#163. Tales from Mount Incomprehension


There was more than a grain of logic in the observation by US treasury secretary Steven Mnuchin that climate activist Greta Thunberg should save her advice until “[a]fter she goes and studies economics in college”. If the authorities were to consent to her demand for the immediate cessation of the use of fossil fuels, the economy would crash and, quite apart from the misery that this would inflict on millions, we would have abandoned any capability to invest in a more sustainable way of life.

This said, taking a course in economics, as it is understood and taught conventionally, would not enhance, in the slightest, her understanding of the critical issues. Conventional economics teaches that economics is ‘the study of money’, and that energy is ‘just another input’. These claims cannot be called ‘contentious’. They are simply wrong.

Worse still, her audience at Davos – the Alpine pow-wow of the world’s political and economic high command – are almost wholly persuaded by a false interpretation which states that action on climate risks carries a “cost”, meaning that doing what she asks would be costlier than carrying on as we are, with an economy powered by oil, gas and coal.

This is a folly every bit as absolute as the argument that we must immediately cease all use of the energy sources on which the economic growth of the past two centuries has been based. Continued reliance on fossil fuels might or might not destroy the environment, but it would certainly condemn the economy to collapse.

A commonality of interests

Because I have an extensive ‘to-do’ list – and in the hope that readers might appreciate some brevity on this issue – let me be absolutely clear that neither side of the debate over the economy and the environment understands how these processes really work. Worse still, it seems that neither side wants to understand this reality.

There’s a hugely damaging false dichotomy around the assumption that there’s some kind of trade-off between our environmental and our economic best interests. If “Davos man” thinks that the economy can prosper so long as we cherry-pick the profitable bits of the environmental agenda (like carbon trading, and forcing everyone to buy a new car), and pour bucket-loads of greenwash over the rest of it, he (or she) could not be more wrong

Because literally none of the goods and services which comprise the economy could be produced without energy, it should hardly be necessary to point out that the economy is an energy system. Equally, it should be obvious that, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This access component is known here as the Energy Cost of Energy (ECoE), and it forms a critical part of the equation which determines our prosperity.

The third part of this ‘trilogy of the blindingly obvious’ is that money has no intrinsic worth, and commands value only as a ‘claim’ on the products of energy. I make no apology for repeating that air-dropping cash (or any other form of money) to a person stranded in the desert, or cast adrift in a lifeboat, would bring him or her no assistance whatsoever.

Money is simply a medium of exchange, valid only when there is something for which it can be exchanged.

The complexity trap

The modern industrial economy is not only enormous by historic standards, but is extraordinarily complex as well. Scale and complexity make the modern economy high-maintenance in energy terms. Output grew rapidly in the period (roughly between 1945 and 1965) when trend ECoEs were at their historic nadir, but has struggled since then, as ECoEs have risen.

Analysis undertaken using SEEDS (the Surplus Energy Economics Data System) indicates that prosperity in the Advanced Economies (AEs) of the West ceased to grow when ECoEs hit a range between 3.5% and 5%. Less complex Emerging Market (EM) economies have greater ECoE tolerance, but they, too, start to become less prosperous once ECoEs reach levels between 8% and 10%. Both China and India have now entered this ‘growth killing ground’.

Back in the high-growth post-War decades, ECoEs were between 1% and 2%. By 2000, though, global trend ECoE had reached 4.1%, which is why the advanced West was already encountering something which bewildered economists labelled “secular stagnation”, though they were at a loss to explain why it was happening. By 2008 – when ECoE had reached 5.6% – efforts at denial based on credit adventurism had achieved nothing other than an escalation in risk which brought the credit (banking) system perilously close to the brink.

Since then, and whilst futile exercises in denial have segued into monetary adventurism, ECoE has continued its relentless rise. Last year, world trend ECoE broke through the 8% threshold at which prior growth in EM prosperity goes into reverse. This, ultimately, explains why global trade in goods is deteriorating, and why sales of everything from cars and smartphones to chips and components are sliding.

