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Fruitless destruction

The “temporary” inflation hasn’t gone away, despite a collapse in non-essential spending across the UK economy.  The Bank of England is still playing chicken with interest rates despite knowing, a) that the rising cost of food and fuel have nothing to do with borrowing, and b) that overdoing it will bring the housing market, and eventually the banking and financial system tumbling down.  Meanwhile, the government is looking at various means of increasing the currency supply via tax cuts and various grants to offset rising energy prices.  All the while, strikes and protests are spreading.  And quite correctly, commentators on both left and right of the political spectrum are increasingly concerned that we are merely reacting to the gathering crisis rather than understanding and deploying a strategy to defuse it.  Richard Partington at the left-leaning Guardian, for example, complains that:

“The important question… is how we react. And therein lies a problem. For the government, it isn’t so much where Britain turns next but what can be done to save Boris Johnson’s floundering leadership.

“As much of the UK struggles with the soaring cost of living, rival Conservative factions push their own agenda. A growing laundry list of ideas has been floated, often with conflicting demands: tax cuts are to be prioritised, yet funds for more military spending are demanded; the public sector is to be slashed, despite promises of levelling-up, as well as more teachers, nurses and police. Last autumn, Johnson wanted a high-wage economy, now he warns against bigger pay rises.

“All this suggests the lack of a coherent economic plan, which is bad enough for a government in normal times but in the middle of the biggest hit to living standards since the 1950s is a dangerous abdication of responsibility.”

The need for a strategic approach is echoed by Brexiteer John Longworth at Politics Home:

“It has already been trailed that there will be no tax cuts until inflation comes down, which won’t be before next year, which seems to be code for we will have a give-away close enough to the election that it is fresh in people’s minds. Any political party can do this. It is meaningless and the electorate are not stupid.  What people really want to know is that the government are competent for the long term in their economic policies and the management of tax and spend. Johnson and Sunak ought to study our free market history to take a tip on how to create economic success, conquer the cost of living crisis, level up and balance the books.”

For Longworth, what is needed is a return to the “free market” approach that propelled Britain to greatness in the nineteenth century:

“We now have a choice. We can accept the declinist dogma of the ‘let them eat cake’ left liberal establishment, or we can emulate our forebears and embrace the creative destruction of a free market future with all of the excitement, innovation, wealth and growth that it will create.

“The government need to grasp our freedom, cut business taxes and the tax on fuel. This will not only encourage investment and trade but, more importantly, it will boost the 70% of the economy that is domestic – including family businesses, many of which are SMEs.

“Unilaterally cutting external tariffs will reduce the cost of living in an instant, as did the abolition of the corn laws. It will reap much of the benefit yet to be achieved from enhanced trade deals, but immediately. Why not cut this tax on food and goods that we do not produce ourselves?

“Meanwhile Deregulation would free our business community and is of even greater importance than trade as it impacts a much larger tranche of the economy.

“Yet, there is no sign that the government intend to do any of this.”

Partington reaches instead for the post-war Keynesian approach of state investment to boost the productive economy:

“Maintaining Britain’s productivity growth from before the 2008 financial crash would have generated an extra £5,000 a worker each year, according to the National Institute of Economic Social Research. Meanwhile, London has pulled further ahead from the rest of the country, indicating deep structural problems, with productivity 50% above the national average, compared with 40% in 2002, according to the Resolution Foundation…

“Well-targeted investment is key to escaping the inflation trap and boosting productivity. The good news is that Sunak recognises this, using his Mais lecture at the Bayes Business School in London to spell out his thinking for investment in ‘capital, people and ideas’, three things economists agree would help. Where this investment comes from and how exactly it is targeted remain unclear.”

Notice that despite both of these positions being fundamentally flawed, there is still massive scope for disagreement between them so that, while missing the true cause of our predicament, we will likely spend the next couple of years locked in an increasingly bitter conflict between “state-interventionists” and “free-marketeers.”  Meanwhile, as the full impact of diverting Russian commodity supplies to the east becomes clear from this coming autumn, our “cost-of-living crisis” looks set to morph into a full-blown collapse – diminishing what remains of our capacity for rational thought and turning up the temperature of our political and economic extremisms.

