The End of Growth

More Tim Morgan from surplus energy economics explaining the end of growth..

1. There are times when the most important facts, though straightforward in principle, are simply too big, or too unpalatable, for general recognition

This is one of those times. The Big Fact informing all of the sub-narratives of our age is that the global economy has stopped growing, and is starting to shrink.

We should swiftly dismiss all official or orthodox statistical claims to the contrary. GDP isn’t a measure of material value created in the economy, but of the transactional exchange of money in the system. Money routinely changes hands without value being added, and never more so than when most of the money in question has been conjured out of thin air as credit.

In reality, no form of money has any intrinsic worth. Obviously enough, we can’t eat fiat currencies, power our cars with cryptos, or sow our fields with precious metals. Rather, money is token, not substance – it commands value only as an exercisable claim on those physical products and services for which it can be exchanged.This principle of money as claim leads directly to a conceptual necessity, which is that we need to think in terms of two economies, not one. The first is the “real” or physical economy of material products and services. The second is the parallel and proxy “financial” economy of money, transactions and credit.Once this is understood, we are spared the futility of comparing money only with itself.

2. There are two things that we need to know about the underlying “real” economy.

The first is that it operates by using energy to convert other raw materials into products, and into those artefacts and infrastructures without which no worthwhile service can be provided. Since some of these products are consumed, whilst others wear out and need to be replaced, this is a continuous process of creation, consumption, abandonment and replacement.

Second, energy is never “free”, but can only be put to use with an energy supply infrastructure. This infrastructure, which might be wells and refineries or wind turbines and grid systems, is material, meaning that it cannot be created, operated, maintained or replaced without the use of energy.

Colloquially, then, we have to “use” energy to “get” energy. Stated more formally, “whenever energy is accessed for our use, some of that energy is always consumed in the access process, and is unavailable for any other economic purpose”.

This proportionate Energy Cost of Energy is a matter, not of money, but of physics. ECoEs from all sources of primary energy have risen from 2.0% in 1980 to more than 11% today. Accompanied by a gradual degradation of the non-energy resource base, this has impaired annual rates of material expansion to a point at which the underlying physical economy inflects from growth into contraction.

3The authors of The Limits to Growth, published back in 1972, used the then-new technique of system dynamics to see this coming, and even gave us a pretty good steer on its probable timing.

None of this is palatable, of course, to a world so obsessed with “growth” that it disregards the obvious truth of Kenneth Boulding’s observation that only “a madman or an economist” could believe in the promise of infinite, exponential economic growth on a finite planet.

Over the past twenty years, material economic prosperity has increased by 25%, but huge rises in the stock of monetary claims have enabled statisticians to assert that the flow of economic activity measured as “real GDP” has more or less doubled (+96%, 2004-2024).

Our resistance to the very concept of an ending and reversal of growth has been vested in two false presumptions. One is that the material economy can be reinvigorated using monetary tools, which would be true only if the banking system could lend energy and raw materials into existence, or if central bankers could conjure them, ex nihilo, out of the ether.

The other is the supposedly “limitless” potential of human ingenuity, enacted as technology. In reality, the potential of technology, far from being limitless, is bounded by an envelope of possibility whose parameters are set by the characteristics of materials and the laws of thermodynamics.

4Since the real costs of energy-intensive necessities are rising, just as top-line prosperity inflects into contraction, the supposed “cost of living crisis” isn’t a temporary “crisis” but the emergence of a wholly predictable trend. This goes a long way towards an explanation of worsening internal political and social instability.

Washington, meanwhile, has awakened, belatedly, to the reality and consequences of material resource finality, an understanding that, we can reasonably infer, has long been grasped in Beijing and Moscow.

The breakdown of international trade – and its balkanisation into trading blocs and exclusion zones – becomes readily explicable if we once recognise the ultimate finality of the material, the impotence of the monetary and the technological, and the resultant intensification of competition for scarce and dwindling resources.

It might be fair to say that visitors to this site divide into two broad categories – those who are interested in economic and financial theory itself, and those more concerned with the explanation of current events and the anticipation of outcomes.

It also needs to be borne in mind that, whilst some readers have long been familiar with surplus energy theory, there are others to whom these concepts are new.

If this first article in a planned series has one message, it is that it’s perfectly possible for us to make sense of economics and finance on our own behalf.

We’re not dependent on what anyone – the authorities, orthodox economists, propagandists, wild optimists or prophets of doom – tries to tell us.

1It doesn’t help anyone’s search for clarity, of course, that the world of today is subject to extraordinary levels of messaging, very little of which is truly objective.

