Bubble image via pedrosek/flickr, Creative Commons 2.0 license.
Marcin Gerwin: For most heads of states, the prime minister of Poland included, the central point of economic policy is maintaining or increasing economic growth. The aim is to encourage people to consume every year more goods and services so that the Gross Domestic Product continues to grow. Do you think it’s a realistic approach?
Richard Heinberg: Over the short term it is, at least in many countries. But it’s becoming harder and harder all the time. That’s especially true for the older industrial nations like United States, Europe and Japan. Ultimately, economic growth can’t be maintained in any country simply because it implies increased extraction and use of resources. After all, we live on a finite planet. This was understood actually by many of the great early economists, including Adam Smith, who foresaw that at some point the global economy would reach limits and will stop growing. There is overwhelming evidence that in fact we are reaching those limits now and that growth is becoming more and more difficult.
Here in United States the highest rates of growth were achieved in 1950’s and 1960’s. Since that time growth has been more anemic. It’s been purchased with spiraling levels of debt. Households in the US have taken on more and more debt in order to finance increased consumption. However, there are limits to debt. Beyond a certain point people are unable to make increasing payments and banks don’t want to loan them more money. We seem to have reached that point in just the last decade. Now household debt is not growing substantially but that’s being made up for with increasing levels of government debt – deficit spending and quantitative easing on the part of central banks. So growth is being maintained in the US but it’s being financed with enormous levels of government debt. This is not a sustainable situation.
At the same time the energy situation is weighing on growth as well. The economy depends on energy. In fact it’s energy that makes the world go ’round, not money or military power; without energy nothing happens. During the 20th century we achieved economic growth largely because we had enormous amounts of cheap, concentrated energy in the form of fossil fuels. We’re not about to run out of fossil fuels; however, we have extracted them using the “best first” principle. In other words we extracted the cheapest, the most concentrated, highest quality coal, oil, and gas first. That means that what the industry produces today is ever more costly, both in terms of capital investment and energy inputs (ever-increasing amounts of energy have to be invested in drilling, mining, and refining). So even though the world is producing record levels of oil, coal, and gas, once the energy expenditures in producing these fuels are taken into account, on a net basis useful world energy has effectively leveled off and (in the case of oil) begun to decline.
As useful net energy declines, the real economy of goods and services shrinks. The only way to achieve the appearance of growth is through financial bubbles, but those always end in a crash.
MC: Is GDP a good measure of progress then?
RH: It’s actually a very bad measure of economic progress. Many economists would agree with that statement.
RH: It just measures the amount of money that’s being spent in an economy on an annual basis. It’s a good gauge of consumption, but of course we can’t continue to increase our rates of consumption forever. So if we aim to continue improving our society then we have to look for ways of doing so that don’t involve increased consumption. GDP can’t help us do that, but indexes that measure quality of life and status of the environment directly could be useful. The Genuine Progress Indicator was developed back in the 1990’s and it’s being used successfully in many places including the State of Maryland here in the United States for economic reporting and forecasting. Also the little Himalayan nation Bhutan has developed Gross National Happiness (GNH) as an economic measure. There are efforts at the United Nations to explore the broader use of GNH in other countries.
MC: If we assume that we don’t need economic growth, what would the economy look like? It wouldn’t be possible for the banks to give loans with interest as economic growth is necessary to pay the interest back.
RH: Certainly the financial system will have to change in a no-growth economy. For clues about the future, we should look to the past. The no-growth economy was the norm, historically, up until the 19th and 20th centuries; in fact it was the expected condition of economies throughout most of the human history—it’s certainly not something that has never existed before. However, a steady-state or a post-growth economy does pose serious challenges for our current financial system, which has gotten hooked on growth. High returns on investments are not feasible in a post-growth economy. We would need a banking system with a 100 percent reserve requirement. The charging of interest on loans would also be problematic. That’s why charging of interest was considered sinful or even criminal in societies that did not experience economic growth.
MC: Would the changes affect also the way that cities function?
RH: As fossil fuels become more scarce and expensive we’re going to have to change a great deal of how society works—including how we design our cities, to reduce the need for transportation so that people live close to where they work and shop. We will be less mobile in a post fossil fuel society. Even if we increase our production of renewable energy very substantially, transport will occur at much lower level then we’re currently used to. So we must re-localize our food systems and reduce fossil fuel inputs in our food systems. That means we’ll need more farmers. So even though urbanization has been the dominant social trend of the past few decades, it is very likely that we will eventually see cities begin to shrink in size as people abandon living arrangements that no longer function and look for ways of subsisting closer to the land.
MC: It seems to me that it may be hard for many people to believe that there is a need to prepare for reduced amounts of fossil fuels. We are told in the media, that the untouched reserves of shale gas in Poland are huge and that the US has reserves of shale oil so large that it could become the next Saudi Arabia.
RH: The supply of shale gas in the US has been substantially overestimated. We did a study at Post Carbon Institute looking at 65 thousand currently producing shale gas and tight oil wells. We’ve found that the rates of production in most individual wells decline very rapidly. In each of the areas that produces shale gas or tight oil there’s typically a small core region where production is fairly prolific and profitable. But outside that region initial production rates are lower and production declines by 60% or more within the first year. This means very high rates of drilling are required to keep production going. But as the best drilling sites are taken, that means the over-all decline rate just gets worse, and eventually a point is reached where drillers just cannot keep up. We will likely arrive at that point around 2017 in America. When the decline begins it will probably be very steep because of the very high per well decline rates. It’s very unrealistic to think of the United States as being the next Saudi Arabia.
Poland has placed considerable hopes on its shale gas, but initial exploratory wells have shown those expectations are unrealistic. It’s likely that only small amounts of shale gas will be produced in Poland and other Central European countries.
MC: What should the prime minister of Poland do in this situation? He insists on maintaining economic growth. However, since it would not be possible, what kind of policies should he focus on?
RH: I would advise economic policy that supports subsistence agriculture, that encourages craft industries and small-scale, local manufacture. These will be the backbones of the economy of the future. Rapid urbanization and economic growth are unsustainable over the long run, so prioritizing them now is not a good strategy.
MC: Hmm, that could be problematic because most people in Poland dream of something else. They want to catch up with the levels of material wealth that are present in Western Europe, like in the United Kingdom or in Germany, for example. Their dream is to earn more money, and that’s the policy they would like to see – earning more money. So in order to change the economic priorities the values of the society would have to change first.
RH: Yes, for a nation that still has a large rural population it’s important to begin to value and support farming and rural culture. Countries that are highly urbanized and that have gotten used to a high rate of economic growth are going to have further to fall. Life is not going to be good in those places. Countries like Poland—and Romania, to an even greater extent—that have large proportion of the population still working the land actually are in a very good position to weather the kinds of economic changes that are on the horizon.
Cities have been with us for thousands of years and will certainly be around for the foreseeable future. However, urbanization requires high rates of energy consumption, and so the end of the fossil fuel era also means the end of the kind of urban development that the industrial world has pursued over the past few decades.
This interview first appeared in Dziennik Opinii in Polish.