The Breaking Point

by James Dale Davidson

  8 Quoted in Henrietta L. Moore and Todd Sanders, Anthropology in Theory, Issues and Epistemology, 2nd ed. (Hoboken: John Wiley & Sons, 2013), 112.

  9 McNeill, J. R., Something New under the Sun: An Environmental History of the Twentieth-Century World (New York: W. W. Norton, 2000), 15.

  10 Ibid.

  11 Ibid.

  12 Morgan, Life after Growth, 61, 62.

  13 Ibid., 55.

  14 Ibid., 63.

  15 Ibid., 64.

  16 Crooks, Ed, “Shale Looks More like Dotcom Boom than Lehman Debt Bubble,” Financial Times, May 7, 2015.

  17 Morgan, Life after Growth, 61.

  18 Ibid., 63.

  19 Ibid., 66.

  20 Taylor, Peter J., The Way the Modern World Works: World Hegemony to World Impasse (Chichester: John Wiley & Sons, 1996), 216.

  21 Morgan, Life after Growth, 69.

  22 See Brown, Roger K., “It’s about a Reasonable Standard of Consumption: People Are Starting to Get It,” http://www.theworldisfinite.com/.

  23 Glasner, David, “An Evolutionary Theory of the State Monopoly over Money,” in Money and the Nation State, ed. Kevin Dowd and Richard H. Timberlake Jr. (New Brunswick: Transaction, 1998), 21–24.

  24 Rothbard, Murray, “The Gold Exchange Standard in the Interwar Years,” in Money and the Nation State, ed. Kevin Dowd and Richard H. Timberlake Jr. (New Brunswick: Transaction, 1998), 132.

  25 Mummery, A. F., and J. A. Hobson, The Physiology of Industry: Being an Exposure of Certain Fallacies in Existing Theories of Economics (London: John Murray, 1889).

  26 Rae, Douglas W., “Vacratic America: Plessy on Foot v. Brown on Wheels,” Annual Review of Political Science 4 (June 2001): 417–38.

  27 Newby, Elisa, “The Suspension of Cash Payments as a Monetary Regime,” Centre for Macroeconomic Analysis Working Paper Series, June 2007, 4.

  28 Smith, Adam, The Wealth of Nations (Chicago: University of Chicago Press, 1976), book 1, 292.

  29 Machlup, Fritz, The Stock Market, Credit and Capital Formation (New York: Macmillan, 1940), 78, 90, 92.

  30 Tverberg, Gail, “Why We Have an Oversupply of Almost Everything (Oil, Labor, Capital, Etc.),” Our Finite World, May 6, 2015.

  31 Jevons, William Stanley, The Theory of Political Economy (London: Macmillan, 1871), ch. 1, par. 2.

  32 Jevons, The Theory of Political Economy.

  Chapter Seventeen

  The Great Slowdown

  Updating Secular Stagnation and the Stationary State in Light of The Coal Question

  Today’s general level of understanding about how the economy works, and energy’s relationship to the economy, is dismally low. Economics has generally denied that energy has more than a very indirect relationship to the economy. Since 1800, world population has grown from 1 billion to more than 7 billion, thanks to the use of fossil fuels for increased food production and medicines, among other things. Yet environmentalists often believe that the world economy can somehow continue as today, without fossil fuels. There is a possibility that with a financial crash, we will need to start over, with new local economies based on the use of local resources. In such a scenario, it is doubtful that we can maintain a world population of even 1 billion.

  —Gail Tverberg

  This chapter analyzes the dire consequences of the continuing decline in energy intensity manifested in the twenty-first century. Among other things, this presages a widening mismatch between the growth of the real economy and the metastasizing claims embodied in the shadow economy of money and debt. The default response of the bankrupt nation-state to the collapse of growth, and the revenue shortfalls that accompany it, is to expand, rather than constrain, debt. This widens the chasm between the rapidly compounding claims of the shadow economy and the stagnant real economy upon which they are a lien.