On the one hand, we are frequently informed about new technological breakthroughs, perhaps in the field of energy supply, that will liberate us from the constraints of material economic finality.On the other, we are warned about imminent financial collapse, sometimes resulting from left-field events not recognised in the generality of analysis.

Two realisations can act as beacons to light our way through this fog of mystification.The first is that meaningful growth has ended, and that the economy is starting to shrink. We’ll look a little later at how this conclusion can be reached.

The second is that nobody, in any position of authority or influence, can possibly afford to admit that this is happening.

This is how Life After Growth becomes Life After Truth.

Put another way, the idea that “when it gets serious, you have to lie” has graduated from the aside of a single individual to the governing leitmotif of an age.

This situation calls for heightened self-reliance, not in the sense of stockpiling canned food and bottled water, but in deciding for ourselves what we do and do not believe about current and future economic conditions.

What we’re going to do here is to start from some basic principles and then apply these to the economy of today and tomorrow.

2The first of these fundamentals is the principle of money as claim.

This principle recognises that money has no intrinsic worth – we can’t eat fiat currencies, power our cars with cryptos, or plant our fields with precious metals.

Rather, money commands value only in terms of those physical things for which it can be exchanged. Anyone having money has, in effect, an exercisable claim on material products and services. This money may be spent in the present (flow), or set aside for use in the future (stock), but in both cases retains the essential characteristic of claim.

That’s exactly why monetary systems tend to be based on credit.

Acceptance of this principle of claim immediately distances us from an economics orthodoxy which asserts that everything can be explained in terms of money alone, and that we need not take account of the material.

On this fallacious basis have been erected the so-called “laws” of economics, but these are in no way analogous to the laws of science.

Rather, they are merely behavioural observations about the human artefact of money.

3The principle of money as claim necessarily leads to our second fundamental, which is the principle of two economies. One of these is the material or “real” economy of physical products and services. The other is the parallel “financial” economy of money, transactions and credit.

This gives us something which orthodox economics does not have – the ability to benchmark the monetary against the material.We are no longer trapped in the futility of comparing money only with itself.

Statistical information about the “financial” economy is available in abundance, but much less attention is devoted to the “real” economy of the material. This is where our third and fourth principles fit into the picture.

4The third principle is the principle of conversion. The “real” economy operates by using energy to convert raw materials into products, and into the artefacts and infrastructures without which no worthwhile service can be provided.

Some of the products of this process are consumed, and others wear out and need to be replaced. So the conversion economy is a continuous process of creation, consumption, relinquishment and replacement.

This brings us to the last of our four foundation principles. Far from being “free”, energy can only be put to use using a physical supply infrastructure, stretching all the way from wells and refineries to solar panels and grid systems. This system is material, meaning that it cannot be created, operated, maintained or replaced without the use of energy.

Colloquially, then, we have to “use” energy in order to “get” energy. More formally stated, “whenever energy is accessed for our use, some of this energy is always consumed in the access process, and is not available for any other economic purpose”.

Describing this “consumed in access” component as the Energy Cost of Energy gives us our fourth principle, which is the principle of ECoE.

5At this point we can start to anticipate some of our conclusions.

First, there has been a gradual but significant degradation of the planet’s non-energy resource base. We observe this every time ore grades decline, every time agricultural land needs more inputs to sustain yields, and every time water becomes scarce in certain localities.

Environmental deterioration fits into this broad pattern of extraction and degradation, most obviously through its adverse effects on land, crops and water supplies. The only way in which we can make sense of environmental issues is to locate them within a holistic appreciation of the economics of the material.

It will be readily apparent that we can’t resolve environmental problems by sending money to the universe. The environment, that’s to say, can’t be “bought off”. We cannot frame environmental challenges effectively without reference to the “real” economy of the material.

Second, trend ECoEs have been rising relentlessly, climbing from 2.0% in 1980 to more than 11% today. We’ll look a little later in this series at why this has been happening, and at the consequences of its continuing exponential progression.

6Our third conclusion is that, as a society, we are wholly unwilling to accept the reality of material constraints to economic activity. Many wise and well-intentioned people have made the case for the restraint of voluntary de-growth, but their words have tended to fall on deaf ears.

This resolute denial of reality has led us into two self-deceiving fallacies.

One of these is that the material economy can be reinvigorated using monetary tools. But this isn’t how the relationship between the financial and the physical actually works. We can, indeed, create almost limitless amounts of monetary claims, but energy and other resources can’t be lent into existence by the banking system, or conjured out of the ether by central bankers.

