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But profit (sort of) matters

The notable – but largely unacknowledged in the mainstream – feature of the recent (failing) attempt to revive the pre-1972 moon landing project is the way in which modern rockets have proved susceptible to all of the problems which beset the Saturn V in the 1960s.  Nor is this a mere technicality.  The reason that the Apollo programme was brought to a premature end in December 1972 was that it had run into an invisible economic limit.  To people – including most economists – who have learned to think of the economy as a purely financial system, this sounds mean.  We can always find the money to fight wars and bail out banks, so why shouldn’t we divert money into a scientific endeavour which might (it won’t) act as a launch pad for humanity’s journey to the stars?

It is a seductive question.  A question, indeed, that corporate capitalism has long learned to bend to its own interests.  The pharmaceutical industry, for example, has grown fat on its profiteering efforts to dump ineffective – and often toxic – drugs onto developing states under a faux-humanitarian claim to be overcoming illnesses which would be far easier to eradicate if the money was invested in things like clean water and sewage disposal, education, and access to a better diet.  The nuclear fusion scammers have diverted trillions of dollars away from workable energy technologies and practical energy conservation programmes on the impossible promise of delivering unlimited energy.  The “green” energy scammers have similarly eaten trillions of dollars on the false promise that we can operate a complex industrial civilisation on diffuse wind and solar energy.  Sociopaths like Klaus Schwab and Bill Gates continue to divert funding away from realistic responses to the bottleneck crises (of which climate change is just one… and not even the most serious) in pursuit of an impossible fully-automated techno-dystopia.

Most alarmingly, the people we used to rely upon to critique this final corporate capitalist blow out prior to the system crashing – investigative journalists, balanced media outlets, and political activists – have mostly been co-opted into acting as useful idiots for the corporations which are killing us.  Wholly unable to hold two dissonant thoughts at the same time – such as, climate change is real but carbon credits are a scam – they have become religious zealots who attack anyone who doesn’t buy into the entire corporatist dogma.  To point out that the “energy transition” isn’t going to work or that electric cars are not going to save the day is to blaspheme and to attract the label of “climate change denier” … even where one clearly states that climate change is real.

This though, is understandable insofar as the entire predicament is framed in financial terms.  And since finance, untethered from anything substantial, is infinite, then any opposition to any techno-utopian fantasy must be political.  That is, if only we had systems of government and political parties which shared enthusiasm for whichever project is under consideration, we could conjure all the money we need out of thin air.  And insofar as it goes, this is true.  We could – and did – for example, pay millions of people to do nothing for the best part of two years in a failed attempt to stop a virus from spreading.  The result though, has been the inflation and ongoing cost of living crisis (although this has also been exacerbated by supply chain disruption and sanctions on Russian energy and raw materials).

This takes us to the opposite side of the financial debate, where the question of profitability arises.  The reason why monetary inflation occurs is that states and/or banks create more currency than there is productive capacity to absorb it… put simply, too much currency chasing too few goods and services.  To put it another way, while we might create as much currency as we please, we cannot conjure energy and resources out of thin air.  This said, most of those who criticise excessive currency “printing” (these days almost entirely electronic) lack clarity as to why we experience times when there is insufficient energy and resources.  After all, for all practical purposes, energy and resources are infinite too.  For example, in theory “we” “could” (two highly seductive and misunderstood words by the way) obtain all of the minerals we need simply by filtering them from sea water.  Moreover, if politics and additional currency were the only obstacles, we would surely have done this decades ago.

What the critics of currency printing will likely point out, is that such a process would be highly unprofitable.  The amount of currency returned from the sale of the mineral resources gained would be far less than the amount of currency required to build and operate the filtration plants.  This is why private investors have never seriously considered such a project, while even the most affluent states can find better uses for government subsidies.

This, of course, is where the proponents of techno-utopian projects call for something they call “sustainable investment.”  By which, it appears, they mean government borrowing huge amounts of currency to build and run the new infrastructure and then levying additional taxes on their populations to repay the debt with interest.  In short, using public subsidies where private investors refuse to go.  And one – potential – benefit of this would be removing the imperative of making a profit.  A wind farm, a nuclear fusion reactor, or an electric car charging network might reduce some of its costs by only having to break even (although the public would still be on the hook for the interest – i.e., profit – on the government debt).