So let us deal with why both of these mainstream versions of the crisis and its potential solutions are fundamentally flawed.  And to begin with, let us return to the glory days of the mid-nineteenth century so beloved of Mr Longworth, and to a book called The Coal Question, written by one William Stanley Jevons (he of Jevons Paradox fame):

“To part in trade with the surplus yearly interest of the soil may be unalloyed gain, but to disperse so lavishly the cream of our mineral wealth is to be spend thrifts of our capital—to part with that which will never come back. And after all commerce is but a means to an end, the diffusion of civilization and wealth. To allow commerce to proceed until the source of civilization is weakened and overturned is like killing the goose to get the golden egg…

“Renewed reflection has convinced me that my main position is only too strong and true.  It is simply that we cannot long progress as we are now doing.  I give the usual scientific reasons for supposing that coal must confer mighty influence and advantages upon its rich possessor, and I show that we now use much more of this invaluable aid than all other countries put together.  But it is impossible we should long maintain so singular a position; not only must we meet some limit within our own country, but we must witness the coal produce of other countries approximating to our own, and ultimately passing it.”

Critics of Jevons might stand with the critics of Thomas Malthus in pointing out that things didn’t work out that way.  In fact, as Longworth argues:

“[By] 1922 we had an empire spanning a third of the population of the globe. There is a huge misconception that this was purely exploitation which made Britain ‘Great’. On the contrary, the empire was burden created out of an accidental acquisition of lands, in turn driven by colonialists – adventurers, landed types and religious reformers – and by Whitehall, when in fact the core purpose was trade and investment.”

To say this without also mentioning that the British Empire had bankrupted itself fighting the First World War and that incorporating former German possessions had merely added to the costs of suppressing dissent within an unsustainable system is remiss to say the least.  Free trade, after all, is only ever the demand of global hegemons.  And as Britain was eclipsed by the USA in the aftermath of the First World War, so free trade gave way to tariff barriers.

What Longworth overlooks, but which was central to Jevons’ understanding of the economy was the centrality of coal to the British Empire.  It was coal which powered the massive Royal Navy which, in turn, policed and rendered safe the sea routes between the resource-rich imperial periphery and the consuming European homeland – much of the militarised areas of the empire being concerned with supplying coal stocks to a network of coaling ports dotted around the world’s seas and oceans.

Coal was why Malthus’s otherwise sound argument that a population cannot exceed the food available to it appeared to fail.  Writing at the end of the eighteenth century, it is doubtful that Malthus could have anticipated, for example, the way in which securitised debt allowed for the development of railways in the USA which, in turn allowed for the expansion of US agriculture in order to supply food to the British and French armies fighting half a world away in the Crimean War.  And without the development of steam technologies utilising the power of coal, such a supply chain – and, indeed, such a war – would have been impossible.  Nevertheless, in the nineteenth century the import of fresh food from around the world began to become normal for the first time.

Arguably, the crisis which Jevons foresaw arrived in the shape of the 1929 Wall Street Crash and the depression which followed, as the economies of Europe entered a surplus coal energy decline.  It was this which prompted Frederick Soddy to revive Jevons’ insight into how the economy really works:

“Still one point seemed lacking to account for the phenomenal outburst of activity that followed in the Western world the invention of the steam engine, for it could not be ascribed simply to the substitution of inanimate energy for animal labour. The ancients used the wind in navigation and drew upon water-power in rudimentary ways. The profound change that then occurred seemed to be rather due to the fact that, for the first time in history, men began to tap a large capital store of energy and ceased to be entirely dependent on the revenue of sunshine. All the requirements of pre-scientific men were met out of the solar energy of their own times. The food they ate, the clothes they wore, and the wood they burnt could be envisaged, as regards the energy content which gives them use-value, as stores of sunlight. But in burning coal one releases a store of sunshine that reached the earth millions of years ago. In so far as it can be used for the purposes of life, the scale of living may be, to almost any necessary extent…

“Then came the odd thought about fuel considered as a capital store, out of the consumption of which our whole civilisation, in so far as it is modern, has been built. You cannot burn it and still have it, and once burnt there is no way, thermodynamically, of extracting perennial interest from it. Such mysteries are among the inexorable laws of economics rather than of physics. With the doctrine of evolution, the real Adam turns out to have been an animal, and with the doctrine of energy the real capitalist proves to be a plant. The flamboyant era through which we have been passing is due not to our own merits, but to our having inherited accumulations of solar energy from the carboniferous era, so that life for once has been able to live beyond its income. Had it but known it, it might have been a merrier age!”

Britain’s coal production had peaked in 1913.  And having started by extracting the cheap and easy deposits first, the cost of producing and supplying coal to power the economy increased even as growth rates slumped.  The USA may have experienced the decade following the war as “the roaring twenties,” but Britain experienced it as a period of economic and political strife.  Only by trading with and, increasingly, being subsumed within a rising, oil-powered American system could Britain avoid an economic catastrophe.

