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Seeing the harness but not the horse

You can count on one hand the number of economists who have even the slightest inkling of the role of energy in the economy.  So whenever I come across an economist who appears to give energy an important role, I am always interested to read what they have to say.  And so, when someone referred me to a 2012 paper by Robert J. Gordon at the National Bureau of Economic Research, I was keen to know more.

The paper starts well; challenging the post-2008 mainstream view that the US economy would return to “normal” rates of growth in short order:

“This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.”

Energy-based economics would certainly concur with this, and would broadly accept the historical timeline which brings Gordon to this conclusion:

“A useful organizing principle to understand the pace of growth since 1750 is the sequence of three industrial revolutions. The first (IR #1) with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second (IR #2) was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900. Both the first two revolutions required about 100 years for their full effects to percolate through the economy. During the two decades 1950-70 the benefits of the IR #2 were still transforming the economy, including air conditioning, home appliances, and the interstate highway system. After 1970 productivity growth slowed markedly, most plausibly because the main ideas of IR #2 had by and large been implemented by then.

“The computer and Internet revolution (IR #3) began around 1960 and reached its climax in the dot.com era of the late 1990s, but its main impact on productivity has withered away in the past eight years. Many of the inventions that replaced tedious and repetitive clerical labor by computers happened a long time ago, in the 1970s and 1980s. Invention since 2000 has centered on entertainment and communication devices that are smaller, smarter, and more capable, but do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars, or indoor plumbing changed it.”

Gordon then goes on to list his six headwinds which threaten to stall further economic growth:

  • The “demographic dividend” from incorporating women and minorities into the workforce
  • The decline in educational outcomes
  • The rise in inequality
  • ICT allowing work to be outsourced to anywhere in the world
  • Climate change and the need to pay the price for prolific fossil fuel use
  • Massive public and private debt.

Faced with these headwinds, Gordon arrives at a growth figure not inconsistent with the rates of growth in the nine years since:

“How large might be the numerical effect of the six headwinds? A plausible set of numbers can be constructed to reduce the growth rate of real per-capita consumption of the bottom 99 percent of the income distribution down to 0.2 percent per year…”

This is one reason why supposedly temporary real negative interest rates have persisted and are likely to persist for some time to come – raising them is likely to trigger a debt default cascade that would make the 2008 crash look trivial.

Gordon knows a thing or two about horses too – enough to provide some salutary lessons to those “greens” who think a world run entirely on renewable energy is a good thing:

“A lot of progress had been made by 1870. After centuries when every task was carried out by human and animal effort, individual tasks began to be carried out by machine power, both water and steam, initially in the U. K. The 1844 invention of the telegraph created by far the biggest increase in the speed of communication in human history, and soon continents were linked with undersea cables.

“But most aspects of life in 1870 (except for the rich) were dark, dangerous, and involved backbreaking work. There was no electricity in 1870. The insides of dwelling units were not only dark but also smoky, due to residue and air pollution from candles and oil lamps. The enclosed iron stove had only recently been invented and much cooking was still done on the open hearth. Only the proximity of the hearth or stove was warm; bedrooms were unheated and family members carried warm bricks with them to bed.

“But the biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and wastewater hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tons of water.  Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930…

“While the railroad connected the cities, there were horses on every urban street. Within the cities, steam power was not practical, so everything was hauled by horses. The average horse produced 20 to 50 pounds of manure and a gallon of urine daily, applied without restraint to stables and streets. The daily amount of manure worked out to between 5 and 10 tons per urban square mile, all requiring disgusting human labor to remove…”

It is here that Gordon’s view of the world departs from energy-based economics.  For Gordon, it is a series of “Great Inventions” which begins to pull humanity out of this short, brutish and unpleasant way of life.  The big inventions of the first industrial revolution – the steam engine and the telegraph usher in the 250 year period of economic growth, but are themselves eclipsed by the technologies of the more powerful second industrial revolution – the internal combustion engine, the spin-offs from electricity generation, running water and indoor plumbing, petrochemicals and pharmaceuticals, and entertainment technologies like radio, motion pictures and vinyl records:

“The effects of these inventions and sub-inventions can be grouped by the particular impact they had on animal and human effort. Motor power replaced animal power. To maintain a horse every year cost approximately the same as buying a horse. Imagine today that for your $30,000 car you had to spend $30,000 every year on fuel and repairs. That’s an interesting measure of how much efficiency was gained from replacing the horses. Gone was the need for unsanitary and repulsive jobs of people who had to remove horse waste.”

