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A question of value

Marx was right… No, bear with me.  Marx was right when he argued that there must be some input to the productive process which provided far more value than was paid for.  Because if everything involved in the productive process was paid exactly what it was worth, then there could be no profit at the end of the process.  Of course, this is distorted by the process of exchange in which, for whatever reason, a consumer may be prepared to pay a lot more for something than it is really worth – think of American billionaires buying the wrong London Bridge… or, indeed, governments paying the salaries of ministers who seem incapable of solving even the smallest of crises, not to mention the flock of catastrophes circling above our heads today.

This gulf between what things are worth and what consumers are prepared to pay for them has been used by modern value deniers to claim that there is no such thing as value beyond that of market exchange.  Value, that is, is in the eye of the beholder.  There is though, a value base below which production is no longer worth engaging in.  If a good or service costs more to produce than it can be exchanged for, eventually nobody will bother producing it.  Nor is this a monetary phenomenon – bankers and states can devalue currencies more or less at will, thereby altering prices but without changing the objective cost.

Marx was side-tracked by the economic theories of British classical economists like Adam Smith and David Ricardo, whose theories were based on the now discredited idea that money economies had been preceded by barter, and that money had been invented to make the process of exchange easier.  Anthropologists and historians have since demonstrated that pre-money economies were based upon obligation rather than an exchange of equivalents.  Indeed, the only places where barter has emerged is in post-money economies where collapse or hyperinflation has rendered money worthless.  Observing the world around them – as we all tend to do – the classical economists saw the rise of manufactories employing hundreds and sometimes thousands of workers and drew the conclusion that value must have been the product of the labour of these workers.  According to Ricardo:

“The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production…”

Smith began to quantify the value of labour:

“If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for, or be worth two deer. It is natural that what is usually the produce of two days’ or two hours’ labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.”

Marx refined this “labour theory of value” by introducing the concept of “socially necessary labour time.”  Marx argued that it was the social average time that it took to hunt a beaver or to make a coat, which determined the value rather than the time any one individual might take to do so.

This did not though, explain how labour came to be paid less than the value it generates.  To explain this, Marx noted that in the emerging capitalist system, workers were paid for the time they spent at work rather than for the value they generated… something which became even more obscured as production lines separated workers from the end product – each contributing just a part of the process.  Collectively, Marx held, workers produced goods of far greater value than they were paid.  The profits made by capitalists being “the unpaid labour of the workers.”

This was largely wrong, but plausible.  It is worth noting that the early Marx was living at a time when Britain’s coal-powered industrial revolution was only just beginning, and where the Rhineland where he grew up remained a rural idyll.  Only as he grew older did he witness the dark satanic mills of England belching out smog and turning out unbelievable volumes of goods such as pottery and cotton clothing.  And as he was planning his intended 10 volumes of Das Kapital (he finished one, and Engels produced two more based on his notes) he pondered whether all of that steam-powered machinery might not be a source of value in its own right and independent of the workers whose role had been reduced to mere machine-minders.  This though, would have been at odds with the politics that he had developed on the back of a widespread Victorian era obsession with a simplistic version of the theory of evolution – similar to the way various woo and new age types latched on to quantum physics toward the end of the last century.  To admit that machines were a source of value would be to negate the belief that capital exploited labour and – crucially – that capitalism would be overthrown and replaced with the socialist utopia.

Marx was right though.  There was something about all of that industrial machinery churning out volumes of goods unthinkable in a pre-industrial age.  But it wasn’t the machinery in and of itself that was the source of value any more than it was the workers.  Rather, it was the massive quantities of fossilised sunlight in the coal which powered the machinery which was one source of value.  And the calories in the food consumed by the workers was anotheralbeit weak – source of value.  Indeed, it was the additional calories from the sugar plantations of the Americas, together with new root vegetables (which also allowed for increased meat consumption) which had fuelled the European Enlightenment which preceded industrialisation.  Energy – not exclusively or even mostly labour – was, and is, the input to production which is bought for a fraction of the value that it generates in return.  All else is merely an argument about the relative shares of the proceeds.

