The End of the Great Stagnation
Although GDP figures suggest otherwise, people of western (OECD) economies are in fact trapped in a great stagnation lasting for fifty years now. During these decades real wages struggled to keep up with inflation as neoliberal economics and globalization ruled supreme. Meanwhile, the wealth of the top 10% — and especially that of the top 1% — has kept rising exponentially, together with debt levels and the chances of a major financial meltdown coming sooner, rather than later. But could it really happened otherwise? Are the lucky few really behind the steering wheel when it comes to economic growth, or are they just that: the lucky, greedy, clueless few who are just riding the top of the wave while it lasts?
I’ve came across ecological economist Eric Beinhocker’s work years ago when I read his book The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. In this truly seminal work he laid out and proved it with ample scientific evidence that the economy is much like a real ecosystem ruled by evolution, and what we call “market” is in fact a manifestation of the ‘survival of the fittest’ principle. Viewing the economy through the lens of system dynamics, as suggested by Beinhocker, allows one to see things happen as a result of countless interactions in a constantly changing environment, with patterns emerging all the time; as opposed to the good old mechanistic world view where economies “gravitate” towards some sort of “equilibrium”. Something to which the economy “somehow” always fails to arrive.
With this in mind, let’s take a look at Beinhocker’s analysis on the reasons behind the great stagnation, starting in the early 1970's. (Indeed, WTF happened in 1971?) As you can see from the screen-grab below, and as you yourself might have experienced, the “bottom” 90% of U.S. incomes (including capital gains) were stagnating for the better part of the last fifty years. This means that in real terms (adjusted for official inflation) you most probably do not earn more than your parents did. In the real world, affected by an unprecedented housing, healthcare and higher education cost increase, however, youngsters in the bottom 90% can afford much less than previous generations could. An own house seems to be totally out of reach, student loans have turned into a form of debt servitude, and healthcare became much less affordable (if at all).
Is it any wonder then, that young couples are no longer keen on having large families (or even starting a family at all)? The social contract — i.e. if you work hard you can earn enough to make a decent living and pay for a house, healthcare and tuition — is now completely broken. What we have instead is an atomized society of individuals, working in two or three different jobs just to stay afloat. On the other end of the spectrum, we have a billionaire class and their special interest groups buying themselves politicians, writing legislation to be passed and suggesting a foreign policy bordering stupidity if not recklessness. But why is that so? Can all this be reversed — as suggested by Beinhocker’s analysis — or there are deeper, structural problems in the background, to which all ‘neoliberal’ monetary policies are just knee-jerk reactions?
What is sorely missing from Beinhocker’s otherwise brilliant analysis — as any true ecologist studying the food web would notice immediately — was the role of energy and resources. So, before we could continue with Beinhocker’s thesis, and the reasons behind the great stagnation, some explanation is in order. The story of the living world is all about acquiring, storing, distributing and using up the energy coming from the Sun. Solar (or geothermal) energy is needed to build and grow living organisms, to keep them moving and finding even more energy — which they can use to procreate... A process ultimately (and rather quickly) ending in all available energy flow being utilized by a complex ecosystem, consisting of all sorts of creatures specialized for consuming a certain food source and contributing, in one form or another, to the bigger whole.
This is why our only truly renewable energy source (food) is coming from plants and animals. What you see around you — all that concrete, glass, steel and the rest — is just a temporary blip in Earth’s history; monuments to a wholly unsustainable enterprise. The reason is simple: the essential building blocks of life (carbon, hydrogen, oxygen and nitrogen) are not only superabundant on Earth, but also require a relatively low amount of energy (not more than mild sunshine) to combine into proteins, cells, and ultimately living beings.
Compare this to the human use of the also relatively abundant other elements such as iron, aluminum or silicon — from which our civilization and our “renewable” energy grid, too, is supposed to be built from. These elements (just like most other metallic ores) are tied to oxygen with a very strong chemical bond in their natural form, requiring high heat to break up (well above a 1000 °C). And not only that: a fair amount of carbon is also needed to steal those pesky oxygen atoms; preventing them from reconnecting with the metals we want to get in the end (1). Yes, that means that producing pure metallurgical grade silicon, the basis of all solar panels, also comes with releasing tons of CO2 by design…
The bad news is fossil fuels — holding all those easy to access carbon atoms required to build and run civilization — are not only wrecking the climate and causing ecosystems to collapse, but have the bad habit of running out fast. Highly technological civilizations, such as ours, are thus inherently time limited offers with a beginning, a high point and an end; as we run out of easy to mine minerals and low cost carbon provided by charcoal, and more recently, fossil fuels. And no, replacing carbon with hydrogen is also not an answer, as it takes much more energy to obtain H2 than it actually returns when burned. Building a civilization entirely on “renewables” such as solar panels and wind turbines (built entirely from finite minerals and requiring high heat and carbon to make), and hydrogen (taking up more energy to produce than it gives back when burned) simply violates all the basic rules of physics and chemistry.