The second industrial revolution is the big generator of economic growth, eclipsing both the first and the third.  Although Gordon is puzzled as to why its impact wasn’t felt sooner:

“By 1906 growth in Britain had crept up to a bit above one percent per year, and then the U.S. took over frontier leadership. Growth rates for the U.S. are plotted at intervals long enough to eliminate the impact of the business cycle, the Great Depression, and World War II. The slow growth from 1906 to 1928 is a puzzle and may reflect measurement problems, as this was a period when IR #2 had its greatest initial impact in providing electricity, motor cars, paved roads, running water, and plumbing to urban America. Then the growth rate exploded over the 1928-50 interval encompassing the Great Depression and World War II. Part of this leap forward was due to technological advances developed during the 1930s (Field, 2011), and another part was due to the large share of U.S. 1950 GDP devoted to military expenditures, using weapons, planes, and equipment financed by the government during World War II.”

The third industrial revolution began with the commercial use of computers in the 1960 and had mostly ended with the development of the internet and the bursting of the dotcom bubble at the end of the 1990s:

“Initially computers shared with the steam engine, the internal combustion engine, and the electric motor the many-faceted benefits of replacing human effort, making jobs easier, less boring, and less repetitive. It may seem surprising that so many of the computer’s labor saving impacts occurred so long ago.

“The first industrial robot was introduced by General Motors in 1961. Telephone operators went away in the 1960s. As long ago as 1960 telephone companies began creating telephone bills from stacks of punch cards. Bank statements and insurance policies were soon computer-printed. The first credit card was introduced in the late 1950s and my personal American Express card is still stamped ‘1968.’

“By the 1970s, even before the personal computer, tedious retyping had been made obsolete by memory typewriters. Airline reservations systems came in the 1970s, and by 1980 bar-code scanners and cash machines were spreading through the retail and banking industries. Old-fashioned mechanical calculators were quickly discarded as electronic calculators, both miniature and desktop, were introduced around 1970.

“The first personal computers arrived in the early 1980s with their word processing, word wrap, and spreadsheets. Word processing furthered the elimination of repetitive typing, while spreadsheets allowed the automation of repetitive calculations. Secretaries began to disappear in economics departments, and professors began to type their own papers…”

Compared to the second industrial revolution, the third was a tiddler; apparently failing to register in economic data:

“Why did all the computer-driven IR #3 improvements before 1995 fail to maintain productivity growth at a faster pace despite the fading out of the benefits of IR #2? In 1987 Robert M. Solow posed his famous paradox, ‘We can see the computers everywhere except in the productivity statistics.’”

Gordon, however, notes that without the productivity growth made possible by a couple of decades of computerisation, the relentless decline in GDP growth from the 1970s would have been even steeper.

Crucially, all of the technologies to which Gordon attributes the growth of the past 250 years or so are once-and-done.  They can neither be re-invented nor substituted.  And so a further, fourth, industrial revolution would require entirely new technologies rather than the reworking of aged technologies like the electric cars, solar panels and wind turbines which are supposed to pave the way for a bright green future.

Unfortunately, while Gordon paints a bleak picture of the downside of a horse drawn world, he sees the harness but not the horse itself.  Energy is covered only as an environmental issue; although he does point to the dangers of exacerbating inequality in moving away from fossil fuels:

“Part of any effort to cope with global warming represents a payback for past growth. In 1901 the environment was not a priority and the symbol of a prosperous city was a drawing of a factory spewing pure black smoke out of its chimneys. The consensus recommendation of economists to impose a carbon tax in order to push American gasoline prices up toward European levels will reduce the amount that households have left over to spend on everything else (unless it is fully rebated in lump-sum or other payments). India and China are both growing more rapidly than the U.S. and taken together those two nations are responsible for double the carbon emissions of the U.S., but they resist suggestions that their growth to high-income status should be curtailed by energy restrictions, since today’s rich nations of North America, Europe, and Japan were not regulated in the same way during their 20th century period of high growth.”

Gordon’s eighteenth century horse which shat and pissed all over the street and added to the disease brought into people’s homes by passing flies, was also a unit of energy – powerful by human standards, but puny compared to the fossilised sunlight which – rather than those spin-off technologies – actually powered the first and second industrial revolutions.  Even less obviously, like every other energy source that humans have exploited, Gordon’s horse grows weaker over time.  As it ages and as it succumbs to various musculoskeletal injuries, so its weight, distance and speed capacity declines.