Together the principles of two economies and of money as claim make it apparent that there needs to be a state of equilibrium between the monetary economy and its material counterpart. If we allow the monetary to out-grow the material, we set up forces tending towards the restoration of equilibrium.What this means is that “excess claims” must, in one way or another, be eliminated. Under conditions of comparatively modest disequilibrium, the erosion of claims through inflation can suffice to meet this need for the elimination of excess claims.

Now, though, we are far beyond those limits at which inflation alone can reconcile the forces tending towards equilibrium. Accordingly, we cannot now escape an enforced elimination of claim value, meaning a crash in asset prices and a cascade of credit defaults.

7Our second exercise in self-deception is the faith that we invest in the supposedly “limitless” potential of technology.

The reality, of course, is that the potential for technological progress, far from being limitless, is bounded by the laws of physics, and specifically by the characteristics of resources and the laws of thermodynamics.

It’s worth reflecting, at this point, that the twin delusions of monetary stimulus and limitless technological possibility share the common characteristic of collective hubris.

If our artefact of money, and our technological genius, could indeed triumph over material reality to make possible ‘infinite economic growth on a finite planet’, we would indeed be ‘Lords of Creation’.

8It will not have escaped your notice that the hubristic fallacies of monetary mastery and limitless technological genius are combined in the contemporary craze for artificial intelligence.AI technology does indeed offer enormous promise, though this is bounded by some significant potential drawbacks, just one of which is the risk of descending into the “slop” of AI endlessly regurgitating its own flawed output.

But the biggest snag with AI is the business model currently favoured for its development. This is the “go big” strategy of progressing AI using enormous data-centres housing huge numbers of very expensive GPUs.

This, financially speaking, is “loss-leading” on a gargantuan scale.

For American tech, “go big” worked wonderfully in the exploitation of the internet. The pre-requisite is access to huge amounts of capital. This enables firms to make large losses over protracted periods of time, thereby driving competitors out of business, and capturing disproportionate market shares, whether of subscribers, of advertisers or of customers for online retail and other services.

The capital thus lost is more than recouped once quasi-monopoly status has been secured.

But “go big” won’t work with AI. Perhaps the most important problem is that this model makes demands for energy, water and other natural resources at scales beyond the possible.

The “go big” version of AI might fail because the required resources do not exist, or because accessing them imposes too much resource deprivation upon other sectors, including households, municipalities and other non-tech businesses.

The other thing that the AI moguls seem to have overlooked is structural change in the economy. For reasons that we have already mentioned – and that will later be explored in greater depth – the downwards trajectory of material prosperity is being compounded by relentless rises in the real costs of energy-intensive necessities.

The result of these processes is the imposition of inescapable downwards pressure on the affordability of discretionary (non-essential) products and services, and AI is, almost overwhelmingly, a discretionary rather than a necessity.

A curious characteristic of Western AI is the failure to align it with the one complementary technology that could make it materially worthwhile (and no, let’s not get into guessing games about what that is).

It wouldn’t even help if – implausible though it is – the “go big” business model for AI were to succeed. The previous craze for globalisation destroyed swathes of blue-collar employment in the West. If AI were to do the same for white-collar employment, the result would be societies so dystopian that their existing social, political and economic arrangements could not survive.

9The intention with this series is the provision of a comprehensive statement of the Surplus Energy Economics thesis, meeting – if all goes to plan – the needs both of those who are interested in economic and financial theory in its own right, and of those who want to know “what happens next, and how can I navigate it?”

In the meantime, few will have failed to notice increasing instability in domestic and international affairs. In part, this reflects belated Western recognition of something long understood in Beijing and Moscow – the unfolding reality of resource finality, and the new competitive conditions created by scarcity.

We will, of course, continue in our misplaced faith that monetary ingenuity and technological genius can combine to rescue us from the unpalatable consequences of material finality.

It takes no great intuition to recognise that the financial system is headed for a crisis that will make the events of 2008-09 look like a stroll in the park, or that the AI bubble will burst, leaving us with very little recoverable value from burned-out and time-expired GPUs, vast, single-purpose buildings “in the middle of nowhere”, and debt collateralised against assets with minimal recoverable value.

Beyond sheer scale, though, the big difference between the previous GFC and the looming “GFC II” sequel is that, this time, it’s not the banking system, but money itself, that will be in the eye of the storm.

Starting in the 1990s, we put banking at hazard in order to pursue the dream of infinite economic expansion on a finite planet. This time, we’ve gambled with the credibility, and hence the viability, of money itself.