I have recently read two monographs (1) that suggest that economic growth, particularly in the West, might be very hard to come by in the future. That rather than a temporary set back the current economic stagnation is the start of a long, long period of very low economic growth. That 0% GDP growth is the new normal.
Both papers see a different cause for a long term forecast of zero economic growth. It would be easy to ignore both of the papers as a symptom of general depression and pessimism in the economic forecasting community. That the same people who brought you unlimited growth for ever are now chastened in to offering unlimited doom for ever and seeking some justification for it. It would certainly be comfortable to ignore the papers. I’m not so sure that that is wise.
Reason one for the end of growth comes from Robert J Gordon of the Cenre for Economic Policy Research.
He suggests that the GDP growth rate of about 2% per annum we have become used to since the 1750’s is due to the long unwinding of three industrial revolutions, that of invention of coal powered steam driven engines, that of the invention of electricity and the internal combustion engine and the third one of the invention of information processing by machine. These industrial revolutions have overlapped with each and driven a large number of new capabilities for humans or reduced the need for human labour in many productive processes.
He talks about a number of one off improvements, improvements that are not available to happen again. We can’t re-invent being able to get most of the food we grow to our tables by increasing transport speed and quantity, refrigerating it and using telephones to tell us which market wants it. We can’t re-invent having homes that are a comfortable temperature all year round. We can’t re-invent the virtual elimination of communicable disease as a cause of premature death. We can re-invent the many labour saving devices deployed in the home that allowed woman to be released for non-domestic labour. We can’t re-invent the plane or the train or the automobile.
Gordon’s suggestion is that these industrial revolutions have run their course in the West. That the rest of the world will have caught up in a few decades. That there is no sign of a forth industrial revolution coming that both eliminate large amounts of human labour from productive processes or significantly improve the capability of humans to do things.
If you are going to nullify Gordon’s suggest I think you have to do a bit more than point at the iPhone. You need to find a way to eliminate about 2% of the time people spend doing things every year for the next century.
The second reason, put forward by Dr Tim Morgan is that we have run into problems with our energy economy. He restates the economic problem as not a problem of where money flows but where surplus energy flows. He suggests that the history of economic growth is one of finding new ways to produce surplus energy and apply it to solving problems. Unless you have surplus energy in your economy then you have no growth. The problem, as Dr Morgan sees it is that the Energy Return On Energy Invested for future energy projects is too low.
Energy Return On Energy Invested (EROEI) is the ratio of the energy that you get out of a particular project to the energy you have to put in to to get that energy. A simple example; imagine you live in the country, a long drive from the nearest petrol station. If you have to use half a tank of petrol to drive too and from the petrol station you only have half a tank of petrol left for running errands. (Your EROEI is 2:1.) If the petrol station is further away, so that you have to use a full tank of petrol to get there and back you don’t have any spare petrol. (your EROEI is 1:1). When we first started pumping oil out of Saudia Arabia the EROEI was about 100:1. We got 99 barrels of oil for every barrel of oil we spent digging oil of the ground. The figure today is closer to 20:1. For North Sea Oil the ratio for new reserves is closer to 5:1. Similar stories for coal and gas. As we dig up the easy to reach stuff it becomes more energy intensive to dig up the not so easy to reach stuff. (2)
This ratio lies at the heart of economic prosperty. With an EROEI of 100:1 for every unit of energy we put in we have 99 units to do all the other stuff we want to do. At 5:1 we only have 4 units of energy to play with. As more energy has to go in to our energy gather system the cost of energy become greater. We tie up more capital in energy infrastructure and more of the energy we produce is used to run our energy systems. We have less energy to do other stuff. We are poorer.
Dr Morgan suggests that at an average EROEI of 15:1 bad things happen to your economic growth. We are currently quite close to an average EROEI of 15:1. At worse figures a lot of accumulated growth unwinds as you stop having enough energy to transport food around and people start dying.
The combination of the two factors has a grim irony. All the innovation we are putting into renewable energy, if only moderately successful, just gets us back to the same average EROEI we have enjoyed for the last hundred years. We remain rich but we get no richer.
These factors affect different parts of the world differently. If you live in China or India or Africa you probably still have large amounts of accumulated technology and associated capital to get hold of. If you live in the US or Europe you are more likely to be at the technology frontier, a frontier that Gordon suggests might have stopped moving. The EROEI problem is more universally spread.
The message is clear but depressing. Unless we can come up with a fourth industrial revolution that is as potent as the invention of steam power and electricity and reverse the falling proportion of energy we have to spend on ourselves we are in for no economic growth, or even economic contraction.
So what can be done?
Well, we could get used to living with economic growth at the rate of mundane innovation and low levels of capital accumulation, 0-0.5% per annum. That has some social implications that I’m not sure we are quite ready to address yet.
What’s out there for industrial revolution number 4? My brain storm throws up the following. None strike me as compelling.
Routine Innovation but BIG. The background rate of innovation outside of an industrial revolution is a drip, drip of marginal improvements. For the last 200 years pretty much only the populations of Europe and North America have been playing because most of the rest of the world has been behind the technology frontier and not prosperous enough to divert significant labour to R&D. What does routine innovation look like now that we have a population of 7 billion supporting it rather than 1 billion?
Big Data. With low cost computer processors are we able to do things with the huge volume of data we can gather and analysis about any activity? We need to be reducing human effort significantly to get any real economic gains.
Quality. We actually waste a huge amount of the effort we put in through poor quality. Defective goods, poor service, bad ideas. Goods that don’t last as long as they could. What happens if we apply total quality management to everything we do?
Managerial revolution based on new understanding of neuroscience. Most organisations appear to be only tolerably run and the applied understanding of positive psychology appears poor. What happens if we work out how to get everyone to do a really good job and then let them get on with doing a really good job?
Peace dividend. NATO targets for defence expenditure are 2% of GDP. What happens if we stop shooting other people and invest this effort in building productive capacity?
Reverse the EROEI problem. If we can improve the effectiveness of renewables we might be able to unlock a period of steadily falling energy costs instead of the long run of energy cost increases we’ve seen. We might get a similar, shorter term boost from energy efficiency programmes.
Service sector labour efficiency. Can we find a way to make the same labour savings with service jobs as we have with manufactoring jobs? (And what are we going to do with all the people?)
None of the these struck me as particularly robust. I wouldn’t want to bet the whole of Western civilisation on them.
(1) One is by Dr Tim Morgan of Tullett Prebon
The second is by Robert J Gordon of the Cenre for Economic Policy Research.
(2) figures for renewables are circa 20-15:1 for wind and 5:1 for solar PV.