  The miseries of Greece are a case in point, where reported real GDP has declined at a compound negative rate of -4.86 percent since 2008, while the effective average interest rate on Greek government debt was 2.4 percent in 2015. At that rate, in about the time it takes the compounding debt to double, the economy will shrink by 41 percent, as energy-constrained economies struggle to grow.

  In recent years, attention has often been called to the drastic fall in Energy Return on Energy Invested (EROEI). Yet that said, there is so little understanding of the crucial role of hydrocarbon energy inputs in fueling economic growth since the Industrial Revolution that we start from behind in trying to tease out the consequences of a hydrocarbon shortfall for the future. Among them, I discuss secular stagnation and the darker possibilities foreseen by Adam Smith in his analysis of the stationary state, culminating in the declining state, with special relevance to understanding the Breaking Point, as I elaborate in the next chapter.

  The Three Economic States of Adam Smith

  It is little noted today that Adam Smith wrote of three distinct economic states: the “progressive state,” what we would today describe as a growing economy; the “stationary state,” or a stagnant steady state economy; and the “declining state” that moves backward, as in Jevon’s retrograde economy.1

  At first glance, these would appear to be relatively simple, straightforward analytical categories. Not quite. As I explain below, Smith’s concept of the “stationary state” needs to be updated in biophysical context. Adam Smith and the classical economists thought in terms of an organic economy where growth was limited by the productivity of the land. So in that sense, the economy operated within an energy limit—the energy capacity of photosynthesis. But over the past couple of centuries, we have escaped from the traditional limits on growth by incorporating vast amounts of hydrocarbon energy to perform the work of the economy. This has profound implications for understanding all the economic states.

  The meanderings of economic thought since Adam Smith’s day have also helped displace consideration of the biophysical context of the economy. The fashion for equilibrium analysis has helped confuse matters considerably. In his 1973 essay, “The Shadow of the Stationary State,” poet and economist Kenneth E. Boulding discussed the idea that any society must be “progressing, stationary, or declining.” He went on to say that the progressing state and the declining state “were thought of as self-limiting, in the sense that in each the rate of progress or of decline would diminish until it was zero and the stationary state was reached.”2

  It is apparent that Boulding is using the term, “stationary state,” in a confused sense. He was talking about two different equilibrium states: a high-level equilibrium attained, however briefly, when the trend rate of economic growth in the progressing state slows to zero and another very different economy, in which a low-level equilibrium is reached when the rate of decline in a declining state economy peters out at the economic equivalent of absolute zero. In other words, in Boulding’s low-level stationary state you’re talking about going as low as you can go. Rock bottom.

  This differs from Adam Smith’s view.

  Among more than 500 pages in The Wealth of Nations, Adam Smith devotes only a few pages to the stationary state and scarcely more than a few sentences to the declining state. He alerts us to the fact that they are analytical possibilities, without delving too deeply into their characteristic features. Smith devoted most of his attentions in The Wealth of Nations to exploring the “progressive state.” He writes:

  It deserves to be remarked, perhaps, that it is in the progressive state, while society is advancing to further acquisition, rather than when it has acquired its full complement of riches, that the condition of the laboring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and hearty state to all the different orders of the society. The stationary is dull; the declining melancholy.3

  It is apparent, however, that in Smith’s terms, the stationary state entails a higher level of opulence than the declining state.