Now, back to Beinhocker’s discussion of the great stagnation presented in his lecture. As someone trained in social science, his fundamental problem space remains firmly rooted in the realm of human cooperation and ingenuity. I’m not blaming him for that, mind you, rather academia and our educational system for failing to give a broad perspective on things. To his credit (and much to the audience’s enjoyment), though, he does brings forth Thomas Thwaites’ toaster experiment, where a Mr Thwaites tried to build a toaster from scratch (going as far as mining and smelting the required ores himself). Needless to say, the experiment failed, but that was exactly the point — prompting Mr Thwaites to note wittingly:
“It takes a civilization to build a toaster”.
When discussing the reasons behind the great malaise we found ourselves in, though, none of this wisdom transpires. Beinhocker, rather unsurprisingly, dismisses the 1973 oil crisis as a one off event, which could not possibly had a role in the fifty-year-long economic standstill for the bottom 90% of people. Back in the real world — still moved, mined, fed, built, transported and ultimately ruined by oil — however, this could not be further from the truth (2).
The reason: US continental oil production has peaked in 1973, then started to decline rapidly. While economists usually dismiss this fact as a minor inconvenience, the first oil peak has signaled the end to an era of exponential growth in extraction and per capita consumption. So while the oil crisis (starting the very same year) was indeed a one-off event, a weakness exploited by the Arab states, the ensuing decline in energy use was not. In fact, as you can see from the chart below, not even the supposed ‘shale revolution’ some forty years later was able to make a dent on the relentless fall in per capita oil consumption, neither in the U.S. nor in Europe.
With cheap and easy to drill oil gone, ever more expensive methods had to be applied; first drilling the northern slope of Alaska, then deep below the Gulf of Mexico. A process which ultimately put an end to the era of cheap fuel, and with it, the era of exponential economic growth. As more and more of this declining energy supply had to be reinvested into new oil and gas production (replacing older, more productive wells) it became clear as daylight that there is simply no return to the pre-1973 world... Now, compare these charts below to the one presented by Mr Beinhocker, and try not to see the similarities.
But why is lower consumption a problem? Haven’t we became much more energy efficient over the past five decades? Well, as I explained in an earlier essay, energy efficiency measures (such as fuel economy improvements of automobiles and trucks) were all maxed out in the 80’s and 90's, and overall MPGs haven’t changed an iota since 2000. Which means that falls in per capita fossil fuel consumption were much more a result of de-industrialization: the closure of factories, mines and other energy intensive businesses. As a result not only stable jobs were gone, but all those fossil fuel intensive products (steel, aluminum etc.) had to replaced with imports from China (where fossil fuel consumption consequently skyrocketed)... So much for “decoupling” economic growth from energy consumption or CO2 emissions.
Consequently, the U.S. and most western economies have been slowly ripped into two parts: a top tier, university, think tank, finance, corporate etc. fairy land where everything is a matter of political will (representing the top 10% of the population), and a gig-economy with low paid jobs, small businesses, zero hours contracts, debt bondage, and a general decline in living standards for the “bottom” 90%. Neoliberal economic policies have not only amplified but also ruthlessly exploited this dynamic, making it much worse in so many ways. Instead of trying to make this fossil fuel decline (induced by peak conventional U.S. oil production) more equitable, and trying to use it as a segway towards a truly sustainable economic system (if there such a thing), elites have created a heavily rigged economy preying on the bottom 90% and enriching the top 10%… An all too familiar pattern across the history of failed civilizations. Well, what else would you expect from a political arrangement where the wealthy write regulations for themselves and buy politicians through “campaign donations”?
Just like in a real ecosystem, the economy, when starved of energy starts to wither and shrink, providing a feast for vultures.
The situation, Europe has found itself in, is a case in point. According to the report published by former European Central Bank chief Mario Draghi, the EU is now facing an existential risk without investment. He summarized the current state of affairs in the foreword to his report rather succinctly:
“The previous global paradigm is fading. The era of rapid world trade growth looks to have passed, with EU companies facing both greater competition from abroad and lower access to overseas markets. Europe has abruptly lost its most important supplier of energy, Russia. All the while, geopolitical stability is waning, and our dependencies have turned out to be vulnerabilities.”
While he was able to identify the root cause behind the continent’s predicament (the abrupt loss of Europe’s most important supplier of energy), he failed to provide an honest approach to the issue at hand. Instead, being a banker for all his life, he suggests to pour more money on a predicament with an outcome, confusing it with a problem in search of a solution (3). Spending 5% of the EU’s GDP on “investments” every year — which is more than double the post-World War Two Marshall Plan by the way — can neither create nor replace low cost energy, not to mention cheap resources. It can only generate more inflation, with more currency chasing the same amount of goods and kW-s circulating in the system. And while he advocates for more balanced deployment of “renewables” as a “solution” this is nothing more than a wet dream. The sudden increases in the cost of building “renewables” during the energy crisis of 2021–22 was exactly due to the same reason the EU is in trouble today: an inadequate supply of fossil fuels and raw materials. The chart below tells it all:
What comes next? Well, expect vulture funds to keep buying up, then emptying out one renowned European company after another. While this certainly keeps the amount of financial transactions (not to mention many law firm’s income) sky high, and thereby “contributing” greatly to GDP, this process of financialization will ultimately leave Europe’s economy in ruins. The continent is already in the process of turning into a museum, where visitors come and perhaps spend some money, but as jet fuel becomes ever scarcer over the years ahead, that income flow, too, will slowly grind to a halt.
