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Exergy-driven crisis

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Media has little in the way of memory and the rest of us struggle to remember much of what happened more than a week ago.  And so, the narratives we use in an attempt to make sense of the rapidly changing world we are living in, tend to revolve around short-term tribal talking points.  Take, for example, the narrative about Britain having a shortage of lorry drivers.  It tends to be a very short narrative: Britain left the European Union, European lorry drivers went home, Britain has a lorry driver shortage.  Ergo “Brexit Bad!”  Unfortunately, there are more holes than a Swiss cheese in this narrative.  To begin with, driver shortages Across Europe were observable to anyone paying attention more than a decade ago:

“The study provides a concise overview of the road freight transport sector, in the light of the structural issue of qualified driver shortage. In particular, this study analyses the multiplicity of factors affecting labour supply and demand, by taking into due consideration also the impacts of the current EU legislation and the effects of the present economic downturn.”

Since 2009 was before the 2016 Brexit referendum, the 2009 lorry driver shortage could not logically have been the result of Brexit.  Moreover, lorry driver shortages across Europe were sufficient that a Franco-German inspired change of regulation – the so-called “Macron Package” (which requires drivers to use hotels overnight and to return home every eight weeks) – was introduced to halt the impact of cheap and unregulated Eastern European drivers on the road haulage industry of Western Europe; this was not a solely British problem.

The driver shortage doesn’t end there though.  According to the International Road Transport Union (IRU), driver shortages are a truly global problem which governments and media have turned a blind eye to for years.  Indeed, had it not been for the disruption of global supply chains caused by the response to the pandemic, the driver shortage might have gone unnoticed for several more years.

Of course, the disruption caused by Brexit – though dwarfed by the response to the pandemic – has added to the problem in the short term.  Certainly, there was no incentive for Eastern European drivers – who live out of their cabs – to stay in the UK during lockdown, and apparently some 25,000 went home and have yet to return.  But this is just 22.5 percent of the total 90,000 driver shortage.  And as James Walton, Chief Economist at IGD notes simply changing visa rules will not solve the problem:

“Exemptions exist for workers with ‘shortage’ skills or for higher-paid, higher-skill workers. At present, exemptions do not cover HGV drivers, so new entrants from outside the UK are excluded. Policy change could address this but would be politically challenging and the government has so far shown little interest in making immigration easier. Also, it is not clear that there is a large international body of skilled HGV drivers ready to move to the UK at short notice.” (My emphasis).

Walton lists several of the “strategic factors” which have led to the current driver shortage which, taken together, tell us that we are dealing with a complexity-related problem rather than – as the pro-remain tendency would like us to believe – a simple political issue:

“UK food and drink businesses have been aware of pressure on driver capacity for some time. Possible long-acting or ‘strategic’ reasons include:

  • Barriers to entry – Cost of market entry for an HGV driver are high – training and testing represent a barrier to recruiting new drivers.
  • Demographics – According to ONS, 34% of HGV drivers in the UK were aged 55 years or older in Q4 2019 – an old population, compared with other UK workers. Many will retire shortly.
  • Pay – IGD contacts suggest that wages for HGV drivers have risen in recent months due to a mismatch between supply and demand. However, it is not obvious that pay for drivers has been sufficient to interest UK-born drivers prior to this, especially given the nature of the work. Pay may have been more attractive to non-UK drivers (allowing businesses to compensate for local shortages by recruiting more widely, at least whilst ‘free movement’ was available).
  • Retail evolution– The rapid growth of online retail and food delivery have created a need for local delivery drivers, allowing those who wish to work as drivers another option. Simultaneously, grocery retail has evolved rapidly, with small stores proliferating – this means that many smaller deliveries are needed to sell the same volume of goods. A desire to reduce held inventory has led to shorter lead times and more frequent ordering in some settings.
  • Tough job– Driving an HGV can be demanding; long hours, nights away, loneliness and technical complexity come with the job. Drivers report concerns that their job exposes them to personal liability (eg: fines for carrying illegal migrants). Some also complain of poor conditions generally (eg: poor facilities at depots, lack of access to toilets, aggressive micro-management).”

What we are actually witnessing is another slow-motion consequence of the political and economic choices made in response to the supply-side crisis of the 1970s.  To understand this, we must first understand that the economy is primarily an energy system.  Value is created by applying useful energy – exergy – to some combination of mineral and organic “resources” in order to create useful – labour-saving or dopamine-inducing – goods and services.  The energy source is the primary generator of value, and its energy-density marks the upper boundary on the value that can be created.  So, for example, coal allows more value than wood and oil allows more value than coal.  Technological efficiency and economies of scale – aka productivity – increase the conversion of exergy into value but are limited by the second law of thermodynamics – that whenever energy is converted, a proportion is lost as waste heat.

Less obviously, the production of exergy itself has an energy cost – we have to invest energy to obtain energy.  And while initially, productivity can optimise the energy return on energy invested, eventually the energy cost of energy begins to increase as we use up all of the cheap and easy fuels and must move on to expensive and difficult sources.  In short, the economy-wide value derived from exergy begins to fall.

Money – which is the prism through which mainstream economics, politics and media view the economy – is not wealth in itself but is merely a claim on the value generated by applying exergy to resources to produce goods and services.  Money based upon precious metals – for example, the “Pound Sterling” refers to a pound (in weight) of Sterling Silver – provided an imperfect measure of value because of the energy required to obtain and refine the precious metal.  In the modern, “fiat currency” system though, there is no such link; central banks simply create new currency at the stroke of a keyboard with no reference to whether there is sufficient available energy and resources to maintain its value.  Worse still, the ability of private banks to multiply the volume of currency in the economy serves to create a massive gulf between the monetary claims on the economy and the amount of value it is physically capable of generating.