In my book, Why Don’t Lions Chase Mice? I provide more or less the same historical timeline as Gordon’s.  And give or take a couple of years, I point to the same two broad periods of economic growth from 1800 to 1950 and from 1953 to 1973.  Moreover, emphasising Gordon’s point about the difference in strength between the first and second industrial revolutions, I point out that the two decades 1953 to 1973 witnessed as much growth as the 150 years which preceded them.

Where I differ with Gordon is that my primary focus is on the horse not the harness.  A horse requires a lot of fuel – food – to run.  And its limited ability to convert plant calories into work energy places a hard limit on what a horse is able to do.  For an economy that runs entirely on renewable energy, the limits are even more stark because there is only so much spare land from which to produce fodder for horses.  And given that food for humans will tend to have the first claim on that land, there might be thousands of uses to which people could imagine putting horses, but relatively few which the economy can actually sustain.

As with all things renewable, the lack of energy-density is the key limitation.  A working horse might consume some 20kg (44lbs) of hay every day.  And it takes a lot of energy to harvest that hay from the fields and then move it to where the horse is working.  Moreover, a horse’s digestive system requires a more or less constant grazing of food rather than a single big breakfast.  Coal – the power behind the first industrial revolution – has the opposite properties.  It is energy dense – 5,736.14 kilocalories per kilogram – and while it still requires transporting to its point of use, the energy it provides in return makes the enterprise far more profitable.  And at the very beginning of the first industrial revolution in Great Britain, there were enough easily accessible coal seams jutting from the side of the hills to make coal a viable alternative to renewable energy.

Why though, should an economy which Gordon argues grew at no more than 0.2 percent per year between 1300 and 1750, suddenly opt to make the switch to coal?  It wasn’t the invention of the steam engine – cultures around the world had occasionally used wood-powered steam engines down the ages.  The doors of the Great Library of Alexandria, for example, were powered with steam.  Nor was coal itself a new discovery; although the hearths, furnaces and smithies of the pre-industrial age were better suited to charcoal.  And charcoal – and the timber it was made from – or rather the lack of charcoal was the primary driver for the adoption of coal as a fuel.  As Clive Ponting explains:

“A timber shortage was first noticed in Europe in specialised areas such as shipbuilding… In the 1580s when Philip II of Spain built the armada to sail against England and the Dutch had to import timber from Poland… Local sources of wood and charcoal were becoming exhausted – given the poor state of communications and the costs involved it was impossible to move supplies very far.  As early as 1560 the iron foundries of Slovakia were forced to cut back production as charcoal supplies began to dry up.  Thirty years later the bakers of Montpellier in the South of France had to cut down bushes to heat their ovens because there was no timber left in their town…”

What Gordon misses is that the technology follows the energy source.  Coal comes with the suite of technologies that Gordon points to.  But it is the additional work that those technologies allow us to harness from the raw energy of the coal which makes them viable.  Put simply, the coal mine comes first; the steam engine follows.

Overlooking this is a simple mistake to make.  Like oil today, the price of coal was but a tiny fraction of the profit it returned.  In contrast, the cost of the technology required to harness the coal was massive; although even this was eclipsed by the wage bill of the workforce needed to operate the machinery.  If you were looking for one thing which unites economic thinkers as diverse as Smith, Marx, Keynes and Hayek, you could do a lot worse than look at their complete inability to understand the vital role of energy in the economy.

Marx’s economics is all the more disappointing because he came so close; but still ended up dangerously removed from how an economy really works.  What Marx got right is that there must be some input to the productive process which is paid less than the value it generates in order for profit to be extracted.  Unfortunately, Marx’s political outlook – together with an unhealthy fixation on a simplistic version of Darwin’s evolution – pushed him into the belief that that input was “socially necessary” labour power; a concept he had refined from David Ricardo.

Again, this is understandable – in the course of Marx’s lifetime, England transitioned from a largely agrarian to an urbanised industrial economy.  Giant steel works, ship yards, railway works and ports employing tens of thousands of workers were popping up like mushrooms.  A casual view of this transition might easily lead one to conclude that it was the harnessing of this mass of workers from which the enormous wealth of the first industrial revolution was generated.  Although toward the end of his life, Marx did begin to worry about all of that machinery.  In the Grundrisse – Marx’s blueprint for the 10 volumes of Das Kapitol – Marx begins to acknowledge that the machines might be a source of value; although he quickly rejects this because of its consequences for his political theories.