The average person in the West has been getting poorer for more than a decade, and, increasingly, he or she knows it, whatever claims to the contrary are made by decision-makers who, for the most part, still don’t understand how the economy really works.

Something very similar now looms for EM countries and their citizens – and, when evidence of EM economic deterioration becomes irrefutable, the myth of “perpetual growth” in the world economy will be exploded once and for all.

When that happens, all of the false assumptions on which a bloated financial system relies will crumble away.

Tenacious irrationality

The irony here is that, far from avoiding economy-damaging “costs”, continued reliance on fossil fuels would be a recipe for economic oblivion. The destructive upwards ratchet in ECoEs is driven by fossil fuels, which still provide four-fifths of our energy supply, and whose costs are rising exponentially now that depletion has taken over from scale and reach as the primary driver of cost. Far from imposing “costs” that will push us towards economic impoverishment, transitioning away from fossil fuels is the best way of minimising future hardship.

This means that economic considerations, when they are properly understood, support, rather than undermine, the arguments put forward by environmentalists.

But we should be equally wary of claims that renewable energy (RE) can usher in some kind of economic nirvana. The ECoEs of REs are highly unlikely ever to fall below 10%, a point far above prosperity maintenance thresholds (of 3.5-5% in the West, and 8-10% in the EMs), let alone give us a return to the ultra-low ECoEs of the post-1945 era of high growth.

Critically, transition to REs would require vast amounts of inputs whose supply relies almost entirely on the use of FFs. The idea that we can somehow “de-couple” economic activity from the use of energy, meanwhile, is utterly asinine.

The only logical conclusion is that we should indeed transition towards REs, but should not delude ourselves that doing this can spare us from deteriorating prosperity, or from other processes (such as de-complexification and de-layering) associated with it. The one-off gift of vast surplus energy from fossil sources is fading away, which, from an environmental point of view, might be just as well. What matters now is that we manage, in a pragmatic and equitable way, the transition to lower levels of energy use and gradually eroding prosperity.

It’s a disturbing thought that our economic and environmental futures are trapped in a slanging match between green fanaticism and Davos-typified cynicism. It’s a truism, of course, that people tend to believe what they want to believe – but this is a point at which the reality of energy as the critical link between prosperity and the planet needs to force its way to the fore.

If there’s cause for optimism here, it is that reality usually triumphs over wishful thinking. The only real imponderables about this are the duration of the transition to reality, and the scale of the damage that protracted delusion will inflict.

800 thoughts on “#163. Tales from Mount Incomprehension

  1. Slow economic growth is a sign of success


    For more information, see the author’s book, Fully Grown: Why a Stagnant Economy Is a Sign of Success (University of Chicago Press, 2020)

    Rather than the rising ECOE, this acedemic is making the argument that growth stagnation is a product of the demagraphic balance shifting to an older society and the balance shift away from goods consumption to services consumption.

    I responded with the ECOE perspective.

    I presume from an ECOE perspective, the shift towards higher service consumption is directly due to the rising costs of surplus energy, especially in relation to energy services which in turn reduces discretionary spending for goods.

    • Economics optimists (from the conventional stable) routinely point at services when endeavouring to shrug off the implications of falling sales of “stuff” (cars, phones, chips, components, commodities etc). More than 90% of recorded US GDP growth over the past decade has been accounted for by services, and virtually nil in thew agricultural, extractive, manufacturing and construction sectors.

      Services are important, obviously, but we need to treat such assertions with more than a pinch of salt. There’s a lot of “taking in each others’ washing” about this. This is where newly-injected liquidity shows up. It’s where cheap credit is likeliest to show up, too, using credit to pay for a holiday, for example. Additionally, rising asset prices, induced by cheap capital, also inflate apparent activity in a wide range of areas (think, for instance, of the income of an estate agent, who sells the same number of houses, at the same rate of commission, but average selling prices have risen).