&nb
sp; Coal Heavers and Prostitutes

  There is little to indicate that Adam Smith recognized the importance of the growing use of coal in the British economy of his time. In an odd digression in The Wealth of Nations, Smith suggests that “coal-heavers” could be paired with prostitutes as “the strongest men and the most beautiful women perhaps in the British dominions,” owing to their tendency to eat a lot of potatoes.4 In a more extended analysis of the economics of coal, he declares erroneously that “coals are a less agreeable fewel than wood,” and therefore cheaper. He also suggests that coal is hardly worth mining because the profits from doing so are supposedly so scanty that “they can be wrought advantageously by nobody but the landlord.”5

  Clearly, Smith was not alert to the importance of the higher BTU content of coal, or the growing dependence of the British economy on the propulsive force fueled by growing quantities of coal. Nor, apparently, did Smith fathom the distinction between the traditional organic economy where wood prices varied with the state of agriculture, much like the price of cattle, he tells us, and the new industrial economy based on fossil fuels that was taking shape in his time.6

  Apart from the lack of attention to the productive potential arising from the higher BTU content of coal, it is evident from what Adam Smith said, speaking of a “full complement of riches,” that he was analyzing an organic economy—one where the sole source of energy was the conversion of sunlight through photosynthesis.

  The Organic Economy and Limits to Growth

  E. A. “Tony” Wrigley, longtime professor of economic history at Cambridge University, notes in a 2011 essay, “Opening Pandora’s Box: A New Look at the Industrial Revolution,” that the classical economists Adam Smith, Thomas Malthus, and David Ricardo dismissed the potential for prolonged growth before the Industrial Revolution since organic economies were limited by the “productive powers of the land.”

  Smith wrote during the takeoff phase of the Industrial Revolution and was hard at work collecting notes for what was to become The Wealth of Nations in 1761, when Francis Egerton, Third Duke of Bridgewater, opened the famous canal that made him the richest noble in England, ferrying coal from his mines in Worsley, Lancashire, to Manchester, the flourishing new center of industrial England.

  Adam Smith was an economist, not an entrepreneur. He apparently did not grasp the importance of the growing incorporation of hydrocarbon energy from coal in the production process as readily as did the Duke of Bridgewater. Of course, few did. The duke died in 1803 with a fortune worth in the vicinity of £20 billion in today’s money.

  In any event, the fact that Adam Smith, along with the early generations of classical economists, did not “get it” where exogenous energy is concerned, means that their treatments of the stationary and declining states are now dated and need revision.

  The Constraints of an Organic Economy

  Meanwhile, when I say that there is little understanding of the role of hydrocarbon energy in fueling economic growth since the Industrial Revolution, I do not mean to downplay the work of economic historians like Tony Wrigley, who convincingly documented that the Industrial Revolution was an energy revolution. In Energy and the English Industrial Revolution, Wrigley explains that the Industrial Revolution was an “escape from the constraints of an organic economy.”7

  Of course, when Tony Wrigley speaks of an organic economy, he does not mean an economy where everyone eats crunchy granola from Whole Foods. A better description of the organic economy is that it depends primarily on photosynthesis for energy. The consumption of energy is integral to any productive process, and in an organic economy, everything relies on the productivity of the land. Wrigley tells us that the breakout from the constraints of the organic economy came with the capture of exogenous hydrocarbon energy from coal.

  Wrigley offers a vivid measurement quantifying the vast increase in energy conversion achieved through the use of coal, as compared to the traditional deployment of somatic energy by men and draught animals in the organic economy. Drawing on the 1851 British census, Wrigley reports that there were 128,086 coal miners in England and Wales in 1851, while 1,135,833 men engaged in agriculture. He further reports that each coal miner, on average, produced thirteen terajoules of energy annually, while the average energy consumption of each man in agriculture was 0.10 terajoules.

  It is not hard to credit that people deploying 1,300 times more energy were responsible for a huge surge in the amount of useful work done. Remember, the details that Wrigley marshals are from a century and a half ago. If the paramount importance of energy were in doubt in the middle of the nineteenth century, it should not be now. The only reason there was an Industrial Revolution—and hence, growth in material production that was both prolonged and exponential, leading to the high-living standards enjoyed today—is because hydrocarbon energy, initially in the form of coal, supplanted wood as the main fuel in powering the economy.

