” study on the basis of their models but, eventually, it is just a question of common sense. To avoid, or at least mitigate collapse, we must stop growth; in this way non renewable resources will last longer and we can use them to develop and use renewable resources. The problem is that curbing growth does not provide profits and that, at present, renewables don’t yet provide profits as large as those of the remaining fossil fuels. So, the system doesn’t like to go in that direction – it tends, rather, to go towards the highest short term yields, with the financial system easing the way. That is, the system tends to keep using non renewable resources, even at the cost of destroying itself. Forcing the system to change direction could be obtained only by means of some centralized control but that, obviously, is complex, expensive, and unpopular.  No wonder that our leaders don’t seem to be enthusiastic about this strategy.

Let’s see, instead, another possible option for leaders: that of “stimulating growth”. What does that mean, exactly? In general, it seems to mean to use the taxation system to transfer financial resources to the industrial system. With more money, industries can afford higher prices for natural resources. As a consequence, the extractive industry can maintain its profits, actually increase them, and keep extracting even from expensive resources. But money, as we said, is not a physical entity; in this case it only catalyzes the transfer human and material resources to the extractive system at the expense of subsystems as social security, health care, instruction, etc. That’s not painless, of course, but it may give to the public the impression that the problems are being solved. It may improve economic indicators and it may keep resource flows large enough to prevent the complete collapse of peripheral regions, at least for a while. But the real attraction of stimulating growth is that it is the easy way: it pushes the system in the direction where it wants to go. The system is geared to exploit natural resources at the fastest possible rate, this strategy gives it fresh resources to do exactly that. Our leaders may not understand exactly what they are doing, but surely they are not stupid – they are not going against the grain.

The problem is that the growth stimulating strategy only buys time (and buys it at a high price). Nothing that governments or financial traders do can change the thermodynamics of the world system – all what they can do is to shuffle resources from here to there and that doesn’t change the hard reality of depletion and pollution. So, pushing economic growth is only a short term solution that worsens the problem in the long run. It can postpone collapse but at the price of making it more abrupt in the form known as the Seneca Cliff. Unfortunately, it seems that we are headed exactly that way.

senica cliff

This post was inspired by an excellent post on the financial situation written by Antonio Turiel with the title “Before the Wave” (in Spanish). 

Source: Cassandra’s legacy

Comments:

  1. "Already in 1972, the models showed that the gradual depletion of high grade ores and the increase of persistent pollution would cause the economy to stop growing and then decline; most likely during the first decades of the 21st century. Later studies of the same kind generated similar results. The present crisis seems to vindicate these predictions."

    That's quite a leap there. I've seen peak oilers arguing the 'present crisis' is underpinned by peak oil too, but I've not seen much in the way of actual evidence. That sort of majestic correlative leap doesn't fill me with confidence.

    "Pushing economic growth is only a short term solution that worsens the problem in the long run." When did that become true? Supposing we're in overshoot now, what are the factors that separate periods of overshoot from periods of 'healthy' growth? I'm presuming here that some of the growth that's taken place in last 2-300 years has been a good thing.

    This issue has come up before: growth has physical limits, as does the population: we'll end up 1 person per square foot in 750 years at the current rate. But that would be an absurd basis for arguing we need to start sterilising people.

    Not sure why I'm feeling so vexed by this. I think it's perhaps because I'm beginning to watch the impact of recession's tentacles creep into so many areas of life. This is what stopping growth looks like, in our current system. We can fantasise about utopias here, but we're still all on-board this particular tanker, and need to find ways to steer it away from the rocks.

    Ugo mentions goverments redirecting money to industry, catalysing more resource use. If we're to transition to a carbon-free economy, isn't that exactly what needs to happen? Or not? Can we come up with any other methods for getting us to a carbon-free future that don't involve using something close to the current financial system to invest in the necessary infrastructure?

  2. "Ugo mentions goverments redirecting money to industry, catalysing more resource use. If we’re to transition to a carbon-free economy, isn’t that exactly what needs to happen? Or not?"

    Yes - IF we were to redirect financial resources to a carbon-free economy, that is exactly what needs to happen. The problem is that it is not happening

  3. I think this is a good topic for us- how imminent is the infinite hamster problem?

    To what extent should all our sustainability questions be treated as parts of a single problem and to what extent can they be treated ad hoc as separate issues? I think there are enough commonalities that it is worthwhile thinking about them collectively. But this bundling may
    make it more difficult to solve any particular issue.

  4. Resources that provide necessities (food, clothing, shelter) tend to be renewable. The author chooses to focus on non-renewable resources (mainly crude oil).

    Obviously these resources will not last forever, which is exactly why we need to invest in renewable energy. Sooner or later, renewable energy will have to make-up for the void that depletion of non-renewable energy and increased global energy demand leave.

    If the U.S. wants to be a global power going forward, we have to be at the cutting edge with these technologies. This can include subsidies, R & D, and taking power away from lobbys who put SR profits over long run well-being.

    But the idea that growth is bad is ridiculous. Has the author of this article never heard of Sustainable Development?

  5. how imminent is the infinite hamster problem?

    To borrow from Chris Martenson from the Crash Course (who put up an interesting presentation on his site last week) everything revolves around the three E's: Economy, Energy and Environment.

    So, to answer your question (based on my view of things):

    Economy: very imminent. The whole debt Ponzi scheme seems to be unwinding. No one is willing to solve it, because it will hurt too much and the powers that be aren't willing to take their losses. Maybe they can prolong it a while longer with some magic tricks, but this bill has been building up for decades.

    Energy: If oil production truly has plateaued and the global system obviously can't do anything else but grow, I'd say this is pretty imminent as well, and possibly antagonistically tied in with the first E.