Within a financial frame, then, profit can – and often is (sometimes reasonably) – equated with greed.  We are often told, for example, that if only Jeff Bezos, Bill Gates, and Elon Musk were to hand back a fraction of their wealth, we could end world hunger overnight (although in reality, they couldn’t liquidate that much of their wealth – they are the only people who could afford to buy the assets – and if they did, the result would be inflation rather than redistribution).  In a deeper sense, however, profit provides an – albeit inaccurate – measure of viability for any proposed endeavour.  One reason why, for example, governments and oil companies are drawn like moths to a flame to the Rosebank and Cambo oil deposits in the North Atlantic, but never get around to drilling them, is that they are unprofitable at any oil price which the wider economy can afford.  When prices spike above $100 per barrel, they begin to look viable, and governments start issuing new drilling licenses.  But a few months later, when the economy slumps in response to the high oil price, all of the excitement dissipates.

The question is, why should this happen?  If governments can print as much currency as they want, it is surely possible to distribute enough new currency across the economy to allow people to afford $100 per barrel oil.  This though, is where we need to throw away the financial framing and replace it with an energy framework.  Because what the unprofitability of deposits like Cambo is really telling us is that the energy cost of developing it is greater than the energy it would return.

Within the financial framing, profit or surplus value is entirely subjective – a good or service is worth whatever someone is prepared to pay for it.  But within an energy framework, profit is a combination of the subjective and the material.  Indeed, the energy framework takes us back to the original sin of Adam Smith, who wrongly believed that socially necessary labour time was the source of value:

“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.”

This idea provided Marx with the foundation of his proposition that profit – surplus value – was the unpaid labour of the working class.  Both Smith and Marx were mostly wrong – and later in life, Marx partially concedes this in the Grundrisse (literally “the blueprint” for the 10 volumes of Das Capital he intended to write… he only managed one) where he points to the value obtained by the massive steam-powered machinery of the later nineteenth century.

What Marx got right was the proposition that for profit to exist, one or more of the inputs to production must be paid less than the value it returns.  And given how labour-intensive early industry was, it is understandable that both Smith and Marx alighted upon the workers.  In Marx’s view, the workers were cheated out of being paid their full worth because they were paid for their time rather than their productivity.  And no doubt such a discrepancy often did – and does – exist.  But human labour is a puny input to industry which was fully eclipsed by the burning of hydrocarbons.  It was energy rather than labour that was massively underpaid – costing only the price of extracting the hydrocarbons rather than the useful work we get in exchange.  As I explained in my latest book, Breakdown:

“A ton of coal contains roughly the equivalent of a year of work (based on an eight-hour-day) a heavy horse provides, or five-and-a-half years of human labour.  But not one of the mining companies which were essential to the industrial revolution would have paid even the tiniest fraction of this to the miners for each ton they dug out of the ground… had they have done so, they would have been bankrupt within a week!  According to Guy Samuel Solomon, a Tyneside miner in the 1830s might have been paid as little as three shillings and sixpence (£11.80 adjusted for inflation) per ton of coal – less than the hourly minimum wage today, and far less than the £183,711 price of 5.5 years of human labour at today’s average wage.

“In the modern economy, oil – which is more energy-dense than coal – provides an even greater return.  A tonne of oil provides a full eleven years’ worth of human labour.  Which works out at roughly 4.5 years per barrel.  That’s the equivalent of £150,309 worth of work for the $85 or so that a barrel currently trades at – that’s a 2,000:1 return on investment…”

Or as Frederick Soddy put it in the early 1930s:

“All the requirements of [pre-industrial] 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…

“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!”

Without hydrocarbon energy, even kings lived just a few steps away from hunger and disease.  But with hydrocarbon energy we built an industrial civilisation in which even ordinary workers could live like kings.  Indeed, where the Gods of Olympus limited themselves to flitting around the Aegean islands, modern humans think nothing of boarding a jet aeroplane and traversing hemispheres.  In energy terms, even in today’s declining economy, the average American has the equivalent of some 8,000 uncomplaining “energy slaves” working day-in and day-out to maintain their standard of living.  And if, for whatever reason, the energy cost of energy rises even to a small degree, living standards can rapidly decline.

