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