  The Defective Mainstream Narrative

  Strangely, while the crucial role of energy in launching the Industrial Revolution is well established as a matter of economic history, its logical corollary—that a slowdown or decline in energy inputs will be reflected by a slowdown, or reversal, in economic growth—seems to have no place in the contemporary mainstream narrative.

  In fact, the only mainstream economist I can think of who wrote something illuminating on the topic is long dead. William Stanley Jevons sounded an alarm in his classic 1865 essay, “The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines.”

  Running Faster and Faster to Stay in the Same Place

  Seeing that modern material civilization depended on hydrocarbon energy, Jevons reminds us that continued economic growth depended upon a daunting problem of compounding that threatened to shorten and darken the prospects for the future, much as it has shortened and darkened the prospects for Greece, Puerto Rico, Italy, and elsewhere.

  Jevons worried that we faced diminishing returns in the quest to continue expanding hydrocarbon energy inputs that power economic growth. He showed that energy inputs had been multiplying “in a uniform ratio” of 3.5 percent per annum over the eight decades before he wrote. But he warned that long-term continued progress was impossible due to changes around the world and the eventual failure of mines, which would cause a stationary condition.8

  Jevons used “stationary condition” as shorthand for the “sufferings and dangers” entailed in economic decline, but he made it clear that the crucial, if altogether impossible, task of maintaining high compound growth in hydrocarbon energy inputs was essential to preserving modern prosperity.

  Jevons tells us that diminishing returns block the doubling of any type of physical output ad infinitum. And this has definite implications for our future use of hydrocarbon fuels. At some point, production would simply hit a peak, which suggested dire consequences for economic growth.9 (Where British coal production was concerned, Jevons was right. It peaked on the eve of World War I in 1913.) Jevons was not anticipating a flattening out of prosperity at a high level, but a retrograde situation that would bring the economy back to a lower level of prosperity. Jevon’s lucid ruminations in The Coal Question mark one of the more closely argued attempts to specify why a growing economy might peter out into a stationary state, or even a declining state in the terms anticipated by Adam Smith. Jevons’s analysis pinpoints a slowdown in the growth of energy inputs as an exogenous supply constraint that reduces GDP growth.10

  More than that, Jevons sees the crucial difference between stationary organic agricultural economy and an industrial economy dependent on dwindling energy reserves—a point that modern economics has failed to fully grasp.11

  The Impossibility of an Industrial Stationary State

  John Stuart Mill, whose working life and that of Jevons overlapped, wrote of the stationary state in 1848. But unlike Jevons, Mill seems to have presumed that the stationary state for an industrial society could actually be stationary. />
  He believed it was impossible to ultimately avoid the stationary state. This irresistible necessity—that the stream of human industry should finally spread itself out into an apparently stagnant sea—must have been, to the political economists of the last two generations, an unpleasing and discouraging prospect. The tone and tendency of their speculations goes completely to identify all that is economically desirable with the progressive state, and with that alone.

  “Adam Smith always assumes that the condition of the mass of the people, though it may not be positively distressed, must be pinched and stinted in a stationary condition of wealth, and can only be satisfactory in a progressive state. The doctrine that, to however distant a time incessant struggling may put off our doom, the progress of society must ‘end in shallows and in miseries,’ far from being, as many people still believe, a wicked invention of Mr. Malthus, was either expressly or tacitly affirmed by his most distinguished predecessors.”12

  Hoping to Park on a Steady-State Hovercraft?

  While Mill seems to have a more positive view of the stationary state than Adam Smith, it may be because his view was less realistic than that of Jevons. Mill does not specifically mention energy resources as crucial, as Jevons does. Mill comes close to endorsing an early version of the current limits to growth green paradigm that supposes we can enjoy a stationary, steady state economy forever. (To confirm for yourself that my characterization of this perspective does not amount to tackling a straw man, see the website of the Center for the Advancement of the Steady State Economy [CASSE].)