      Additionally, travel plays a huge role in this, which makes it very exposed to virus fear effects. With the media calling cruise-liners “floating petri-dishes”, people understandably wary about taking flights, and the risk being quarantined either at your destination or on your return (or even both), travel is going to be hammered. The world’s biggest mobile tech conference (in Barcelona) has already been scrapped, the Venice carnival was cut short, and I wouldn’t put a bet on the Tokyo Olympics actually happening. Football and rugger matches are already being postponed, or played in empty stadia.

      If this is, as I suspect, “peak travel”, the service sector is going to be reporting horrible numbers quite soon.

  2. Does Democracy Work?
    Ron Paul writes:
    “Trump loved it when Wikileaks exposed the criminality of Hillary Clinton and the Democratic Party, as it cheated to deprive Bernie Sanders of the Democratic Party nomination. Wikileaks’ release of the DNC emails exposed the deep corruption at the heart of US politics, and as a candidate Trump loved the transparency.

    Then Trump got elected.”

    If you haven’t followed the Julian Assange case, the US in the UK court is taking the position that Assange should be tried for espionage in a US court, although he is not a US citizen, but that he also cannot claim second amendment rights because he is not a US citizen. Trump favors a 175 year sentence.

    All of which might lead one to despair that a vote means anything at all. Scholarly studies have shown that what the public thinks means practically nothing to our elected representatives. One of Bush’s officials proudly stated ‘we make our own reality’. And thinking that democracy makes a difference is assuming that the public is more trustworthy than Washington officials…which may be a wildly wrong assumption.

    I made a little resolution yesterday not to be so cynical. But I think my resolve lasted less than 24 hours.

    Don Stewart

    • This issue occurred to me about the CEO of Huawei, too – since trading with Iran isn’t illegal for a Chinese citizen under Chinese law, what possible case has the US for demanding extradition, or Canada for detaining her? I’ve no idea why the UK ever extradites its own citizens – many other countries never do this.

      The UK has behaved very badly over Assange. When he was holed up in the Ecuadorian embassy, some moron in the government threatened to violate embassy sovereignty to grab him, thereby putting in danger British diplomats around the world. This is the arrogance of power at its worst.

    • Don, I am not blaming America or Trump, unfortunately USA is a police state, a classic example of fascism being the collusion of state and corporations; I expect nothing less from USA.as they will repress just about anything that threatens their hegemony but I rest content that their comeuppance will arrive in due course.

      No, I vehemently accuse our government in UK of being the slobbering poodle to USA that they have always been. Our politicians need to find some backbone, dismiss this case for the crass invention it is, and tell Trump to get lost. We will be facing much more nonsense from America before Brexit is over. I worry much about our NHS as the American healthcare despots are eyeing our wonderful system and any HMG that puts this in jeopardy will have a riot on their hands.

      I am seeing my MP in April to make my point and there are many of Julian’s supporters doing the same. God help Boris if they extradite him.

  3. It’s interesting, in the light of current events, that London Heathrow Airport still wants to add an additional runway, supposedly reflecting future growth in demand. The airline industry, meanwhile, wants us to believe that it can become carbon-neutral, apparently by a combination of using biofuels and planting trees.

    My own view is that we may very well be at “peak aviation”, and perhaps even “peak travel”. Anyone flying abroad on holiday now risks not only quarantine before they can leave their desitination, but after they get home as well, not to mention the actual infection risk. Faced with that, staying at home might have a lot of appeal. As for cruise-liners, the media tag “floating petri-dishes” isn’t a great marketing slogan.

    I’m not basing this interpretation on the virus, which hopefully will be a time-limited event. But, even before this hit, sales of cars worldwide were falling – prosperity, as measured using SEEDS, is already in decline – and then there’s the climate issue.

    We’ve only ever managed to fly courtesy of the ultra-high power-to-weight ratio of petroleum. It might not be too fanciful to wonder whether, in not too many decades from now, the only “frequent fliers” might have feathers….