    Environment: Though not good, not really imminent either (yet). It could possibly be the icing on the cake a bit further down the road.

    We can talk details all we like, while we're comfortably sitting at home behind our computers, but in the end it all boils down to what Ugo wrote, writes and hopefully will write.

    Even if all our sustainability questions aren't caused by one single problem (dominant economic paradigm), they cannot be solved conclusively as long as that problem is there. It's a major obstruction.

  6. Why is economic growth so popular? Because everybody wants or needs to cash in compound interest. No exponential growth (real wealth), no compound interest (virtual wealth).

    What strikes me is that almost everybody thinks of the market of virtual wealth just like the market of real stuff. But, alas, financial markets have no invisible hands.

    ---
    What is the infinite hamster problem?

  7. "Why is economic growth so popular? Because everybody wants or needs to cash in compound interest. No exponential growth (real wealth), no compound interest (virtual wealth)."

    Hiring a car doesn't require that the number of cars should multiply. You're paying for the use of the car for a time. The same can apply to money: you're paying to hire it for a time. There's absolutely no requirement for growth to justify charging interest any more than it's wrong to charge for car hire. The existence of growth does *change* the nature of that hire, but it's not a necessary condition for charging interest. Getting a mortgage is essentially hiring money so you can enjoy living in the house a good 10 years or so earlier than you would otherwise be able to. Hiring money is often about buying time in this way.

    Impossible hamster.

  8. Let’s see, instead, another possible option for leaders: that of “stimulating growth”. What does that mean, exactly? In general, it seems to mean to use the taxation system to transfer financial resources to the industrial system.

    The peoples of the earth will need perhaps around 200 square km of solar panels, much of it on rooftops, and a similar area of wind turbines. This requires "transfer of resources to the industrial system" but more importantly for generating influential opposition, alteration of existing cash flows.

    The rules do not ensure anything like optimal circulation of money, but allow and almost invite an unhealthy degree of accumulation of money and power. Ideally this could be different. As with a number of posts at Planet 3.0 this one leads me to back to Steve's The Power to Change Systems. Unfortunately this power has been vested in a small minority, hence Steve's post ends with

    … ... And then take to the streets.

    Conclusion: Notice that as we proceed down the list, and look at more fundamental changes to the systems, the solutions for climate change and the financial crisis start to merge. Also notice that in both cases, many of my examples aren’t what climate scientists or economists generally talk about. We need to broaden the conversation.

  9. 200 km ^ 2 sounds pretty trivial. At 10% efficiency in an equatorial desert (optimal conditions) with no area overhead you will yield 50 watts per square meter, so at 2 * 10^8 meters you will yield 10^10 watts, or about 1.3 watts per capita. That will help, but not much.

  10. Sustainable development was defined by the Bruntland commissions as "a pattern of reswource use that meets the needs of the present without compromising the ability of future generations to meet their own needs"; there is nothing about growth there.

    It is certainly true that we need growth in the poorer half of the world. The question is what resource consumption level we can rise to on aq global average and still meet the constraints.

    In our back of the envelope I=PAT type calculations, it is easy to argue that much of the world has already overshot this level. This means that we can ASPIRE to zero growth if we diligentrly reduce impact. It actually doesn't look that easy in a broad brush model. It's once you break that down onto components that the story becomes less clear.

  11. mt you got me on the numbers for sure. A square of solar panels 200 km on a side would be better as part of the energy solution. But this underscores the point that we can't get close to what we need without very major manufacturing and many jobs. The price would be better than good after accounting for externalities. So why don't we see the clearly need crash program to re-energize ourselves? It seems to me that our leaders do not represent the 99.99 percent. I have mentioned a democracy deficit before, but already it looks like a blitzkrieg war on democracy which the Dark Side may already have won. This continues to concern me much more than limits to growth.

  12. "Hiring money"

    Well, yeah, there's no problem with that - if it's not overdone. The problem is "everybody". It's no problem for some random individuals to hire or lend some money. But if a large part of the system relies on debt then bad things can happen.

    Already with the elementary notion of (fiat) money we get this individual-community paradox: You (individual) can anytime change your money into real assets. But we (community) can't all do that at the same time (all assets are owned and to produce new ones takes time).

    Debt is promise of future production of assets. Can "we" (U.S.A, EU) still fulfil this promise? The compund interest paradox/problem is much amplified by fractional reserve banking, where banks create money ex nihilo. Here there's nobody who promises anything. But the money is there, waiting for the economy to grow accordingly.

    Compound interest gets even more ridiculous if you look at it from the viewpoint of "entropy": While real assets decay, money grows. Sell your hamster and you get an immortal virtual hamster, even two or more if you wait (lend the money) long enough.

  13. "Can you expand on your use of “entropy”?"

    Haha! Guess why I put it in scare quotes... I haven't read any Georgescu-Roegen, but Daly's Beyond Growth (1995) who tells about one Frederick Soddy who did thermodynamic economics around 1920.

    The cow dies (or contracts BSE). The Mercedes Benz wears out (or ends in a crash). Entropy increases. And then there's energy that calls for being profited from. Entropic economics? Dunno.

    At least it seems I've just invented the immortal parthenogenic virtual cow. (Hamster not so good picture here.)

    (I've only recently found some motivation to look into the ridiculousities of economics. Last century I could have prided myself in understanding the math behind the Fundamental Theorem of Asset Pricing (which back then I found maximally uninteresting (later amplified by hearing about stochastic analysis in climate modelling)). Plus, I'm quick in forgetting stuff. So, don't take mestupid too serious...)


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