Just as the worker transformed calories into useful work, so industrial technologies converted first wind and waterpower, and later coal and oil power into useful work in volumes which could never be replicated by labour alone.  And just as socially necessary labour determines labour’s worth, so socially efficient energy use determines the value it provides to an economy.

A tonne of coal contains some seven million Kcals, whereas an average human consumes Just 2,500 Kcals per day. And so, that tonne of coal might provide the equivalent of eight years of human labour.  Except that not all of the calories consumed by humans can be converted into work.  Perhaps 1,000 Kcals are consumed just to stay alive.  With maybe 500 more lost as waste heat.  Being generous, we might say that the useful energy value of an average human is 1,000 Kcals.  In which case, that tonne of coal would be equivalent to a full 19 years of human labour.  On the other hand, the machinery which utilises coal – particularly as it must convert water into steam before it can be powered – is even less energy-efficient than the human body, with maybe 60 percent of its potential energy lost as waste heat.  In which case, that tonne of coal provides something like six years of human labour.

Oil is more energy dense than coal.  A tonne of oil contains some 10 million Kcals, and after taking account of waste heat, amounts to roughly eleven years of human labour at 1,000 Kcals per day – a massive increase in work for the relatively small increase in energy density.  Although, of course, as a liquid, oil is also more versatile than coal – particularly as a fuel source for transport and heavy machinery.

In Marx’s day (1818-1883) the transformation brought about by fossil fuels would have seemed miraculous.  And with no apparent limit upon human progress, people could begin to imagine all sorts of utopian futures from humans conquering the stars to techno-utopian automated societies where nobody need work again.  And so long as – two world wars aside – the march of human progress appeared to go in a single, upward direction, people began to lose sight of the fossilised solar energy which made it all possible.

Only when civilisation faltered – as it did in the years after the Wall Street Crash in October 1929 – did a few people begin to question the received wisdom about how industrial civilisation really works.  English Nobel Prize-winning chemist, Frederick Soddy, for example, grasped what Marx had almost realised toward the end of his life – that energy is the source of value, and that in modern societies this means fossil fuels:

“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!”

That economic crisis – and reflection about its causes – was due to the slowing in coal production in the 1920s:

The reason why energy crises begin in the financial sector – also identified by Soddy – is that currency is created as debt – either borrowed into existence by states or loaned into existence by banks.  But debt-based and interest-baring currency assumes infinite exponential growth… something which would only be possible with exponentially growing energy production.  The gradual slowdown in the growth of coal production in the early twentieth century – marking the peak of coal-based coal production – created the conditions in which financial claims on future economic growth grew far beyond what was possible in the real economy.  In colloquial terms, a “bubble.”

Oil – the production of which expanded massively during the Second World War – came to the rescue back then:

Just as coal production had grown exponentially in the nineteenth century, so oil production grew exponentially in the two decades 1953 to 1973, when we experienced the first “oil shock.”  That oil production growth corresponded to the massive post-war economic boom, during which economic output and trade exceeded that generated in the previous 150 years.  (Note also, that the introduction of oil – diesel – powered machinery allowed for a gradual increase in the volume of coal which could be produced).  That is, just as the 1930s crisis was about a decline in the rate of coal production rather than the volume, so too was the crisis of the 1970s.  In both cases, human civilisation went on to consume more after the economic crisis than before hand:

The economic crisis persisted in one form or another, however, because there was never a means by which the slowdown in the rate of growth in energy production – and thus in the energy available to the wider economy – could be squared with the attempt to generate sufficient exponential growth to repay all of the debt used to generate currency.

To add to the problem, humanity has burned its way through the cheapest to produce fossil fuels first.  This is also evident in the coal production after 1930 – coal which couldn’t be accessed in a coal-powered economy became accessible in the (more energy-dense) oil age.  But the same energy cost of energy problem arises with all forms of energy, so that we experience a kind of “red queen syndrome” in which we have to run ever faster just to stand still.