In any case, Marx would have been wrong to view the machinery as the source of value.  What he – and generations of economists down the years – missed was something so obvious that it went unnoticed.  If, as Marx correctly reasoned, there was some input to production that cost far less than the value it provided, would that input not be one of the cheapest?  Both capital and labour are expensive.  Coal, on the other hand, was relatively cheap.  And the development of railways and steam ships to move the coal from the mine to the factory served to lower the price even further.

Where technology followed the energy source, productivity improvements follow the technology.  Trevithick’s 1804 steam locomotive trundling down the Taff valley at nearly five miles per hour – and having to be pulled back up the valley by horses – provided a proof of concept upon which future steam engineers could build.  And as is the case with all technologies, a series of fairly obvious and low-cost improvements can greatly increase the value – i.e., energy harnessed in return – of the technology.  These improvements also include economies of scale as, for example, a multitude of locomotive manufacturers were amalgamated into a handful of giant railway works by the end of the nineteenth century.

The additional calories provided by oil – 5,019.16 kilocalories – compared to coal may not seem like much; little more, indeed than the calories needed to power an adult male manual worker and a lot less that the 20,000 kilocalories required for a working horse to simply exist.  Nevertheless, those additional calories were the difference between the slow burn of coal-powered economic growth between 1750 and 1950 and the explosion of oil-powered growth between 1953 and 1973.

A single barrel of oil contains the energy equivalent of 11 years of human manual labour (at 40 hours per week, 48 weeks per year).  And yet, even at today’s recession-inducing $70 per barrel, oil is dirt cheap.  Hypothetically (because it couldn’t happen in reality) if we attempted to do all of the work currently derived from a barrel of oil using human labour, it would cost us £184,166.40 at the Minimum Wage or £325,600 at the average wage – a potential return on investment of some 236,095 to 465,143 percent; one reason why economies are so profoundly impacted by increases in the price of oil.

This is also why Gordon is wrong to claim a third industrial revolution.  There was no third energy source – more energy-dense and accessible than fossil fuels – to form the basis for a new suite of technologies.  Rather, the computerisation which helped generate additional productivity that kept the economy going through to the end of the 1990s was merely the final – electronics – component of the suite of technology of the oil age; powered by the turbine halls of coal-based power stations.

Worse than this though, like Gordon’s horse, fossil fuels grow old and tired with use.  Although not quite the same process, the end result is the knacker’s yard.  With fossil fuels, we simply consumed the easiest and cheapest deposits first.  When we had burned through these by the early 1970s, we moved on to more expensive deposits like the North Sea and the North Alaskan slope.  And it is the additional cost of these – and the hit to the percentage energy return that results – which is the underlying cause of the remorseless decline in growth that Gordon presents.  As the US frackers are currently discovering, the oil that remains is simply too expensive for the economy to afford.  And so, for energy as well as climate reasons, some form of transition is inevitable.

In theory, liquid hydrogen – at 33,938.80 kilocalories per kilogram (bearing in mind that hydrogen is extremely light) – could power a new industrial revolution.  And The European Union has a stated aim of creating a hydrogen-based economy in response to climate change.  But in practice, neither burning hydrogen directly nor converting it to electricity in a fuel cell has proved to be viable at scale.  Several vehicle manufacturers have developed prototype hydrogen internal combustion and hydrogen fuel cell prototypes.  But with the exception of a few niche operations, investors, manufacturers and governments view battery-electric as being more realistic.

Nuclear – if anyone could ever figure out how to do it properly – could potentially lead to suites of technologies as unimaginable to us as our technologies would be to a caveman.  A kilogram of uranium, for example, could provide some 19,268,642,447 kilocalories of energy to anyone who could figure out how to harness it.  In the meantime though, our brightest minds can do little more than spend billions of pounds building glorified pressure cookers to generate electricity so expensive that the bottom half of the population won’t be able to afford.

In contrast, wind and sunlight are so energy-diffuse that they cannot be calculated in terms of calories per kilogram.  Rather – like the hay that fed the work horses of yore – the wind and sunlight must be harvested from far and wide before, at great expense, being transported to where the energy is needed.  A relatively few wind turbines and solar panels in a broader energy mix may prevent growth stalling more rapidly, but on their own they are not going to save the day.

It is an absence of surplus energy (over and above the energy needed to produce energy) rather than an absence of innovation which is the cause of the return to a growth rate of 0.2 percent which Gordon seeks to explain. And Gordon’s six headwinds are real enough barriers too.  Which begs the question of whether we should be fighting for more growth at all?  Might some kind of managed de-growth be a better choice than attempting – and failing – to maintain a system that just about everyone agrees is unsustainable?

As you made it to the end…

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