The two big economic and political crises of the past 50 years – the stagflation of the 1970s and the crash and ensuing depression from 2008 – were the result of supply-side shocks resulting from a decline in the supply of oil – our main source of energy.  The responses to rising oil-prices – Nixon’s switch to fiat currency and Bernanke’s increase in interest rates – served to turn economic slowdowns into full-blown crises which, in turn, required a political/ideological reset.  The lorry drivers shortage is just one of the consequences of the neoliberal reset which – temporarily – resolved the economic crisis of the 1970s.

Neoliberalism had three basic tricks.  First, take the once-and-done gender dividend by promoting equalities legislation to bring women into the workplace and thus the consumption market.  Second, attack workers’ rights and protections in order to drive wages down.  Third, offshore high-wage activities to parts of the world with lower wages and fewer regulations.  To this latter, the European Union was able to add the drafting in of cheap Eastern European labour to undercut wages in Western Europe – although similar use of low-paid migrant labour has fuelled driver shortages across the world.

The cost and benefits of these changes were shared unequally across the workforce in the Western European states.  As Larry Elliott at the Guardian explains:

“There has been much academic work done into the impact of migration on wages in the UK. The evidence is that where workers from overseas complement home-grown workers, they boost earnings. This tends to benefit those at the top end of the income scale.

“It is a different story at the other end of the labour market, because wages are held down when migrant workers compete with domestic workers. The competition tends to be greatest in low-paid jobs, such as hospitality and social care.

“That is not quite the end of the story, because increasing the supply of overseas workers also boosts demand. The new employees are also consumers and spend the money they earn like everybody else. The extra demand creates more jobs, although mainly in low-paid sectors.

“Against this backdrop, it is perhaps unsurprising that Brexit divided the nation in the way it did. If you were in a relatively well-paid job and not at risk of being replaced or undercut by a worker from overseas, you were likely to vote remain. The Polish plumber was cheaper, the Lithuanian nanny was better educated, so what was not to like?

“If, on the other hand, you were part of Britain’s casualised workforce, needing two or more part-time jobs to get by, you were much more likely to vote leave, on the grounds that tougher controls on migration would lead to a tighter labour market, which in turn would push up wages.”

Where lorry drivers had been relatively well-paid prior to the Single Market, increased competition from lower-paid Eastern European drivers served to drive down wages.  But that wasn’t the only problem.  Corporations have persistently lobbied governments to allow ever larger lorries onto the roads in order to minimise the number of trips and thus the number of drivers.  But bigger lorries and heavier loads create a raft of new safety concerns which are addressed by a combination of technology and regulation.  This is not too much of a problem for existing drivers as they adapt on the job.  But it does mean that the cost of obtaining a heavy goods vehicle license has increased remorselessly.  As a result, while older drivers have continued to work, fewer younger people have been looking to work in road haulage.

One of the reasons the Roman Empire collapsed was that its workers – especially farmers – were so heavily taxed that they packed up and walked away.  In the modern world it is low wages rather than high taxes (although these are arguably higher than we can afford) that have been resulting in the same problem.  It is not just lorry drivers; there are labour shortages across all of the low-paid sectors of the UK economy.  Nor is it just the UK economy that is suffering.  But will the solution that is now emerging – raising wages – solve the problem?

The basic proposition is that labour shortages will force employers to do some combination of:

  • Investing in technology
  • Re-training the existing workforce
  • Improving pay and conditions.

This is both obvious and misleading because it fails to address the question of who picks up the bill.  Taxpayers – via the state – may pick up some of the costs; for example, subsidising new technologies and providing training grants.  Alternatively, businesses – particularly the large corporations – might be left to meet the cost from their profits.  But most likely the state will not intervene, and corporations will attempt to pass the costs on to consumers in the form of higher prices.

In a purely financial economy, this wouldn’t matter.  The state could simply print new currency to pay for public services, pensions and benefits, and infrastructure to increase consumer spending.  So long as an equivalent amount of currency was removed from the corporations via taxation, this redistribution would not need to be inflationary.  But such a world only exists in the fiction section of the library known as economics.

In the real world, the rising energy cost of energy has resulted in a collapse in discretionary spending as more and more of us struggle to pay for essentials like food, utilities and housing.  There is just too much month left at the end of your wages to make ends meet.  And that is a problem for anyone who thinks that rising wages and rising prices are about to generate a new round of economic expansion akin to the decades after the Second World War.  On the contrary, increased prices will simply add fuel to an already catastrophic retail apocalypse.  Businesses will, indeed, seek to pass rising wage costs onto consumers.  But the consumer response is unlikely to be a massive spending spree.  Rather, with the cost of essentials rising remorselessly, most of us will simply cease consuming or at least put off consuming until the economy picks up.

What the lorry driver shortage actually signals is the disintegration of a neoliberal global economy which depended upon growing debt-based consumption to continue.  That consumption was already slowing following the rise in oil prices in 2006.  It slowed still further with the ensuing interest rate rises and it collapsed beneath the financial turmoil and economy-smashing oil price rises from 2008.  For most people, living standards have been falling ever since.  Rising prices will disrupt supply chains even further as fewer of us are prepared to pay for discretionary consumption.

Absent some new high-density energy source – and none currently exists – the most likely outcome by the end of the decade is a world in which far less consumption and trade takes place.  The ships, trucks and aeroplanes which continue to operate will move far more essential items and far less discretionary ones.  The lorry drivers who continue to work will undoubtedly be better paid – but like aeroplane pilots and ships captains, there are going to be a lot less of them.  We, meanwhile, will likely be doing a lot more physical work for a simpler and far less material lifestyle… that’s exergy for you.

As you made it to the end…

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