In 2005, conventional oil production peaked, triggering the wave of general price increases, central bank interest rises, debt-defaults and banking collapses of the 2008 crash and the ensuing decade of depression.  After this, we squandered the once-and-done US shale boom, during which time we might have – but didn’t – make hard choices about restructuring the financial system and changing our fixation on infinite growth.  And so, when oil production from all sources peaked in November 2018, a collapse of some kind was guaranteed.

In the 1970s, and again briefly after 2008, the importance of energy came to the fore.  But once new sources of energy had been developed, we were lulled into believing that energy was not so important after all.  Notice, by the way, that by the 2018 oil peak, human civilisation was consuming double the energy it had been consuming in the mid-1970s, as we had entered an everything age in which all forms of energy – including coal – were increased in an attempt to keep the globalising economy running.

While energy slowdowns predict trouble ahead, the exact nature of the crash is less obvious.  Price increases were already appearing across the economy in 2019.  And given the predictability of central banks, rate rises would likely have not been far behind them.  Eventually, higher interest rates would result in defaults which, in turn, would burst derivatives bubbles which have grown since 2008.  Institutions which had been “too big to fail” back then, would likely be too big to save this time around – a collapsing banking system likely taking national currencies down with it.

What nobody could have foreseen was the irrational attempt to stop a pandemic in its tracks by locking down economies for the best part of two years.  The (demand-side) additional currency created just to keep firms in existence and workers employed, coupled with the (supply-side) severe disruption to supply chains and productive output was bound to generate a wave of shortages – and thus price increases – across the economy.  And if this wasn’t bad enough, the ill-conceived sanctions salad in which Europe has cut itself off from a large part of the energy it needs, and in which the west as a whole has provoked most of the rest of the world to begin switching away from dollar-based trade, threatens an economic collapse on a scale not seen since the 1340s.

Take Germany – the industrial powerhouse of the European Union.  In 2021, Germany consumed 905 TWh of gas – more than half of which (55 percent) was imported from Russia.  That gas has now gone elsewhere and, most likely, is not coming back.  And despite the dangerous reassurances of politicians, there is a global shortage of liquid natural gas (LNG) with which to replace it.  In value terms, the loss of Russian gas is equivalent to 350 million years of human labour – which, at the average German wage   would be €246,404,437,039 ($246,466,038,148).

This, of course, only scratches the surface of the problem because gas can do things which are impossible for humans – notably providing thermal energy required in industrial processes such as metal smelting or solar panel production.  Oil – which is also sanctioned – or coal, might – with considerable capital investment – provide an alternative – albeit much dirtier – source of thermal energy… but not for several winters to come.  And non-renewable renewable energy-harvesting technologies (NRREHTs) cannot produce sufficient thermal energy, even in arc furnaces, to replace most gas-powered applications.

Nor does our predicament end there, because of the cascade problem.  Gas isn’t just a source of thermal power.  It is also a fuel for essential electricity generation used to balance the intermittency of NRREHTs and to respond to increases in demand.  Alternatives like nuclear and coal simply cannot respond in the same way.  However, while gas is essential to modern energy grids, priority has to be given to domestic consumption because of the threat of explosions on restart if the system is temporarily disrupted.  The official response to gas shortages will be electricity outages as gas power stations are taken offline.  Those electricity cuts translate into a multiplied loss of value as work processes which depend upon electricity have to cease.  But in addition to the direct loss comes the cascade as other critical infrastructure such as the water and sewage system or the internet fail for want of electricity.  In short, that quarter trillion dollar hit that the German economy is about to take as a result of the loss of Russian gas is going to be multiplied over and over as energy shortages cascade across German – and, indeed, European – critical infrastructure.

This, in turn, raises questions about a western currency system which has racked up trillions, and possibly quadrillions, of dollars of derivatives (we will only find out when the system goes down) on the back of trillions of dollars of – now unpayable – public and private debt.  The most likely outcome must surely be a currency reset on a par with the switch to the Bretton Woods system after the Second World War… an outcome complicated by the emerging switch to a commodity-backed BRICS currency as an alternative to the “exorbitant privilege” of the US dollar system.  Either way, with a loss of value on this scale, we can expect a very dark winter in more ways than one.

As you made it to the end…

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