If coal had been the only fossil fuel, then industrial civilisation would have entered a rapid decline from the 1930s… and Jevons would have been proved correct.  Instead, in the aftermath of the Second World War, in the twenty years 1953 to 1973 the world economy grew by more than it had done in the 150 years before.  Some of this, no doubt, can be attributed to such things as the protestant work ethic, the US system of liberty and free speech, and the American “can-do” approach to life.  But just three letters explain what actually lay behind the post-war boom:  O.I.L.  It was the immense additional surplus energy provided first from the oil fields of the continental USA, and later from the Middle East and North Africa, together with the suite of “oil-age” technologies designed to harness that energy, which drove the post-war boom.  And during those unique twenty years, oil production and consumption grew exponentially.

The year 1973 – marred by the OPEC oil embargo that October – marks the point when global oil production ceased growing exponentially… roughly coinciding with the peak of mainland USA oil production in 1971.  And while oil production continued to grow through to 2019, the rate of growth slowed and, crucially, the energy cost of growth increased.  The result being that by the beginning of the twenty-first century, the global economy was struggling unsuccessfully to convert declining surplus energy into further increases in real – non-financial – economic growth.

Just as 1929 resulted from the peak of coal-based coal production, so 2019 marked the peak of oil-based oil production.  And just as with coal in 1929, this doesn’t mean to say that we do not still have access to massive quantities of oil (and coal and gas) today.  Rather, the problem is that the energy we derive from these fossil fuels, after their extraction and refinement is accounted for, is shrinking faster than the absolute quantity… that is, they are getting more energy expensive.  And while this may sound technical, what it means is that with each passing year, the amount of non-financial economic activity we can have has to fall.

This has been masked for more than a decade by the financial alchemy of low interest rates and quantitative easing – borrowing from an impossible future in an attempt to make the present appear sustainable.  As Tim Morgan reports of the UK:

“Even before the onset of the pandemic in 2020, Britain had spent twenty years adding £4 of new debt for each £1 of reported ‘growth’ in GDP. The mathematics get even worse if we add broader financial liabilities, and unfunded pension commitments, to the equation. Where Britain is concerned, these broader liabilities are enormous.

“Even this 4:1 ratio understates the grim reality, because the injection of liquidity creates transactional activity – measured as GDP – rather than adding value. SEEDS calculations indicate that, within recorded ‘growth’ of £715bn (at constant 2021 values) between 1999 and 2019, only 30% (£215bn) was organic expansion, with the remaining 70% (£500bn) the cosmetic effect of borrowing at an annual average of 7.2% of GDP through this period.”

In this respect, the UK economy is a basket case, largely as a consequence of the “creative destruction” and free market policies espoused by Mr Longworth and practiced by neoliberal governments of all shades over the past 40 years.  In an economy bereft of surplus energy, there is nothing “creative” about stepping back and allowing businesses to fail simply because the failures will involve the final collapse of critical infrastructure such as rail, electricity generation, farming, and steelmaking.  But for the same reason, Mr Partington’s fantasy of state-led productivity growth cannot be realised either, because productivity – maximising the surplus energy converted into useful work – comes with diminishing returns, and we have already pushed our oil-age technologies to the economic/energy limits.

Understanding how close to the limits of oil we had become by 2019, a wise advisor might have cautioned our leaders to avoid doing anything really dumb, like disconnecting our global just-in-time supply chains or voluntarily embargoing our economies of the fossil fuel imports they depend upon from Russia (and Iran and Venezuela) in the hope that the Gulf States might magic-up a few millions of barrels per day to take their place.  These though, are merely accelerating a crisis which was foreseeable as far back as the artificial oil shocks of the 1970s.  And there are just three alternatives before us:

First (and highly unlikely) we can try to find some yet-to-be-discovered energy source that is more energy-dense and at least as versatile as oil; and invent the new suite of technologies needed to convert that energy into productive work.  This is the only alternative which allows further economic and demographic growth.  Second (and also highly unlikely) we can enter into a process of dematerialisation and re-localisation of what remains of our economy – substituting those essential imports that it is possible to grow, extract or manufacture at home.  Third (and by far the most likely) is that we will argue – increasingly violently – about the respective merits of economic and political alternatives which are impossible in practice.  And all the while our economy crashes down around our ears.  As Woody Allen once put it:

“More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness; the other to total extinction.  Let us pray we have the wisdom to choose correctly.”

As you made it to the end…

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