Seen in these terms, value (energy) sets a hard economic limit on what is possible – one reason why despite knowing how to build and operate commercial supersonic air travel, nobody is doing it anymore… or perhaps less obviously, why few automated car washes are in operation these days.  This said, many motorists still make the calculation that paying over the odds to have a machine wash their car is preferable to doing it themselves – which is why in an energy framework, a degree of subjectivity is also involved.  In a similar way, the British and French government decision to subsidise the Concorde despite it failing to deliver any social value (beyond acting as a luxury plaything for tech godzillionaires, movie stars, and rock musicians) is a subjective choice on behalf of taxpayers who mostly could never afford to fly on a Concorde.

The difficulty though is that we lack any settled means of calculating energy costs.  Indeed, there is currently no agreement on what has to be factored into the calculation.  For example, the early proponents of energy-based economics looked to the cost of producing a ton of coal or a barrel of oil at the point of production (the mine or the well).  And the existing infrastructure – drilling gear, winches, railways, pipelines, etc. – was excluded from the input costs.  But for an energy cost calculation to be of use in economics, the end point of the calculation needs to be the point of use.  At the same time, the input costs need to include the infrastructure along with global supplies of raw materials which are transported around the world continuously, and without which the entire system would grind to a halt – a degree of complexity which my more perceptive readers will notice could only be calculated with an advanced supercomputer.

Profit, on the other hand, despite being a far from ideal proxy for energy cost, may be the simplest and easiest measure available.  If enough investors believe that they can extract enough surplus value – i.e., surplus energy – from a process, then it will happen (so long as it is lawful).  But where – as is true of oilfields like Cambo or the European wind industry in general – the energy cost is too high (i.e., there is no profit to be derived) – it will not happen… at least without governments reaching ever deeper into the pockets of increasingly hard-pressed households to provide unsustainable public subsidies.  And when governments do interfere in this way, there are often negative unforeseen consequences.  For example, after pursuing so-called “net zero” policies to the detriment of oil and gas production, UK and European governments find themselves in the grip of an energy crisis which has rendered “green energy” unviable.  But attempts to restart oil and gas production have failed to attract investors, who fear further state interference in future.  As Juliet Samuel at the Telegraph put it:

“The meeting goes like this: ‘We need you!’ say the politicians.  The producers scratch their heads as they mull $20 billion, 20-year investments, and wonder whether, when the war is over and the green bandwagon rolls back into town, the politicians will still sound so sweet on them.  ‘Your green targets still say we need to shut down by 2030,’ they point out.  To which Europe says: ‘Well, of course.  Fossil fuels are evil!’”

Not that producing hydrocarbons just to continue with business as usual is viable either.  The global economy is now in a state of overshoot because the energy cost of energy has risen beyond the point at which further material growth is possible.  Each time the economy threatens to grow, the price of energy spikes upward causing a wave of price rises which ultimately push the economy into recession again… a pattern which has been worsening since the crash of 2008, and which has been particularly pronounced since the locking down of the western and Chinese economies.

Geopolitically, this is made worse for the USA and its western vassals by the growing integration of a BRICS block which holds most of the remaining accessible (i.e., profitable) hydrocarbon and mineral resources.  This raises the very real threat of massive and economy-crushing import inflation as “our” oil, gas and mineral resources are diverted east and south.  Germany is currently enjoying a taste of what happens when you disconnect your economy from cheap hydrocarbons and mineral resources.  And where Germany is going, Europe as a whole will surely follow.  And the import-dependent UK, with its over-reliance on the City of London Ponzi scheme, no longer able to produce sufficient coal, oil, and gas, nor build windfarms and nuclear plants in a practical timeframe, will be worst hit of all.

But so long as we continue to view the economy through a financial framework (and equate profit solely with greed) we will fail even to understand why things are breaking down, still less how to mitigate what’s coming.

As you made it to the end…

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