    • I think there will be still short hops around Europe available on electric planes with advanced batteries with five times the energy density of current ones.

      These will be 100 seaters.

      I do think -as I have mentioned before – that we’ll need a new channel tunnel to cope with frieght.

      Also the new HS2 should be a relatively slow speed frieght and passenger line.

      The Governments assertion that shaving 20 – 30 minutes off travel times will lead to greater productivity is ridiculous.

      But the department that did the sums may still think that computers are room sized and that there is no Internet.

    • That makes rather a lot of assumptions, I believe.

      First, we’d have to prove that we can increase the efficiency of batteries to that sort of extent. Second, we’d have to prove that we can supply the necessary materials, within satisfactory cost and environmental parameters. Even that would leave us with the hefty cost of building enough aeroplanes to replace the very large numbers in use today. Third, we’d have to assume that customers, whose prosperity is decreasing, are prepared to pay up.

    • Well there is current research which indicates that between 3 to 5 times current energy density is possible which use far less precious metals.

      There would be no need for a large fleet as mass air travel as we know it will not exist.

      For much European travel cars and planes can be replaced with coaches and trains.

      Hydrogen powered coaches are feasible and although ticket prices won’t be as cheap as the legendary Magic Bus – people will still want to travel.

      There will still be oil left for some long distance jet travel – but this will be severely restricted and would excluded tourism.

    • Yesterday, I missed a scheduled conference call. But here is a summary:
      “Collectively, much human behavior stems from beliefs rooted in complexes and archetypes — symbols and “stories that we tell ourselves.” All behavior is also a balance between cooperation and competition. American stories, like cowboy movies, have long tipped American behavior toward individualism and competitiveness, but we also rush in to help victims of disasters, like hurricanes.

      Scientists long assumed that if they just presented facts and data about climate change, officials and the public would take action. Instead they met intense pushback and denial. They had left the “heart” out of their stories. Belatedly, they are now communicating better. ”

      Yesterday I saw an advertisement, which obviously benefitted greatly from the magic of photo-shop. Two fat and frumpy 30ish women are sitting in front of a TV eating potato chips. Next scene is same two women, but now at a swimming pool somewhere in the tropics with palm trees and a distant blue ocean, attired in the legal minimum in terms of bathing suits, sipping frosty drinks, while two hunky guys approach them. (taking advantage of that extraordinary power to weight ratio)

      So the real scientists face the extraordinary task of overcoming the ‘complexes and archetypes’ that the descendants of Edward Bernays and David Ogilvy have crafted so skillfully. There seem to be four choices:
      Scare people to death
      Keep dancing as long as the music plays
      Craft a better way to live, holistically

      Most of what we have seen is the second option, the choice of virtually all of the politicians. The second most popular choice is the third option, which is the overwhelming favorite of corporations. The scientists have mostly chosen the first option. The fourth option has been seldom explored, but occasionally a meme comes out of left field and, at least briefly, captures some attention…e.g., the book from Japan titled The Courage of Being Disliked.

      I suggest that the daunting challenge of making the fourth option more common, at least for some people, is the only alternative to simply waiting for the collapse…which may be stretched over decades or centuries, like Rome.

      Don Stewart

    • Yes,totally agree. The firepower of petrol is epic.I recall a Tv program 30 years ago that used a mortar to compare gunpowder with petrol The teaspoon of gunpowder shot a coke can just out the barrel onto the ground. The teaspoon of petrol sent the can off out of sight something like 200 metres. away!!! It was actually hilarious to see.

      That really shows what our future will be like without the embodied energy of petroleum to serve us as it does today.

  4. Trivia
    Above I linked to the book Mastering Diabetes, and identified it as one of the game changers affecting the 19 percent of the US GDP devoted to healthcare (or sick care, if you prefer). The book is now on the New York Times bestseller list. Right below the immortal The Subtle Art of Not Giving a F*CK.

    So take your pick.

    Don Stewart

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