“Assume a tin-opener”
In a recent speech, former US Treasury Secretary Larry Summers posed an interesting question, which I’ll paraphrase for you.
The electricity industry accounts for 4% of GDP by value. If electricity supplies are halted, how much economic activity remains?
To the economist, the answer is 96%.
To any sane non-economist, however, the answer is 0%, because, without electricity, the entire economy would grind to an immediate halt.
This, essentially, tells you all you need to know about the real role of energy.
It probably also tells you all you need to know about economists.
My late father used to recount a story about three professors, marooned on a desert island with hundreds of tins of baked beans, but no tin-opener. How can they eat?
“My answer”, says the chemist, “is to put the tins in water. Over time, they will corrode away”.
“But”, says the physicist, “how many years is that supposed to take? My solution is to put the tins in a fire. Pressure will increase, and they will soon explode”.
“Covering the entire island with beans and peppering us with lethal shrapnel”, retorts the chemist.
Both turn to the economist for advice. It is succinct:
“Assume a tin-opener”.
A useless answer, of course. But is “assume perpetual growth” any better?
* * * * * * *
Unless some event provokes me into print (which is by no means impossible), this is likely to be my last article of 2013. It’s been an eventful year. In August, I left Tullett Prebon, where I’d been head of research since 2009. During the summer I completed the manuscript of my book, Life After Growth, which was published in November.
If you’ll indulge me for a few moments, I’d like to discuss my recent activities, as this leads into future plans. Let me make one thing abundantly clear, though – everything that has happened in recent months reaffirms my belief in the “surplus energy” interpretation (and it also, for that matter, reaffirms my belief that, broadly speaking, economic growth is over).
Working with Terry Smith and others at Tullett Prebon was a marvellous experience. After leaving the company, I immediately became immersed in completing the book. Life After Growth was a huge project even though I’d laid much of the groundwork with earlier research. The big challenge was to tie it all together, my aim being to articulate, in everyday language, an analysis that could be applied equally to the past, the present and the future of the economy. What you don’t really see when you read the book is the extensive statistical work that it draws on.
I got this done, but I don’t mind saying that it was exhausting. Ironically, energy (in the purely personal sense of the word) was in short supply after I’d completed the book.
As a result, I didn’t feel able to accept any of the many speaking invitations that I received, even though a lot of these were at very interesting events. As the festive season approaches, I’m recharging my batteries and thinking about what to do in 2014.
* * * * * * *
One big project has dominated my thinking about future directions. You could think of it as Life After Growth II – The Database. The aim is to model EROEI, and its implications in terms of energy costs and economic trends, in a comprehensive way. It’s a huge exercise, and apologies are due to anyone who has noted the dearth of written comment from me in recent months.
At time of writing, the database is nearly complete. I’ve modelled the EROEI environment by energy source and location – back-testing it for three decades, which is about as far back as is possible with the data sources that I have – and have moved on to countries and regions, starting with the US, Canada, Mexico, Germany, Britain, France, Brazil, Australia, China, India, Japan, Russia, Saudi Arabia and South Africa.
I can tell you now that most (though not all) of these countries are facing economic erosion, and most are carrying financial commitments that their future economic trajectories will not allow them to honour.
The scale of these challenges differs markedly between countries. If you were to read the database, it would cheer you up if you happened to be Norwegian or Saudi Arabian, but would depress you no end if you are British, Mexican or Japanese.
* * * * * * *
The reality, you see, is that energy isn’t “only” 8% of the global economy any more than electricity is “only” 4% of US activity. Without energy, the economy would cease to exist.
This isn’t the problem, of course, because energy supplies are abundant. The real problem is that we’ve exhausted supplies of energy which are either “highly concentrated” (if you’re a scientist), “high return” (if you’re an energy economist) or, in layman’s terms, “cheap”.
As a result, much of the world is ex-growth (as, arguably, it has been for at least a decade). Human ingenuity is such that we should be able to cope with an ex-growth economy, not least by curbing wastefulness.
This would be true if we hadn’t already applied that same ingenuity in the creation of a financial system predicated on “assume
a tin-opener perpetual growth”.
This means that politicians and central bankers are trying to defy economic gravity, resorting to all sorts of increasingly desperate
fiddles policies in order to keep at least the semblance of growth going. It won’t work, of course.
At least my new database is already telling me where, when and how things are likely to go wrong (or, in some cases, right).
My task for 2014 is to work out how best to use this information.
Meanwhile, have a great Christmas, and please do make sure you’ve got a corkscrew, a bottle opener – and, of course, a tin-opener!