Buying liquefied natural gas, which takes at least twice as much energy to produce and deliver than regular pipeline gas, or shifting coal, gasoline and diesel fuel around the world to plug in the holes created by the economic and proxy war (both of which the West is in the process of losing), is not going to bring back lost prosperity. Nor would “investments” in a “renewable” grid cut the mustard; the creation and maintenance of such a system would still require burning copious amounts of fossil fuels. As someone living in a EU country, I don’t like this analysis the slightest, but the quiet part must be said out loud: Europe is toast. This how a five-hundred year-long era of European colonialism and supremacy finally meets its fate: not with a loud bang, but a decades long slow agony.
The economy is a complex adaptive system, feeding on low cost energy and resources, with no one at the helm. As soon as the supply of these vital inputs starts to dwindle, and as the extraction of said resources keeps eating away more and more energy, though, the era of the great stagnation will come to an end. In the grand scheme of things the past fifty years will turn out to be nothing more than a prelude to the ever accelerating unraveling of the West; soon to be followed by the fall of the (re)emerging Eurasian superpowers.
There is absolutely nothing new in this. Every civilization, ours included, grew by living up its one time inheritance — be it fertile topsoil, forests or petroleum — overshooting both the natural carrying capacity of its environment and the non-renewable resource base it relied on. Then, as resources got depleted below a critical level, they all went through their respective phases of stagnation and collapse. Decline is a perfectly normal, easy to understand part of every society’s life. Once you move beyond denial and bargaining it becomes clear that all this has its causes in our biology, physics and Earth’s geology. There is really no one to blame, and there is really no super-duper technology holding the key to saving civilization either.
Knowing that we have built our entire global civilization on finite, non-renewable materials, it makes no sense to dream about delaying the inevitable end hoping that human collaboration will somehow save an inherently unsustainable system. Instead, it would be high time we turned our focus, energy and collaboration towards returning to an agrarian, local, low-tech economy as decently and as quickly as possible. Having such scared, technutopian, clueless elites advised by bankers, however, I’m not holding my breath.
Interesting times ahead.
Until next time,
B
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Notes:
(1) Fun fact: because iron ore contains more oxygen than iron atoms, and smelting iron requires heat above 1500°C (courtesy of burning copious amounts of coke), furnaces are producing more CO2 by weight than molten iron.
(2) Keep in mind that almost every economic activity requires oil to a varying degree. Even lawyers and economists need to commute, fly, buy goods and food delivered on a truck, or switch on their computer… The raw materials of which were all mined, built, delivered by oil-guzzling machines — to say nothing of the power coming from a grid, which is also hopelessly reliant on fossil fuels to operate in a stable fashion. (Just like “renewables”, hydro, nuclear, fusion, geothermal, tidal etc. power: all of these devices need concrete, steel, mined minerals, metals, and glass — none of which could be provided at scale without fossil fuels).
(3) While admitting the policy failure (when it comes to completely disregarding your primary energy supplier’s security needs) and begging hat in hand for forgiveness could restore at least a small portion of your lost fossil fuel supply, it will neither be cheap nor sufficient ever again. That gas has now found new (more reliable) customers. Global oil and gas production can be expected to start declining in a matter of years anyway, so why not skip this step, and try to convert the EU into an ecotechnic society? Sure, that would require wisdom and foresight accompanied with an ability to manage a hitherto unprecedented change, but hey why not dream big? (Just kidding.) I guess you start to see now why I call this situation a predicament with an outcome, where waiting for the elites to enlighten is as useful as waiting for pigs to grow wings.
Your analysis of our civilizational predicament is, as always, enlightening. I am particularly enchanted by the jaunty nature of your writing as you skim along the surface of our collective doom. You make collapse almost an enjoyable entertainment. But of course the dangers embedded into our high-energy techno existence are very serious challenges that require retreat to low energy living. People will only go there kicking and screaming like the clueless toddlers that we are.
The increase in the number of rich people at the expense of the increase in the number of poor people is unequivocal proof that we are immersed in a decline in the net available energy:
"Physicist Francois Roddier has said that physics dictates the outcome of widely diverging incomes when energy supply is low. It takes much less energy to supply an economy of a few rich people and many poor people than it takes to support an economy with relatively equal incomes. The vast majority of the supposed wealth of the rich exists as promises that can only be fulfilled in the future if there is enough energy of the right kinds to fulfill these promises. Their promised future wealth does not affect today’s energy use. While the energy use of rich people is somewhat higher than that of poor people, much of the difference disappears when a person considers the fact that much of their wealth is essentially “paper wealth” that may or may not actually be present as the future actually unfolds."
https://ourfiniteworld.com/2024/08/21/todays-economy-is-like-that-of-the-late-1920s/